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Rule

Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

Action

Final Rules And Interim Final Rule With Comment Period.

Summary

We are revising the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs of acute care hospitals to implement changes arising from our continuing experience with these systems, and to implement certain provisions made by the TMA, Abstinence Education, and QI Program Extension Act of 2007, the Medicare Improvements for Patients and Providers Act of 2008, and the American Recovery and Reinvestment Act of 2009. In addition, in the Addendum to this final rule, we describe the changes to the amounts and factors used to determine the rates for Medicare acute care hospital inpatient services for operating costs and capital-related costs. These changes are applicable to discharges occurring on or after October 1, 2009. We also are setting forth the update to the rate-of-increase limits for certain hospitals excluded from the IPPS that are paid on a reasonable cost basis subject to these limits. The updated rate-of-increase limits are effective for cost reporting periods beginning on or after October 1, 2009.

Second, we are updating the payment policy and the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs) for rate year (RY) 2010, including responding to public comments received on a June 3, 2009 supplemental proposed rule relating to the proposed RY 2010 Medicare Severity Long-Term Care Diagnosis-Related Groups (MS-LTC-DRG) relative weights and the proposed RY 2010 high-cost outlier (HCO) fixed-loss amount. In the Addendum to this final rule, we also set forth the changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010. These changes are applicable to discharges occurring on or after October 1, 2009. In addition, we are responding to public comments received on and finalizing a June 3, 2009 interim final rule with comment period that revised the MS-LTC-DRG relative weights for payments under the LTCH PPS for the remainder of FY 2009 (that is, from June 3, 2009, through September 30, 2009).

Third, in this final rule, we are responding to public comments we received on, and finalizing, two May 2008 interim final rules with comment period that implemented certain provisions of section 114 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, Pub. L. 110-173) relating to payments to LTCHs and LTCH satellite facilities, the establishment of LTCHs and LTCH satellite facilities, and increases in beds in existing LTCHs and LTCH satellite facilities under the LTCH PPS.

Fourth, through an interim final rule with comment period as part of this document, we are implementing those provisions of the ARRA that amended certain provisions of section 114 of the MMSEA relating to payments to LTCHs and LTCH satellite facilities and increases in beds in existing LTCHs and LTCH satellite facilities under the LTCH PPS.

Unified Agenda

 

Table of Contents Back to Top

Tables Back to Top

DATES: Back to Top

Effective Dates: These final rules are effective on October 1, 2009, with the following exceptions:

The provisions of §§ 412.534(c) through (e) and (h) and 412.536(a)(2) are effective for cost reporting periods beginning on or after July 1, 2007, or October 1, 2007, as applicable. In accordance with sections 1871(e)(1)(A)(i) and (ii) of the Social Security Act, the Secretary has determined that retroactive application of the provisions of §§ 412.534(c) through (e) and (h) and 412.5536(a)(2) is necessary to comply with the statute and that failure to apply the changes retroactively would be contrary to public interest.

Comment Period: To be assured consideration, comments on the interim final rule with comment period (CMS-1406-IFC) that appears as section XI. of the preamble of this document must be received at one of the addresses provided below, no later than 5 p.m. E.S.T. on October 26, 2009.

ADDRESSES: Back to Top

When commenting on issues presented in the interim final rule with comment period, please refer to file code CMS-1406-IFC. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1. Electronically. You may submit electronic comments on this regulation at http://www.regulations.gov. Follow the instructions for “Comment or Submission” and enter the file code CMS-1406-IFC to submit comments on this interim final rule.

2. By regular mail. You may mail written comments (one original and two copies) to the following address only: Centers for Medicare Medicaid Services, Department of Health and Human Services, Attention: CMS-1406-IFC, P.O. Box 8011, Baltimore, MD 21244-1850.

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

3. By express or overnight mail. You may send written comments (one original and two copies) to the following address only: Centers for Medicare Medicaid Services, Department of Health and Human Services, Attention: CMS-1406-IFC, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to either of the following addresses: a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201.

(Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) b. 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

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

For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION, CONTACT: Back to Top

Tzvi Hefter, (410) 786-4487, and Ing-Jye Cheng, (410) 786-4548, Operating Prospective Payment, MS-DRGs, Wage Index, New Medical Service and Technology Add-On Payments, Hospital Geographic Reclassifications, Capital Prospective Payment, Excluded Hospitals, Direct and Indirect Graduate Medical Education Payments, Disproportionate Share Hospital (DSH), Critical Access Hospital (CAH), EMTALA Hospital Emergency Services, and Hospital-within-Hospital Issues.

Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG Relative Weights for FYs 2009 and 2010 Issues.

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

James Poyer, (410) 786-2261, Quality Data for Annual Payment Update Issues.

Lisa Grabert, (410) 786-6827, Hospital-Acquired Conditions.

SUPPLEMENTARY INFORMATION: Back to Top

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions at that Web site to view public comments.

Comments received timely will also be available for public inspection, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access 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 Web page address is http://www.gpoaccess.gov/), 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

3M3M Health Information System

AAHKSAmerican Association of Hip and Knee Surgeons

AAMCAssociation of American Medical Colleges

ACGMEAccreditation Council for Graduate Medical Education

AHAAmerican Hospital Association

AHICAmerican Health Information Community

AHIMAAmerican Health Information Management Association

AHRQAgency for Healthcare Research and Quality

ALOSAverage length of stay

ALTHAAcute Long Term Hospital Association

AMAAmerican Medical Association

AMGAAmerican Medical Group Association

AOAAmerican Osteopathic Association

APR DRGAll Patient Refined Diagnosis Related Group System

ARRAAmerican Recovery and Reinvestment Act of 2009, Public Law 111-5

ASCAmbulatory surgical center

ASCAAdministrative Simplification Compliance Act of 2002, Public Law 107-105

ASITNAmerican Society of Interventional and Therapeutic Neuroradiology

BBABalanced Budget Act of 1997, Public Law 105-33

BBRAMedicare, Medicaid, and SCHIP [State Children's Health Insurance Program]Balanced Budget Refinement Act of 1999, Public Law 106-113

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

BLSBureau of Labor Statistics

CAHCritical access hospital

CARE[Medicare] Continuity Assessment Record Evaluation [Instrument]

CARTCMS Abstraction Reporting Tool

CBSAsCore-based statistical areas

CCComplication or comorbidity

CCRCost-to-charge ratio

CDAC[Medicare] Clinical Data Abstraction Center

CDAD Clostridium difficile-associated disease

CIPICapital input price index

CMICase-mix index

CMSCenters for Medicare Medicaid Services

CMSAConsolidated Metropolitan Statistical Area

COBRAConsolidated Omnibus Reconciliation Act of 1985, 99

COLACost-of-living adjustment

CoP[Hospital] condition of participation

CPIConsumer price index

CYCalendar year

DPPDisproportionate patient percentage

DRADeficit Reduction Act of 2005, Public Law 109-171

DRGDiagnosis-related group

DSHDisproportionate share hospital

ECIEmployment cost index

EMRElectronic medical record

EMTALAEmergency Medical Treatment and Labor Act of 1986, 99

FAHFederation of Hospitals

FDAFood and Drug Administration

FFYFederal fiscal year

FHAFederal Health Architecture

FIPSFederal information processing standards

FQHCFederally qualified health center

FTEFull-time equivalent

FYFiscal year

GAAPGenerally Accepted Accounting Principles

GAFGeographic Adjustment Factor

GMEGraduate medical education

HACsHospital-acquired conditions

HCAHPSHospital Consumer Assessment of Healthcare Providers and Systems

HCFAHealth Care Financing Administration

HCOHigh-cost outlier

HCRISHospital Cost Report Information System

HHAHome health agency

HHSDepartment of Health and Human Services

HIPAAHealth Insurance Portability and Accountability Act of 1996, Public Law 104-191

HIPCHealth Information Policy Council

HISHealth information system

HITHealth information technology

HMOHealth maintenance organization

HPMPHospital Payment Monitoring Program

HSAHealth savings account

HSCRC[Maryland] Health Services Cost Review Commission

HSRVHospital-specific relative value

HSRVccHospital-specific relative value cost center

HQAHospital Quality Alliance

HQIHospital Quality Initiative

HwHHospital-within-a-hospital

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

ICD-10-CMInternational Classification of Diseases, Tenth Revision, Clinical Modification

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

ICRInformation collection requirement

IHSIndian Health Service

IMEIndirect medical education

I-OInput-Output

IOMInstitute of Medicine

IPFInpatient psychiatric facility

IPPS[Acute care hospital] inpatient prospective payment system

IRFInpatient rehabilitation facility

LAMCsLarge area metropolitan counties

LOSLength of stay

LTC-DRGLong-term care diagnosis-related group

LTCHLong-term care hospital

MAMedicare Advantage

MACMedicare Administrative Contractor

MCCMajor complication or comorbidity

MCEMedicare Code Editor

MCOManaged care organization

MCVMajor cardiovascular condition

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

MIEA-TRHCAMedicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Public Law 109-432

MIPPAMedicare Improvements for Patients and Providers Act of 2008, Public Law 110-275

MMAMedicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173

MMSEAMedicare, Medicaid, and SCHIP Extension Act of 2007, Public Law 110-173

MPNMedicare provider number

MRHFPMedicare Rural Hospital Flexibility Program

MRSAMethicillin-resistant Staphylococcus aureus

MSAMetropolitan Statistical Area

MS-DRGMedicare severity diagnosis-related group

MS-LTC-DRGMedicare severity long-term care diagnosis-related group

NAICSNorth American Industrial Classification System

NALTHNational Association of Long Term Hospitals

NCDNational coverage determination

NCHSNational Center for Health Statistics

NCQANational Committee for Quality Assurance

NCVHSNational Committee on Vital and Health Statistics

NECMANew England County Metropolitan Areas

NQFNational Quality Forum

NTISNational Technical Information Service

NTTAANational Technology Transfer and Advancement Act of 1991 (Pub. L. 104-113)

NVHRINational Voluntary Hospital Reporting Initiative

OACT[CMS'] Office of the Actuary

OBRA 86Omnibus Budget Reconciliation Act of 1996, 99

OESOccupational employment statistics

OIGOffice of the Inspector General

OMBExecutive Office of Management and Budget

OPMU.S. Office of Personnel Management

O.R.Operating room

OSCAROnline Survey Certification and Reporting [System]

PIPPeriodic interim payment

PLIProfessional liability insurance

PMSAsPrimary metropolitan statistical areas

POAPresent on admission

PPIProducer price index

PPSProspective payment system

PRMProvider Reimbursement Manual

ProPACProspective Payment Assessment Commission

PRRBProvider Reimbursement Review Board

PSFProvider-Specific File

PSRProvider Statistical and Reimbursement (System)

QIGQuality Improvement Group, CMS

QIOQuality Improvement Organization

RCEReasonable compensation equivalent

RHCRural health clinic

RHQDAPUReporting hospital quality data for annual payment update

RNHCIReligious nonmedical health care institution

RPLRehabilitation psychiatric long-term care (hospital)

RRCRural referral center

RTIResearch Triangle Institute, International

RUCAsRural-urban commuting area codes

RYRate year

SAFStandard Analytic File

SCHSole community hospital

SFYState fiscal year

SICStandard Industrial Classification

SNFSkilled nursing facility

SOCsStandard occupational classifications

SOMState Operations Manual

SSOShort-stay outlier

TEFRATax Equity and Fiscal Responsibility Act of 1982, 97

TEPTechnical expert panel

TMATMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007, Public Law 110-90

TJATotal joint arthroplasty

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

3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)

4. Critical Access Hospitals (CAHs)

5. Payments for Graduate Medical Education (GME)

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

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

D. Issuance of a Notice of Proposed Rulemaking

1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights

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

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

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

5. FY 2010 Policy Governing the IPPS for Capital-Related Costs

6. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

7. Proposed Changes to the LTCH PPS

8. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals

9. Determining Proposed Prospective Payments Rates for LTCHs

10. Impact Analysis

11. Recommendation of Update Factors for Operating Cost Rates of Payment for Hospital Inpatient Services

12. Discussion of Medicare Payment Advisory Commission Recommendations

E. Finalization of an Interim Final Rule With Comment Period That Revised the MS-LTC-DRG Relative Weights for FY 2009 (for June 3, 2009 Through September 30, 2009)

F. Finalization of Two LTCH PPS Interim Final Rules With Comment Period Issued in May 2008

G. Interim Final Rule With Comment Period That Implements Certain Provisions of the ARRA Relating to Payments to LTCHs and LTCH Satellite Facilities

II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) Classifications and Relative Weights

A. Background

B. MS-DRG Reclassifications

1. General

2. Yearly Review for Making MS-DRG Changes

C. Adoption of the MS-DRGs in FY 2008

D. FY 2010 MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90

2. Prospective Adjustment to the Average Standardized Amounts Required by Section 7(b)(1)(A) of Public Law 110-90

3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 Required by Public Law 110-90

4. Retrospective Evaluation of FY 2008 Claims Data

5. Adjustments for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act

6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90

7. Background on the Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2010 and Subsequent Years

9. Background on the Application of the Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

10. Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background

a. Summary of the RTI Study of Charge Compression and CCR Refinement

b. Summary of the Rand Corporation Study of Alternative Relative Weight Methodologies

2. Summary of FY 2009 Changes and Discussion for FY 2010

3. Timeline for Revising the Medicare Cost Report

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

1. Statutory Authority

2. HAC Selection Process

3. Collaborative Process

4. Selected HAC Categories

5. Public Input Regarding Selected and Potential Candidate HACs

6. POA Indicator Reporting

7. Additional Considerations Addressing the HAC and POA Payment Provision

G. Changes to Specific MS-DRG Classifications

1. MDC 5 (Diseases and Disorders of the Circulatory System): Intraoperative Fluorescence Vascular Angiography (IFVA)

2. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue): Infected Hip and Knee Replacements

3. Medicare Code Editor (MCE) Changes

a. Diagnoses Allowed for Males Only Edit

b. Manifestation Codes as Principal Diagnosis Edit

c. Invalid Diagnosis or Procedure Code

d. Unacceptable Principal Diagnosis

e. Creation of New Edit Titled “Wrong Procedure Performed”

f. Procedures Allowed for Females Only Edit

4. Surgical Hierarchies

5. Complication or Comorbidity (CC) Exclusions List

a. Background

b. CC Exclusions List for FY 2010

6. Review of Procedure Codes in MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 Through 989 to MDCs

b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

c. Adding Diagnosis or Procedure Codes to MDCs

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

8. Other Issues Not Addressed in the Proposed Rule

a. Administration of Tissue Plasminogen Activator (tPA) (rtPA)

b. Coronary Artery Bypass Graft (CABG) With Intraoperative Angiography

c. Insertion of Gastrointestinal Stent

H. Recalibration of MS-DRG Weights

I. Add-On Payments for New Services and Technologies

1. Background

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

3. FY 2010 Status of Technologies Approved for FY 2009 Add-On Payments

4. FY 2010 Applications for New Technology Add-On Payments

a. The AutoLITT TM System

b. CLOLAR® (clofarabine) Injection

c. LipiScan TM Coronary Imaging System

d. Spiration® IBV® Valve System

e. TherOx Downstream® System

5. Technical Correction

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

A. Background

B. Requirements of Section 106 of the MIEA-TRHCA

1. Wage Index Study Required Under the MIEA-TRHCA

a. Legislative Requirement

b. Interim and Final Reports on Results of Acumen's Study

2. FY 2009 Policy Changes in Response to Requirements Under Section 106(b) of the MIEA-TRHCA

a. Reclassification Average Hourly Wage Comparison Criteria

b. Within-State Budget Neutrality Adjustment for the Rural and Imputed Floors

C. Core-Based Statistical Areas for the Hospital Wage Index

D. Occupational Mix Adjustment to the FY 2010 Wage Index

1. Development of Data for the FY 2010 Occupational Mix Adjustment Based on the 2007-2008 Occupational Mix Survey

2. Calculation of the Occupational Mix Adjustment for FY 2010

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

1. Included Categories of Costs

2. Excluded Categories of Costs

3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals Under the IPPS

F. Verification of Worksheet S-3 Wage Data

G. Method for Computing the FY 2010 Unadjusted Wage Index

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

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General

2. Effects of Reclassification/Redesignation

3. FY 2010 MGCRB Reclassifications

4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act

5. Reclassifications Under Section 1886(d)(8)(B) of the Act

6. Reclassifications Under Section 508 of Public Law 108-173

J. FY 2010 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

K. Process for Requests for Wage Index Data Corrections

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

A. Background

B. Rebasing and Revising the IPPS Market Basket

1. Development of Cost Categories and Weights

a. Medicare Cost Reports

b. Other Data Sources

2. Final Cost Category Computation

3. Selection of Price Proxies

a. Wages and Salaries

b. Employment Benefits

c. Fuel, Oil, and Gasoline

d. Electricity

e. Water and Sewage

f. Professional Liability Insurance

g. Pharmaceuticals

h. Food: Direct Purchase

i. Food: Contract Services

j. Chemicals

k. Blood and Blood Products

l. Medical Instruments

m. Photographic Supplies

n. Rubber and Plastics

o. Paper and Printing Products

p. Apparel

q. Machinery and Equipment

r. Miscellaneous Products

s. Professional Fees: Labor-Related

t. Administrative and Business Support Services

u. All Other: Labor-Related Services

v. Professional Fees: Nonlabor-Related

w. Financial Services

x. Telephone Services

y. Postage

z. All Other: Nonlabor-Related Services

4. Labor-Related Share

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

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

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

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

1. Background

a. Overview

b. Hospital Quality Data Reporting Under Section 501(b) of Public Law 108-173

c. Hospital Quality Data Reporting Under Section 5001(a) of Public Law 109-171

2. Retirement of RHQDAPU Program Measures

3. Quality Measures for the FY 2011 Payment Determination and Subsequent Years

a. Considerations in Expanding and Updating Quality Measures Under the RHQDAPU Program

b. RHQDAPU Program Quality Measures for the FY 2011 Payment Determination

4. Possible New Quality Measures for the FY 2012 Payment Determination and Subsequent Years

5. Form, Manner, and Timing of Quality Data Submission

a. RHQDAPU Program Procedures for the FY 2011 Payment Determination

b. RHQDAPU Program Disaster Extensions and Waivers

c. HACHPS Requirements for the FY 2011 Payment Determination

6. Chart Validation Requirements

a. Chart Validation Requirements and Methods for the FY 2011 Payment Determination

b. Chart Validation Requirements and Methods for the FY 2012 Payment Determination and Subsequent Years

c. Possible Supplements to the Chart Validation Process for the FY 2013 Payment Determination and Subsequent Years

7. Data Accuracy and Completeness Acknowledgement Requirements for the FY 2011 Payment Determination and Subsequent Years

8. Public Display Requirements for the FY 2011 Payment Determination and Subsequent Years

9. Reconsideration and Appeal Procedures for the FY 2010 Payment Determination

10. RHQDAPU Program Withdrawal Deadlines

11. Electronic Health Records

a. Background

b. EHR Testing of Quality Measures Submission

c. HITECH Act EHR Provisions

B. Medicare-Dependent, Small Rural Hospitals (MDHs): Budget Neutrality Adjustment Factors for FY 2002-Based Hospital-Specific Rate

1. Background

2. FY 2002-Based Hospital-Specific Rate

C. Rural Referral Centers (RRCs)

1. Case-Mix Index

2. Discharges

D. Indirect Medical Education (IME) Adjustment

1. Background

2. IME Adjustment Factor for FY 2010

3. IME-Related Changes in Other Sections of this Final Rule

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

1. Background

2. Policy Change Relating to the Inclusion of Labor and Delivery Patient Days in the Medicare DSH Calculation

a. Background

b. Proposed and Final Policy Change

3. Policy Change Relating to Calculation of Inpatient Days in the Medicaid Fraction in the Medicare DSH Calculation

a. Background

b. Proposed and Final Policy Change

4. Policy Change Relating to the Exclusion of Observation Beds and Patient Days from the Medicare DSH Calculation

a. Background

b. Proposed and Final Policy Change

5. Public Comments Received Out of the Scope of the Proposed Rule

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

G. Payments for Direct Graduate Medical Education (GME) Costs

1. Background

2. Clarification of Definition of New Medical Residency Training Program

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

4. Technical Corrections to Regulations

H. Hospital Emergency Services Under EMTALA

1. Background

2. Changes Relating to Applicability of Sanctions Under EMTALA

I. Rural Community Hospital Demonstration Program

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

VI. Changes to the IPPS for Capital-Related Costs

A. Overview

B. Exception Payments

C. New Hospitals

D. Hospitals Located in Puerto Rico

E. Proposed and Final Changes

1. FY 2010 MS-DRG Documentation and Coding Adjustment

a. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009

b. Prospective MS-DRG Documentation and Coding Adjustment to the National Capital Federal Rate for FY 2010 and Subsequent Years

c. Documentation and Coding Adjustment to the Puerto Rico-Specific Capital Rate

2. Revision to the FY 2009 IME Adjustment Factor

3. Other Changes for FY 2010

VII. Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

B. Criteria for Satellite Facilities of Hospitals

C. Critical Access Hospitals (CAHs)

1. Background

2. Payment for Clinical Diagnostic Laboratory Tests Furnished by CAHs

3. CAH Optional Method of Payment for Outpatient Services

4. Continued Participation by CAHs in Counties Redesignated as Urban

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

1. Background

2. Changes to the Scope of the Provider-Based Status Regulations for CAHs

a. CAH-Based Clinical Diagnostic Laboratory Facilities

b. CAH-Based Ambulance Services

3. Technical Correction to Regulations

E. Report of Adjustment (Exceptions) Payments

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

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority

2. Criteria for Classification as a LTCH

a. Classification as a LTCH

b. Hospitals Excluded From the LTCH PPS

3. Limitation on Charges to Beneficiaries

4. Administrative Simplification Compliance Act (ASCA) and Health Insurance Portability and Accountability Act (HIPAA) Compliance

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

1. Background

2. Patient Classifications Into MS-LTC-DRGs

a. Background

b. Changes to the MS-LTC-DRGs for RY 2010

3. Development of the RY 2010 MS-LTC-DRG Relative Weights

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

b. Data

c. Hospital-Specific Relative Value (HSRV) Methodology

d. Treatment of Severity Levels in Developing the MS-LTC-DRG Relative Weights

e. Low-Volume MS-LTC-DRGs

f. Steps for Determining the RY 2010 MS-LTC-DRG Relative Weights

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

1. Overview of Development of the LTCH Payment Rates

2. Market Basket for LTCHs Reimbursed Under the LTCH PPS

a. Overview

b. Market Basket Under the LTCH PPS for RY 2010

c. Market Basket Update for LTCHs for RY 2010

d. Labor-Related Share Under the LTCH PPS for RY 2010

3. Adjustment for Changes in LTCHs' Case-Mix Due to Changes in Documentation and Coding Practices That Occurred in a Prior Period

a. Background

b. Evaluation of FY 2007 Claims Data

c. Evaluation of FY 2008 Claims Data

d. RY 2010 Documentation and Coding Adjustment

D. Technical Corrections of LTCH PPS Regulations

IX. Revisions to the FY 2009 Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-DRG) Relative Weights: Finalization of an Interim Final Rule With Comment Period

A. Overview

B. Changes to the FY 2009 MS-LTC-DRG Relative Weights

C. Summary of Public Comments Received on the June 3, 2009 Interim Final Rule With Comment Period and Our Responses

D. Finalization of the June 3, 2009 Interim Final Rule With Comment Period

E. Regulatory Impact Analysis for the June 3, 2009 Interim Final Rule With Comment Period

X. Finalization of Two Interim Final Rules With Comment Period That Implemented Certain Provisions of Section 114 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173) Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

B. May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Section 114(c)(3) of the MMSEA Regarding Certain Short-Stay Outlier Cases

1. Background

2. Public Comments Received on the May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Section 114(c)(3) of the MMSEA

C. May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Sections 114(e)(1) and (e)(2) of the MMSEA Regarding the Standard Federal Rate for the 2008 LTCH PPS Rate Year

1. Background

2. Public Comments Received on the May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Sections 114(e)(1) and (e)(2) of the MMSEA

D. May 22, 2008 Interim Final Rule With Comment Period Provision Implementing Sections 114(c)(1) and (c)(2) of the MMSEA Regarding Payment Adjustment to LTCHs and LTCH Satellite Facilities

1. Background

2. Payment Adjustment to LTCHs and LTCH Satellite Facilities Specified by Section 114(c) of the MMSEA

3. Public Comments Received on the May 22, 2008 Interim Final Rule With Comment Period Implementing Section 114(c)(1) and (c)(2) of the MMSEA Regarding Payment Adjustment to LTCHs and LTCH Satellite Facilities

E. May 22, 2008 Interim Final Rule With Comment Period Provisions Implementing Section 114(b) of the MMSEA Regarding Moratorium on the Establishment of LTCHs, LTCH Satellite Facilities and on the Increase in Number of Beds in Existing LTCHs or LTCH Satellite Facilities

1. Background

2. Provisions of the May 22, 2008 Interim Final Rule With Comment Period Implementing Section 114(d) of the MMSEA That Established Moratoria on New LTCHs and LTCH Satellite Facilities and on Bed Increases in Existing LTCHs and LTCH Satellite Facilities

3. Public Comments Received on the on the May 22, 2008 Interim Final Rule With Comment Period Provisions Implementing the Exception to the Moratorium on the Increase in Number of LTCHs Beds in Existing LTCHs and LTCH Satellite Facilities

XI. Interim Final Rule with Comment Period Implementing Section 4302 of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5) Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

B. Amendments Relating to Payment Adjustment to LTCHs and LTCH Satellite Facilities Made by Section 4302 of the ARRA

C. Amendments to the Moratorium on the Increase in Number of Beds in Existing LTCHs or LTCH Satellite Facilities Made by Section 4302 of the ARRA

D. Response to Comments

E. Waiver of Proposed Rulemaking

F. Collection of Information Requirements

G. Regulatory Impact Analysis

XII. MedPAC Recommendations

XIII. Other Required Information

A. Requests for Data From the Public

B. Collection of Information Requirements

C. Additional Information Collection Requirements

1. Present on Admission (POA) Indicator Reporting

2. Add-On Payments for New Services and Technologies

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

4. Occupational Mix Adjustment to the FY 2010 Index (Hospital Wage Index Occupational Mix Survey)

5. Hospital Applications for Geographic Reclassifications by the MGCRB

Regulation Text Back to Top

Addendum—Schedule of Standardized Amounts, Update Factors, and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning on or after October 1, 2009 Back to Top

I. Summary and Background

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

A. Calculation of the Adjusted Standardized Amount

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

C. MS-DRG Relative Weights

D. Calculation of the Prospective Payment Rates

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

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

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

C. Capital Input Price Index

IV. Changes to Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

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

A. LTCH PPS Standard Federal Rate for RY 2010

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

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

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

VI. Tables

Table 1A.—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (68.8 Percent Labor Share/31.2 Percent Nonlabor Share If Wage Index Is Greater Than 1)

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

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

Table 1D.—Capital Standard Federal Payment Rate

Table 1E.—LTCH Standard Federal Prospective Payment Rate

Table 2.—Acute Care Hospitals Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010 (2006 Wage Data); and 3-Year Average of Hospital Average Hourly Wages

Table 3A.—FY 2010 and 3-Year Average Hourly Wage for Acute Care Hospitals in Urban Areas by CBSA

Table 3B.—FY 2010 and 3-Year Average Hourly Wage for Acute Care Hospitals in Rural Areas by CBSA

Table 4A.—Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State—FY 2010

Table 4B.—Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State—FY 2010

Table 4C.—Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by State—FY 2010

Table 4D-1.—Rural Floor Budget Neutrality Factors for Acute Care Hospitals—FY 2010

Table 4D-2.—Urban Areas With Acute Care Hospitals Receiving the Statewide Rural Floor or Imputed Floor Wage Index—FY 2010

Table 4E.—Urban CBSAs and Constituent Counties for Acute Care Hospitals—FY 2010

Table 4F.—Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals by CBSA—FY 2010

Table 4J.—Out-Migration Adjustment for Acute Care Hospitals—FY 2010

Table 5.—List of Medicare Severity Diagnosis-Related Groups (MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay—FY 2010

Table 6A.—New Diagnosis Codes

Table 6B.—New Procedure Codes

Table 6C.—Invalid Diagnosis Codes

Table 6D.—Invalid Procedure Codes

Table 6E.—Revised Diagnosis Code Titles

Table 6F.—Revised Procedure Code Titles

Table 6G.—Additions to the CC Exclusions List (Available Through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)

Table 6H.—Deletions from the CC Exclusions List (Available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)

Table 6I.—Complete List of Complication and Comorbidity (CC) Exclusions (Available only through the Internet on the CMS Web site at: http:/www.cms.hhs.gov/AcuteInpatientPPS/)

Table 6J.—Major Complication and Comorbidity (MCC) List (Available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)

Table 6K.—Complication and Comorbidity (CC) List (Available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)

Table 7A.—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2008 MedPAR Update—March 2009 GROUPER V26.0 MS-DRGs

Table 7B.—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2008 MedPAR Update—March 2009 GROUPER V27.0 MS-DRGs

Table 8A.—Statewide Average Operating Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals—July 2009

Table 8B.—Statewide Average Capital Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals—July 2009

Table 8C.—Statewide Average Total Cost-to-Charge Ratios (CCRs) for LTCHs—July 2009

Table 9A.—Hospital Reclassifications and Redesignations—FY 2010

Table 9C.—Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act—FY 2010

Table 10.—Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Medicare Severity Diagnosis-Related Groups (MS-DRGs)—July 2009

Table 11.—MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and Short-Stay Outlier Threshold for Discharges Occurring From October 1, 2009 Through September 30, 2010 under the LTCH PPS

Table 12A.—LTCH PPS Wage Index for Urban Areas for Discharges Occurring From October 1, 2009 Through September 30, 2010

Table 12B.—LTCH PPS Wage Index for Rural Ares for Discharges Occurring From October 1, 2009 Through September 30, 2010

Appendix A—Regulatory Impact Analysis Back to Top

I. Overall Impact

II. Objectives of the IPPS

III. Limitations of Our Analysis

IV. Hospitals Included in and Excluded From the IPPS

V. Effects on Hospitals Excluded From the IPPS

VI. Quantitative Effects of the Policy Changes Under the IPPS for Operating Costs

A. Basis and Methodology of Estimates

B. Analysis of Table I

C. Effects of the Changes to the MS-DRG Reclassifications and Relative Cost-Based Weights (Column 1)

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

E. Effects of Wage Index Changes (Column 3)

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

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

H. Effects of MGCRB Reclassifications (Column 6)

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

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

K. Effects of All Changes (Column 9)

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

M. Impact Analysis of Table II

VII. Effects of Other Policy Changes

A. Effects of Policy on HACs, Including Infections

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

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

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

E. Effects of Policy Changes Relating to the Payment Adjustment to Disproportionate Share Hospitals

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

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

H. Effects of Implementation of Rural Community Hospital Demonstration Program

I. Effects of Policy Changes Relating to Payments to Satellite Facilities

J. Effects of Policy Changes Relating to Payments to CAHs

K. Effects of Policy Changes Relating to Provider-Based Status of Facilities and Organizations

VIII. Effects of Changes in the Capital IPPS

A. General Considerations

B. Results

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

A. Introduction and General Considerations

B. Impact on Rural Hospitals

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

D. Effect on the Medicare Program

E. Effect on Medicare Beneficiaries

X. Alternatives Considered

XI. Overall Conclusion

A. Acute Care Hospitals

B. LTCHs

XII. Accounting Statements

A. Acute Care Hospitals

B. LTCHs

XIII. Executive Order 12866

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

I. Background

II. Inpatient Hospital Update for FY 2010

III. Secretary's Final Recommendation

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

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. 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 eligible outlier payment is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments.

Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid in whole or in part based on their hospital-specific rate based on their costs in a base year. For example, sole community hospitals (SCHs) receive the higher of a hospital-specific rate based on their costs in a base year (the highest of FY 1982, FY 1987, FY 1996, or FY 2006) or the IPPS Federal rate based on the standardized amount. Through and including FY 2006, a Medicare-dependent, small rural hospital (MDH) received the higher of the Federal rate or the Federal rate plus 50 percent of the amount by which the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 hospital-specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the higher of the Federal rate or the Federal rate plus 75 percent of the amount by which the Federal rate is exceeded by the highest of its FY 1982, FY 1987, or FY 2002 hospital-specific rate. SCHs are the sole source of care in their areas, and MDHs are a major source of care for Medicare beneficiaries in their areas. Specifically, section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that is located more than 35 road miles from another hospital or that, by reason of factors such as isolated location, weather conditions, travel conditions, or absence of other like hospitals (as determined by the Secretary), is the sole source of hospital inpatient services reasonably available to Medicare beneficiaries. In addition, certain rural hospitals previously designated by the Secretary as essential access community hospitals are considered SCHs. Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located in a rural area, has not more than 100 beds, is not an SCH, and has a high percentage of Medicare discharges (not less than 60 percent of its inpatient days or discharges in its cost reporting year beginning in FY 1987 or in two of its three most recently settled Medicare cost reporting years). Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries.

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

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

2. Hospitals and Hospital Units Excluded From the IPPS

Under section 1886(d)(1)(B) of the Act, as amended, certain hospitals and hospital units are excluded from the IPPS. These hospitals and units are: Rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children's hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)). (We note that the annual updates to the LTCH PPS are now included as part of the IPPS annual update document (for RY 2010, in this final rule). Updates to the IRF PPS and IPF PPS are issued as separate documents.) Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system subject to a rate-of-increase ceiling on inpatient operating costs per discharge.

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

3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)

The Medicare prospective payment system (PPS) for LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) effective for cost reporting periods beginning on or after October 1, 2002. The LTCH PPS was established under the authority of sections 123(a) and (c) of Public Law 106-113 and section 307(b)(1) of Public Law 106-554. During the 5-year (optional) transition period, a LTCH's payment under the PPS was based on an increasing proportion of the LTCH Federal rate with a corresponding decreasing proportion based on reasonable cost principles. Effective for cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR part 412, subpart O. Beginning with RY 2010, we are issuing the annual updates to the LTCH PPS in the same documents that update the IPPS (73 FR 26797 through 26798).

4. Critical Access Hospitals (CAHs)

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

5. Payments for Graduate Medical Education (GME)

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

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

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

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

Section 4301(b) of the American Recovery and Reinvestment Act of 2009 (AARA), Pub. Law 111-5, enacted on February 17, 2009, requires that the phase-out of the capital IPPS teaching adjustment at § 412.322(c) (that is, the 50-percent reduction for FY 2009) shall be applied, as if such paragraph had not been in effect. That is, discharges occurring on or after October 1, 2008, through September 30, 2009, receive the full capital IPPS teaching adjustment as determined under § 412.322(b) of the regulations. We note that, in this final rule, in response to public comments on our proposed implementation of section 4301(b) of the ARRA, we are deleting § 412.322(d) of the existing regulations which currently eliminates the teaching adjustment beginning in FY 2010. We discuss the implementation of these provisions in sections VI.A. and E.2. of the preamble of this final rule.

Section 4302 of the ARRA included several amendments to provisions of section 114 of the MMSEA relating to: (1) The 3-year delay in the application of certain provisions of the payment adjustments for short-stay outliers and revision to the RY 2008 standard Federal rate for LTCHs; and (2) the 3-year moratorium on the establishment of new LTCHs and LTCH satellite facilities and on increases in beds in existing LTCHs and LTCH satellite facilities. We discuss the final implementation of these provisions in sections I.E., VIII., and XI. of the preamble of this final rule.

D. Issuance of a Notice of Proposed Rulemaking

On May 22, 2009, we published in the Federal Register (74 FR 24080) a proposed rule that set forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs of acute care hospitals in FY 2010. We also set forth proposed changes relating to payments for IME costs and payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis. In addition, we set forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010. On June 3, 2009, we published in the Federal Register (74 FR 26600) a supplemental proposed rule (hereafter referred to as the “RY 2010 LTCH PPS supplemental proposed rule”) that presented both proposed RY 2010 MS-LTC-DRG relative weights and a proposed RY 2010 high-cost outlier (HCO) fixed-loss amount based on the revised FY 2009 MS-LTC-DRG relative weights presented in an interim final rule with comment period published also on June 3, 2009 in the Federal Register (74 FR 26546).

Below is a summary of the major changes that we proposed to make:

1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights

In section II. of the preamble of this final rule, we included—

  • Proposed changes to MS-DRG classifications based on our yearly review.
  • Proposed application of the documentation and coding adjustment to hospital-specific rates for FY 2010 resulting from implementation of the MS-DRG system.
  • A discussion of the Research Triangle International, Inc. (RTI) and RAND Corporation reports and recommendations relating to charge compression, including a solicitation of public comments on the “over” standardization of hospital charges.
  • Proposed recalibrations of the MS-DRG relative weights.

We also presented a listing and discussion of hospital-acquired conditions (HACs), including infections, that are subject to the statutorily required quality adjustment in MS-DRG payments for FY 2010.

We presented our evaluation and analysis of the FY 2010 applicants for add-on payments for high-cost new medical services and technologies (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting).

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

In section III. of the preamble to the proposed rule, we proposed revisions to the wage index for acute care hospitals and the annual update of the wage data. Specific issues addressed include the following:

  • Second year of the 3-year transition from national to within-State budget neutrality for the rural floor and imputed floor.
  • Final year of the 2-year transition for changes in the average hourly wage criterion for geographic reclassifications.
  • Changes to the CBSA designations.
  • The proposed FY 2010 wage index update using wage data from cost reporting periods that began during FY 2007.
  • Analysis and implementation of the proposed FY 2010 occupational mix adjustment to the wage index for acute care hospitals, including the use of data from the 2007-2008 occupational mix survey.
  • Proposed revisions to the wage index for acute care hospitals based on hospital redesignations and reclassifications.
  • The proposed adjustment to the wage index for acute care hospitals for FY 2010 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index.
  • The timetable for reviewing and verifying the wage data used to compute the proposed FY 2010 wage index for acute care hospitals.

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

In section IV. of the preamble of the proposed rule, we proposed to rebase and revise the acute care hospital operating and capital market baskets to be used in developing the FY 2010 update factor for the operating and capital prospective payment rates and the FY 2010 update factor for the excluded hospital rate-of-increase limits. We also set forth the data sources used to determine the proposed revised market basket relative weights.

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

In section V. of the preamble of the proposed rule, we discussed a number of the provisions of the regulations in 42 CFR parts 412, 413, and 489, including the following:

  • The reporting of hospital quality data as a condition for receiving the full annual payment update increase.
  • Discussion of applying the correct budget neutrality adjustment for the FY 2002-based hospital-specific rates for MDHs.
  • The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status.
  • The statutorily-required IME adjustment factor for FY 2010.
  • Proposed changes to the policies governing payments to Medicare disproportionate share hospitals, including proposed policies relating to the inclusion of labor and delivery patient days in the calculation of the DSH payment adjustment, calculation of inpatient days in the Medicaid fraction for the Medicare DSH calculation, and exclusion of observation beds and patient days from the Medicare DSH calculation and from the bed count for the IME adjustment.
  • Proposed changes to the policies governing payment for direct GME.
  • Proposed changes to policies on hospital emergency services under EMTALA relating to the applicability of sanctions under EMTALA.
  • Discussion of the implementation of the Rural Community Hospital Demonstration Program in FY 2010.
  • Proposed technical correction to the regulations governing the calculation of the Federal rate under the IPPS.

5. FY 2010 Policy Governing the IPPS for Capital-Related Costs

In section VI. of the preamble to the proposed rule, we discussed the payment policy requirements for capital-related costs and capital payments to hospitals for FY 2010. We also proposed to remove a section of the regulations relating to the phase-out of the capital IME adjustment for FY 2009 to implement the provisions of section 4301(b) of the ARRA.

6. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

In section VII. of the preamble of the proposed rule, we discussed—

  • Proposed changes to payments to excluded hospitals.
  • Proposed changes to the regulations governing satellite facilities of hospitals.
  • Proposed changes relating to payments to CAHs, including payment for clinical laboratory tests furnished by CAHs and payment for outpatient facility services when a CAH elects the optional payment method.
  • Proposed changes to the rules governing provider-based status of facilities and a proposed technical correction to the regulations governing provider-based entities.

7. Proposed Changes to the LTCH PPS

In section VIII.A. through C. and F. of the preamble of the proposed rule, we set forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010, including the annual update of the MS-LTC-DRG classifications and relative weights for use under the LTCH PPS for RY 2010, the proposed use of the FY 2002-based RPL market basket for LTCHs, and proposed technical corrections to the LTCH PPS regulations.

In section VIII.D. of the preamble of the proposed rule, we discussed our ongoing monitoring protocols under the LTCH PPS. In section VIII.E. of the preamble of the proposed rule, we discussed the Research Triangle Institute, International (RTI) Phase III Report on its evaluation of the feasibility of establishing facility and patient criteria for LTCHs, as recommended by MedPAC in its June 2004 Report to Congress.

We note that, because we did not propose any policy changes relating to our present activities in monitoring and updates on the RTI contract, we are not republishing these section discussions in this final rule. We did receive several public comments on specific aspects of the summary of RTI's most recent work. These commenters urged CMS not to finalize any proposals based on RTI's Phase III report until the public has had the opportunity to review the report and comment on its findings. We regret that RTI's Phase III report was not posted on the CMS Web site, as we had indicated in our proposed rule. The report will be available in the near future at http://www.cms.hhs.gov/LongTermCareHopitalPPS/02a_RTIReports.asp#TopOfPage. Although we did not propose any policies based on that report, we can assure the readers that any policies that we believe are appropriate for implementation would be subject to the notice-and-comment rulemaking process.

8. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed FY 2010 prospective payment rates for operating costs and capital-related costs for acute care hospitals. We also established the proposed threshold amounts for outlier cases. In addition, we addressed the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2010 for hospitals excluded from the IPPS.

9. Determining Proposed Prospective Payment Rates for LTCHs

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed RY 2010 prospective standard Federal rate. We also established the proposed adjustments for wage levels, the labor-related share, the cost-of-living adjustment, and high-cost outliers, including the fixed-loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH PPS.

10. Impact Analysis

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

11. Recommendation of Update Factors for Operating Cost Rates of Payment for Hospital Inpatient Services

In Appendix B of the 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 2010 for the following:

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

12. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2008 recommendations concerning hospital inpatient payment policies address the update factor for hospital inpatient operating costs and capital-related costs under the IPPS, for hospitals and distinct part hospital units excluded from the IPPS, and for LTCHs. We addressed these recommendations in Appendix B of the proposed rule. For further information relating specifically to the MedPAC March 2008 report or to obtain a copy of the report, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

We received approximately 525 timely pieces of correspondence from the public in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and the supplemental proposed rule. We summarize these public comments and present our responses under the specific subject areas of this final rule.

E. Finalization of Interim Final Rule With Comment Period That Revised the FY 2009 MS-LTC-DRG Relative Weights

On June 3, 2009, we issued in the Federal Register an interim final rule with comment period that revised the MS-LTC-DRG relative weights for payments under the LTCH PPS. We revised the MS-LTC-DRG relative weights for FY 2009 due to the misapplication of our established methodology in the calculation of the budget neutrality factor. The revised relative weights are effective for the remainder of FY 2009 (that is, from June 3, 2009 through September 30, 2009). We received 11 timely pieces of correspondence from the public in response to this interim final rule with comment period. In section IX. of the preamble of this final rule, we summarize these public comments, present our responses, and finalize the provisions of the interim final rule with comment period.

F. Finalization of Two LTCH PPS Interim Final Rules With Comment Period Issued in May 2008

On May 6, 2008 and May 22, 2008, we issued in the Federal Register two interim final rules with comment period relating to the LTCH PPS (73 FR 24871 and 73 FR 29699, respectively), which implement section 114 of Public Law 110-173 (MMSEA). The May 6, 2008 interim final rule with comment period implemented provisions of section 114 of Public Law 110-173 relating to a 3-year delay in the application of certain provisions of the payment adjustment for short-stay outliers and revisions to the RY 2008 standard Federal rate for LTCHs. The May 22, 2008 interim final rule with comment period implemented certain provisions of section 114 of Public Law 110-173 relating to a 3-year moratorium on the establishment of new LTCHs and LTCH satellite facilities and on increases in beds in existing LTCHs and LTCH satellite facilities. The May 22, 2008 interim final rule with comment period also implemented a 3-year delay in the application of certain payment policies that apply to payment adjustments for discharges from LTCHs and LTCH satellite facilities that were admitted from certain referring hospitals in excess of various percentage thresholds.

We received six timely pieces of correspondence from the public in response to the May 6, 2008 interim final rule with comment period. We received 30 timely pieces of correspondence from the public in response to the May 22, 2008 interim final rule with comment period. In section X. of the preamble of this final rule, we summarize these public comments, present our responses, and finalize the provisions of both interim final rules with comment period, as appropriate.

G. Interim Final Rule With Comment Period That Implements Certain Provisions of the ARRA Relating to Payments to LTCHs and LTCH Satellite Facilities

Section 4302 of the American Recovery and Reinvestment Act of 2009 (ARRA, Pub. L. 111-5) included several amendments to section 114 of Public Law 110-173 (MMSEA) relating to payments to LTCHs and LTCH satellite facilities that are discussed under section X. of the preamble of this final rule. These amendments are effective as if they were enacted as part of section 114 of Public Law 110-173 (MMSEA). We issued instructions to the fiscal intermediaries and Medicare administrative contractors (MACs) to interpret these amendments (Change Request 6444). In section XI. of this document, we implement the provisions of section 4302 of Public Law 111-5 through an interim final rule with comment period. Comments on this interim final rule with comment period may be submitted as specified in the DATES and Comment Period sections of this document.

II. Changes to Medicare Severity Diagnosis-Related Group (MS-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.

B. MS-DRG Reclassifications

1. General

As discussed in the preamble to the FY 2008 IPPS final rule with comment period (72 FR 47138), we focused our efforts in FY 2008 on making significant reforms to the IPPS consistent with the recommendations made by MedPAC in its “Report to the Congress, Physician-Owned Specialty Hospitals” in March 2005. MedPAC recommended that the Secretary refine the entire DRG system by taking severity of illness into account and applying hospital-specific relative value (HSRV) weights to DRGs. [1] We began this reform process by adopting cost-based weights over a 3-year transition period beginning in FY 2007 and making interim changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and modifying 32 other DRGs across 13 different clinical areas involving nearly 1.7 million cases. As described in more detail below, these refinements were intermediate steps towards comprehensive reform of both the relative weights and the DRG system as we undertook further study. For FY 2008, we adopted 745 new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system, based on severity levels of illness, was established (72 FR 47141).

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

The process of developing the MS-DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formulated by physician panels to ensure that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final MS-DRG could contain patients in different MDCs. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2009, cases are assigned to one of 746 MS-DRGs in 25 MDCs. The table below lists the 25 MDCs.

Major Diagnostic Categories (MDCs) Back to Top
1 Diseases and Disorders of the Nervous System.
2 Diseases and Disorders of the Eye.
3 Diseases and Disorders of the Ear, Nose, Mouth, and Throat.
4 Diseases and Disorders of the Respiratory System.
5 Diseases and Disorders of the Circulatory System.
6 Diseases and Disorders of the Digestive System.
7 Diseases and Disorders of the Hepatobiliary System and Pancreas.
8 Diseases and Disorders of the Musculoskeletal System and Connective Tissue.
9 Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast.
10 Endocrine, Nutritional and Metabolic Diseases and Disorders.
11 Diseases and Disorders of the Kidney and Urinary Tract.
12 Diseases and Disorders of the Male Reproductive System.
13 Diseases and Disorders of the Female Reproductive System.
14 Pregnancy, Childbirth, and the Puerperium.
15 Newborns and Other Neonates with Conditions Originating in the Perinatal Period.
16 Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders.
17 Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms.
18 Infectious and Parasitic Diseases (Systemic or Unspecified Sites).
19 Mental Diseases and Disorders.
20 Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders.
21 Injuries, Poisonings, and Toxic Effects of Drugs.
22 Burns.
23 Factors Influencing Health Status and Other Contacts with Health Services.
24 Multiple Significant Trauma.
25 Human Immunodeficiency Virus Infections.

In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to an MS-DRG. However, under the most recent version of the Medicare GROUPER (Version 26.0), there are 13 MS-DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These MS-DRGs are for heart transplant or implant of heart assist systems; liver and/or intestinal transplants; bone marrow transplants; lung transplants; simultaneous pancreas/kidney transplants; pancreas transplants; and tracheostomies. Cases are assigned to these MS-DRGs before they are classified to an MDC. The table below lists the 13 current pre-MDCs.

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

Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on hospital resource consumption. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or comorbidity (CC) or a major complication or comorbidity (MCC).

Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect MS-DRG assignment for certain principal diagnoses. An example is extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones. Lithotripsy procedures are not routinely performed in an operating room. Therefore, lithotripsy codes are not classified as O.R. procedures. However, our clinical advisors believe that patients with urinary stones who undergo extracorporeal shock wave lithotripsy should be considered similar to other patients who undergo O.R. procedures. Therefore, we treat this group of patients similar to patients undergoing O.R. procedures.

Once the medical and surgical classes for an MDC were formed, each diagnosis class was evaluated to determine if complications or comorbidities would consistently affect hospital resource consumption. Each diagnosis was categorized into one of three severity levels. These three levels include a major complication or comorbidity (MCC), a complication or comorbidity (CC), or a non-CC. Physician panels classified each diagnosis code based on a highly iterative process involving a combination of statistical results from test data as well as clinical judgment. As stated earlier, we refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

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

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

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

The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible MS-DRG classification changes and to recalibrate the MS-DRG weights. However, in the FY 2000 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year's proposed rule. This date allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year's proposed rule.

As we indicated above, for FY 2008, we made significant improvements in the DRG system to recognize severity of illness and resource usage by adopting MS-DRGs that were reflected in the FY 2008 GROUPER, Version 25.0, and were effective for discharges occurring on or after October 1, 2007. Our MS-DRG analysis for the FY 2009 final rule was based on data from the March 2008 update of the FY 2007 MedPAR file, which contained hospital bills received through March 31, 2008, for discharges occurring through September 30, 2007. For this final rule, for FY 2010, our MS-DRG analysis is based on data from the March 2009 update of the FY 2008 MedPAR file, which contains hospital bills received through September 30, 2008, for discharges occurring through September 30, 2008.

2. Yearly Review for Making MS-DRG Changes

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

The actual process of forming the MS-DRGs was, and will likely continue to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. In the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described in detail the process we used to develop the MS-DRGs that we adopted for FY 2008. In addition, in deciding whether to make further modification to the MS-DRGs for particular circumstances brought to our attention, we considered whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the MS-DRG. We evaluated patient care costs using average charges and lengths of stay as proxies for costs and relied on the judgment of our medical advisors to decide whether patients are clinically distinct or similar to other patients in the MS-DRG. In evaluating resource costs, we considered both the absolute and percentage differences in average charges between the cases we selected for review and the remainder of cases in the MS-DRG. We also considered variation in charges within these groups; that is, whether observed average differences were consistent across patients or attributable to cases that were extreme in terms of charges or length of stay, or both. Further, we considered the number of patients who will have a given set of characteristics and generally preferred not to create a new MS-DRG unless it would include a substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 through 47939; and 72 FR 47140 through 47189). As we noted in the FY 2006 IPPS final rule, we had insufficient time to complete a thorough evaluation of these recommendations for full implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in FY 2006 to address public comments on this issue and the specific concerns of MedPAC regarding cardiac surgery DRGs. We also indicated that we planned to further consider all of MedPAC's recommendations and thoroughly analyze options and their impacts on the various types of hospitals in the FY 2007 IPPS proposed rule.

For FY 2007, we began this process. In the FY 2007 IPPS proposed rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 2008 (if not earlier). Based on public comments received on the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007 IPPS final rule (71 FR 47906 through 47912), we discussed several concerns raised by commenters regarding the proposal to adopt CS DRGs. We acknowledged the many comments suggesting the logic of Medicare's DRG system should continue to remain in the public domain as it has since the inception of the PPS. We also acknowledged concerns about the impact on hospitals and software vendors of moving to a proprietary system. Several commenters suggested that CMS refine the existing DRG classification system to preserve the many policy decisions that were made over the last 20 years and were already incorporated into the DRG system, such as complexity of services and new device technologies. Consistent with the concerns expressed in the public comments, this option had the advantage of using the existing DRGs as a starting point (which was already familiar to the public) and retained the benefit of many DRG decisions that were made in recent years. We stated our belief that the suggested approach of incorporating severity measures into the existing DRG system was a viable option that would be evaluated.

Therefore, we decided to make interim changes to the existing DRGs for FY 2007 by creating 20 new DRGs involving 13 different clinical areas that would significantly improve the CMS DRG system's recognition of severity of illness. We also modified 32 DRGs to better capture differences in severity. The new and revised DRGs were selected from 40 existing CMS DRGs that contained 1,666,476 cases and represented a number of body systems. In creating these 20 new DRGs, we deleted 8 existing DRGs and modified 32 existing DRGs. We indicated that these interim steps for FY 2007 were being taken as a prelude to more comprehensive changes to better account for severity in the DRG system by FY 2008.

In the FY 2007 IPPS final rule (71 FR 47898), we indicated our intent to pursue further DRG reform through two initiatives. First, we announced that we were in the process of engaging a contractor to assist us with evaluating alternative DRG systems that were raised as potential alternatives to the CMS DRGs in the public comments. Second, we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes as part of making further refinements to the current CMS DRGs to better recognize severity of illness based on the work that CMS (then HCFA) did in the mid-1990's in connection with adopting severity DRGs. We describe below the progress we have made on these two initiatives and our actions for FYs 2008, 2009, and 2010 based on our continued analysis of reform of the DRG system. We note that the adoption of the MS-DRGs to better recognize severity of illness has implications for the outlier threshold, the application of the postacute care transfer policy, the measurement of real case-mix versus apparent case-mix, and the IME and DSH payment adjustments. We discuss these implications for FY 2010 in other sections of this preamble and in the Addendum to this final rule.

In the FY 2007 IPPS proposed rule, we discussed MedPAC's recommendations to move to a cost-based HSRV weighting methodology using HSRVs beginning with the FY 2007 IPPS proposed rule for determining the DRG relative weights. Although we proposed to adopt the HSRV weighting methodology for FY 2007, we decided not to adopt the proposed methodology in the final rule after considering the public comments we received on the proposal. Instead, in the FY 2007 IPPS final rule, we adopted a cost-based weighting methodology without the HSRV portion of the proposed methodology. The cost-based weights were adopted over a 3-year transition period in1/3increments between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we indicated our intent to further study the HSRV-based methodology as well as other issues brought to our attention related to the cost-based weighting methodology adopted in the FY 2007 final rule. There was significant concern in the public comments that our cost-based weighting methodology does not adequately account for charge compression—the practice of applying a higher percentage charge markup over costs to lower cost items and services and a lower percentage charge markup over costs to higher cost items and services. Further, public commenters expressed concern about potential inconsistencies between how costs and charges are reported on the Medicare cost reports and charges on the Medicare claims. In the FY 2007 IPPS final rule, we used costs and charges from the cost report to determine departmental level cost-to-charge ratios (CCRs) which we then applied to charges on the Medicare claims to determine the cost-based weights. The commenters were concerned about potential distortions to the cost-based weights that would result from inconsistent reporting between the cost reports and the Medicare claims. After publication of the FY 2007 IPPS final rule, we entered into a contract with RTI International (RTI) to study both charge compression and to what extent our methodology for calculating DRG relative weights is affected by inconsistencies between how hospitals report costs and charges on the cost reports and how hospitals report charges on individual claims. Further, as part of its study of alternative DRG systems, the RAND Corporation analyzed the HSRV cost-weighting methodology. We refer readers to section II.E. of the preamble of this final rule for discussion of the issue of charge compression and the cost-weighting methodology for FY 2010.

We believe that revisions to the DRG system to better recognize severity of illness and changes to the relative weights based on costs rather than charges are improving the accuracy of the payment rates in the IPPS. We agree with MedPAC that these refinements should be pursued. Although we continue to caution that any prospective payment system based on grouping cases will always present some opportunities for providers to specialize in cases they believe have higher margins, we believe that the changes we have adopted and the continuing reforms we are adoptimg in this final rule for FY 2010 will improve payment accuracy and reduce financial incentives to create specialty hospitals.

We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

D. FY 2010 MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90

As we discussed earlier in this preamble, we adopted the MS-DRG patient classification system for the IPPS, effective October 1, 2007, to better recognize severity of illness in Medicare payment rates for acute care hospitals. The adoption of the MS-DRG system resulted in the expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008 (currently, 746 DRGs, which include 1 additional MS-DRG created in FY 2009). By increasing the number of DRGs and more fully taking into account patients' severity of illness in Medicare payment rates for acute care hospitals, the use of MS-DRGs encourage hospitals to improve their documentation and coding of patient diagnoses. In the FY 2008 IPPS final rule with comment period (72 FR 47175 through 47186), we indicated that we believe the adoption of the MS-DRGs had the potential to lead to increases in aggregate payments without a corresponding increase in actual patient severity of illness due to the incentives for additional documentation and coding. In that final rule with comment period, we exercised our authority under section 1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget neutrality by adjusting the national standardized amount to eliminate the estimated effect of changes in coding or classification that do not reflect real changes in case-mix. Our actuaries estimated that maintaining budget neutrality required an adjustment of −4.8 percent to the national standardized amount. We phased in this −4.8 percent adjustment over 3 years. Specifically, we established prospective documentation and coding adjustments of −1.2 percent for FY 2008, −1.8 percent for FY 2009, and −1.8 percent for FY 2010.

On September 29, 2007, Congress enacted the TMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 7(a) of Public Law 110-90 reduced the documentation and coding adjustment made as a result of the MS-DRG system that we adopted in the FY 2008 IPPS final rule with comment period to −0.6 percent for FY 2008 and −0.9 percent for FY 2009. Section 7(a) of Public Law 110-90 did not adjust the FY 2010 −1.8 percent documentation and coding adjustment promulgated in the FY 2008 IPPS final rule with comment period. To comply with section 7(a) of Public Law 110-90, we promulgated a final rule on November 27, 2007 (72 FR 66886) that modified the IPPS documentation and coding adjustment for FY 2008 to −0.6 percent, and revised the FY 2008 payment rates, factors, and thresholds accordingly. These revisions were effective on October 1, 2007.

For FY 2009, section 7(a) of Public Law 110-90 required a documentation and coding adjustment of −0.9 percent instead of the −1.8 percent adjustment established in the FY 2008 IPPS final rule with comment period. As discussed in the FY 2009 IPPS final rule (73 FR 48447) and required by statute, we applied a documentation and coding adjustment of −0.9 percent to the FY 2009 IPPS national standardized amount. The documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period, as amended by Public Law 110-90, are cumulative. As a result, the −0.9 percent documentation and coding adjustment for FY 2009 was in addition to the −0.6 percent adjustment for FY 2008, yielding a combined effect of −1.5 percent.

2. Prospective Adjustment to the Average Standardized Amounts Required by Section 7(b)(1)(A) of Public Law 110-90

Section 7(b)(1)(A) of Public Law 110-90 requires that if the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different than the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, the Secretary shall make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act authorizes adjustments to the average standardized amounts for subsequent fiscal years in order to eliminate the effect of such coding or classification changes. These adjustments are intended to ensure that future annual aggregate IPPS payments are the same as the payments that otherwise would have been made had the prospective adjustments for documentation and coding applied in FY 2008 and FY 2009 reflected the change that occurred in those years.

3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 Required by Public Law 110-90

If, based on a retroactive evaluation of claims data, the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different from the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an additional adjustment to the standardized amounts under section 1886(d) of the Act. This adjustment must offset the estimated increase or decrease in aggregate payments for FYs 2008 and 2009 (including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustment applied under section 7(a) of Public Law 110-90. This adjustment is in addition to making an appropriate adjustment to the standardized amounts under section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) of Public Law 110-90. That is, these adjustments are intended to recoup (or repay) spending in excess of (or less than) spending that would have occurred had the prospective adjustments for changes in documentation and coding applied in FY 2008 and FY 2009 precisely matched the changes that occurred in those years. Public Law 110-90 requires that the Secretary make these recoupment or repayment adjustments for discharges occurring during FYs 2010, 2011, and 2012.

4. Retrospective Evaluation of FY 2008 Claims Data

In order to implement the requirements of section 7 of Public Law 110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that we planned a thorough retrospective evaluation of our claims data. We stated that the results of this evaluation would be used by our actuaries to determine any necessary payment adjustments to the standardized amounts under section 1886(d) of the Act beginning in FY 2010 to ensure the budget neutrality of the MS-DRGs implementation for FY 2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed rule (73 FR 23541 through 23542), we described our preliminary plan for a retrospective analysis of inpatient hospital claims data and invited public input on our proposed methodology.

In that proposed rule, we indicated that we intended to measure and corroborate the extent of the overall national average changes in case-mix for FY 2008 and FY 2009. We expected that the two largest parts of this overall national average change would be attributable to underlying changes in actual patient severity and to documentation and coding improvements under the MS-DRG system. In order to separate the two effects, we planned to isolate the effect of shifts in cases among base DRGs from the effect of shifts in the types of cases within base DRGs.

The MS-DRGs divide the base DRGs into three severity levels (with MCC, with CC and without CC); the previously used CMS DRGs had only two severity levels (with CC and without CC). Under the CMS DRG system, the majority of hospital discharges had a secondary diagnosis which was on the CC list, which led to the higher severity level. The MS-DRGs significantly changed the code lists of what was classified as an MCC or a CC. Many codes that were previously classified as a CC are no longer included on the MS-DRG CC list because the data and clinical review showed these conditions did not lead to a significant increase in resource use. The addition of a new level of high severity conditions, the MCC list, also provided a new incentive to code more precisely in order to increase the severity level. We anticipated that hospitals would examine the MS-DRG MCC and CC code lists and then work with physicians and coders on documentation and coding practices so that coders could appropriately assign codes from the highest possible severity level. We note that there have been numerous seminars and training sessions on this particular coding issue. The topic of improving documentation practices in order to code conditions on the MCC list was also discussed extensively by participants at the March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. Participants discussed their hospitals' efforts to encourage physicians to provide more precise documentation so that coders could appropriately assign codes that would lead to a higher severity level. Because we expected most of the documentation and coding changes under the MS-DRG system would occur in the secondary diagnoses, we believed that the shifts among base DRGs were less likely to be the result of the MS-DRG system and the shifts within base DRGs were more likely to be the result of the MS-DRG system. We also anticipated evaluating data to identify the specific MS-DRGs and diagnoses that contributed significantly to the documentation and coding payment effect and to quantify their impact. This step entailed analysis of the secondary diagnoses driving the shifts in severity within specific base DRGs.

In that same proposed rule, we also stated that, while we believe that the data analysis plan described previously will produce an appropriate estimate of the extent of case-mix changes resulting from documentation and coding changes, we might decide, if feasible, to use historical data from our Hospital Payment Monitoring Program (HPMP) to corroborate the within-base DRG shift analysis. The HPMP is supported by the Medicare Clinical Data Abstraction Center (CDAC).

In the FY 2009 IPPS proposed rule, we solicited public comments on the analysis plans described above, as well as suggestions on other possible approaches for performing a retrospective analysis to identify the amount of case-mix changes that occurred in FY 2008 and FY 2009 that did not reflect real increases in patients' severity of illness.

A few commenters, including MedPAC, expressed support for the analytic approach described in the FY 2009 IPPS proposed rule. A number of other commenters expressed concerns about certain aspects of the approach and/or suggested alternate analyses or study designs. In addition, one commenter recommended that any determination or retrospective evaluation by the actuaries of the impact of the MS-DRGs on case-mix be open to public scrutiny prior to the implementation of the payment adjustments beginning in FY 2010.

We took these comments into consideration as we developed our proposed analysis plan (described in greater detail below) and in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 through 24101) solicited public comment on our methodology and analysis. For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective evaluation of the FY 2008 data for claims paid through December 2008. Based on this evaluation, our actuaries determined that implementation of the MS-DRG system resulted in a 2.5 percent change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008. In the FY 2010 IPPS/RY 2010 LTCH proposed rule, we also stated that we would update the results from the proposed analysis plan with data extracted from FY 2008 Medicare claims that were paid through March 2008 [sic] for the FY 2010 IPPS final rule. (We note that the March 2008 date for the updated data that appeared in the proposed rule should have been March 2009.)

In performing the analysis for the proposed rule, we first divided the case-mix index (CMI) obtained by grouping the FY 2008 claims data through the FY 2008 GROUPER (Version 25.0) by the CMI obtained by grouping these same FY 2008 claims through the FY 2007 GROUPER (Version 24.0). This resulted in a value of 1.028. Because these cases are the same FY 2008 cases grouped using Versions 24.0 and 25.0 of the GROUPER, we attribute this increase primarily to two factors: (1) The effect of changes in documentation and coding under the MS-DRG system; and (2) the measurement effect from the calibration of the GROUPER. We estimated the measurement effect from the calibration of the GROUPER by dividing the CMI obtained by grouping cases in the FY 2007 claims data through the FY 2008 GROUPER by the CMI obtained by grouping cases in these same claims through the FY 2007 GROUPER. This resulted in a value of 1.003. In order to isolate the documentation and coding effect, we then divided the combined effect of the changes in documentation and coding and measurement (1.028) by the measurement effect (1.003) to yield 1.025. Therefore, our estimate of the documentation and coding increase was 2.5 percent.

We then sought to corroborate this 2.5 percent estimate by examining the increases in the within-base DRGs as compared to the increases in the across base DRGs as described earlier in our analysis plan. In other words, we looked for improvements in code selection that would lead to a secondary diagnosis increasing the severity level to either a CC or an MCC level.

In the analysis of data for the proposed rule, we found that the within-base DRG increases were almost entirely responsible for the case-mix change, supporting our conclusion that the 2.5 percent estimate was an accurate reflection of the FY 2008 effect of changes in documentation and coding under the MS-DRG system. In fact, almost every base DRG that was split into different severity levels under the MS-DRG system experienced increases in the within-base DRGs.

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

The results of the analysis for the proposed rule provided additional support for our conclusion that the proposed 2.5 percent estimate accurately reflected the FY 2008 increases in documentation and coding under the MS-DRG system.

While we attempted to use the CDAC data to distinguish real increase in case-mix growth from documentation and coding in the overall case-mix number, we found aberrant data and significant variation across the FY 1999-FY 2007 analysis period. It was not possible to distinguish changes in documentation and coding from changes in real case-mix in the CDAC data. Therefore, we concluded that the CDAC data would not support analysis of real case-mix growth that could be used in our retrospective evaluation of the FY 2008 claims data.

Although we could not use the CDAC data, we did examine the overall growth in case-mix using the FY 2007 claims data in which we grouped cases using the FY 2007 GROUPER and the FY 2008 data in which we grouped cases using the FY 2008 GROUPER. We found the overall growth in case-mix was 1.9 percent. The implication of overall FY 2008 case-mix growth of 1.9 percent relative to our estimate of the FY 2008 documentation and coding effect and the GROUPER measurement effect is that real case-mix declined between FY 2007 and FY 2008. After additional data analysis, our actuaries determined that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent estimate of the FY 2008 documentation and coding effect for reasons that included: (1) Our mathematical model for determining the 2.5 percent documentation and coding effect was corroborated by the amount of case-mix growth attributed to within-DRG improvements in secondary coding of MCCs and CCs; (2) our data analysis confirmed the substitution of specified diagnosis for unspecified diagnoses for such common conditions as heart failure and chronic obstructive pulmonary disease; and (3) there was a relative decline in above average cost short-stay surgical cases that can be performed on an outpatient basis, such as certain high volume pacemaker procedures.

We also examined the differences in case-mix between the FY 2008 claims data in which cases were grouped through the FY 2008 GROUPER (Version 25.0) and the FY 2009 GROUPER (Version 26.0). This was to help inform analysis of the potential for increase in the documentation and coding effect in FY 2009. In FY 2008, we were transitioning to the fully implemented MS-DRG relative weights and the fully implemented cost-based weights. We found that the use of the transition weights mitigated the FY 2008 documentation and coding effect on expenditures. Using the FY 2009 relative weights, the documentation and coding effect would have been an estimated 3.2 percent in FY 2008 instead of our estimated 2.5 percent. Even assuming no continued improvement in documentation and coding in FY 2009, we estimated that the use of the FY 2009 relative weights would result in an additional 0.7 percent documentation and coding effect in FY 2009. After taking into account the results of our FY 2008 analysis and the expertise of our coding staff, our actuaries continue to estimate that the cumulative overall effect of documentation and coding improvements under the MS-DRG system will be 4.8 percent. However, our actuaries estimate that these improvements will be substantially complete by the end of FY 2009. Therefore, our estimate of the FY 2009 MS-DRG documentation and coding effect for the proposed rule was 2.3 percent.

As in prior years, the FY 2008 MedPAR files were available to the public to allow independent analysis of the FY 2008 documentation and coding effect. Interested individuals may still order these files by going to the Web site at http://www.cms.hhs.gov/LimitedDataSets/ and clicking on MedPAR Limited Data Set (LDS)-Hospital (National). This Web page describes the file and provides directions and further detailed instructions for how to order.

Persons placing an order must send the following: a Letter of Request, the LDS Data Use Agreement and Research Protocol (refer to the Web site for further instructions), the LDS Form, and a check for $3,655 to:

Mailing address if using the U.S. Postal Service: Centers for Medicare Medicaid Services, RDDC Account, Accounting Division, P.O. Box 7520, Baltimore, MD 21207-0520.

Mailing address if using express mail: Centers for Medicare Medicaid Services, OFM/Division of Accounting—RDDC, 7500 Security Boulevard, C3-07-11, Baltimore, MD 21244-1850.

Comment: MedPAC commented that its analysis of 2008 claims confirmed the CMS finding that documentation and coding improvements increased case-mix by 2.5 percent in 2008, which resulted in overpayments of 1.9 percent. With regard to CMS' projection that by the end of 2009, hospitals' documentation and coding improvements will have increased case-mix by a cumulative total of 4.8 percent, MedPAC stated that, while all documentation and coding improvement projections are subject to uncertainty, 4.8 percent appears to be a reasonable estimate, given MedPAC's own examination of recent experience in Maryland.

Response: We agree with MedPAC's comment that changes in documentation and coding increased case-mix by 2.5 percent in FY 2008. Using more recent FY 2008 claims data updated through March 2009, our actuaries' estimate of the effect of changes in documentation and coding continues to be 2.5 percent. Our actuaries also continue to estimate that by the end of FY 2009, changes in documentation and coding will have increased case-mix by 4.8 percent, consistent with MedPAC's comment.

Comment: Most commenters questioned CMS' methodology for the retrospective evaluation of FY 2008 claims data and CMS' finding that real case-mix growth in FY 2008 was negative. These comments were generally similar to the comments from the AHA, which read:

“In its analysis of documentation and coding changes, CMS concludes that from FY 2007 to FY 2008, there was a decline in real case mix; in contrast, our analysis found that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case mix and we are concerned that CMS' conclusion is incorrect. Further, because CMS' conclusion that real case-mix declined is an inference based on its analysis of documentation and coding-related increases, we are concerned that the 1.9 percent proposed cut also is inaccurate and overstated.”

The commenters also raised concerns that CMS' estimate did not fully consider other potential causes of increased case-mix, such as patients requiring less complex services receiving care in other settings and “healthier” patients enrolling in Medicare Advantage plans in increasing numbers. Other commenters indicated that factors such as the changes in the CC/MCC definitions, limitations on the number of codes used by CMS for payment and ratesetting, resequencing of secondary diagnoses, the transition to the cost-based weights, less use of “not otherwise specified” codes, and increases in real case-mix due to health reform efforts also resulted in an inaccurate documentation and coding analysis. One commenter indicated that, of the overall case-mix increase, 1.0 percent to 1.5 percent is “real” case-mix increase, while 1.0 percent to 1.5 percent is due to documentation and coding or other increases.

Response: The assertion that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case-mix is predicated on the assumption that there was little documentation and coding effect in those historical years. In considering these comments concerning historical real case-mix, we calculated overall increases in case-mix for the period from FY 2000 to FY 2007 using the cases from each year and the GROUPER and relative weights applicable for each year. The results are shown in the following chart:

Overall Case-Mix Increases for FY 2000 to FY 2007 Back to Top
Year Overall case-mix change from prior year (in percent)
FY 2000 −0.7
FY 2001 −0.4
FY 2002 1.0
FY 2003 1.4
FY 2004 1.0
FY 2005 0.9
FY 2006 1.2
FY 2007 −0.2

Overall case-mix growth is predominately comprised of three factors: real case-mix growth; a documentation and coding effect; and a measurement effect. Under the reasonable assumption that there has been a relatively small measurement effect in those years, the assertion that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case-mix implies that the documentation and coding effect in many of those years was negative. For example, as described earlier, we estimated a recent measurement effect of +0.3 percent. The overall case-mix growth of −0.2 percent in FY 2007 net of a measurement effect of +0.3 percent results in growth of +0.1 percent. A real case-mix growth of +1.2 percent in FY 2007, therefore, implies a negative documentation and coding effect of approximately −1.1 percent. It is not obvious why documentation and coding would have had such a large negative effect in FY 2007, or in any other year where the overall case-mix change is significantly less than the commenter's claimed average annual trend, calling into question the assertion that real case-mix growth is a steady 1.2 to 1.3 percent per year.

Our current estimate of the overall case-mix growth for FY 2008 based on more recent data than the data used in the proposed rule is 2.0 percent, still less than our actuaries' estimate of a 2.5 percent documentation and coding increase. With respect to the concerns raised by commenters about our finding of negative real case-mix growth in FY 2008, a finding of negative real case-mix growth is consistent with the fact that, in some years, overall case-mix growth has been negative, as shown in the chart presented above in this response. Some commenters were particularly focused on our statement in the proposed rule regarding a relative decline in above average cost short-stay surgical cases. We did not state that the decline in real case-mix was entirely attributable to the relative decline in above average cost short-stay outliers. We stated that—

“After additional data analysis, our actuaries determined that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent estimate of the FY 2008 documentation and coding effect for reasons that included: (1) Our mathematical model for determining the 2.5 percent documentation and coding effect was corroborated by the amount of case-mix growth attributed to within-DRG improvements in secondary coding of MCCs and CCs; (2) our data analysis confirmed the substitution of specified diagnosis for unspecified diagnoses for such common conditions as heart failure and chronic obstructive pulmonary disease; and (3) there was a relative decline in above average cost short-stay surgical cases that can be performed on an outpatient basis, such as certain high-volume pacemaker procedures.”

The decline in above average cost short-stay surgical cases was one factor in our actuaries' determination that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent documentation and coding estimate. It was not the only factor. Our current estimate of the overall case-mix growth between FY 2007 and FY 2008 based on more recent data than the data used in the proposed rule is 2.0 percent. We observed numerous small changes for a number of base DRGs that drive the difference between this overall case mix growth estimate of 2.0 percent and our documentation and coding estimate of 2.5 percent, including the relative decline in above average cost surgical stay cases that can be performed on an outpatient basis that we cited in the proposed rule. These other base DRGs include MS-DRGs 193, 194, and 195 (Simple Pneumonia and Pleurisy with MCC, with CC, and without CC or MCC, respectively); MS-DRGs 246 and 247 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with MCC or Four or More (4+) Vessels/Stents and without MCC, respectively); MS-DRGs 233 and 234 (Coronary Bypass with Cardiac Catheterization with MCC and without MCC, respectively); MS-DRGs 235 and 236 (Coronary Bypass without Cardiac Catheterization with MCC and without MCC, respectively); MS-DRGs 252, 253, and 254 (Other Vascular Procedures with MCC, with CC, and without CC or MCC, respectively); MS-DRGs 291, 292, and 293 (Heart Failure and Shock with MCC, with CC, and without CC or MCC, respectively); MS-DRG 313 (Chest Pain); and MS-DRGs 391 and 392 (Esophagitis, Gastroenteritis and Miscellaneous Digestive Disorders with MCC and without MCC, respectively). It is reasonable that the cumulative impact of small changes across a number of base DRGs could result in a difference of 0.5 percentage points between the overall growth in case-mix and our documentation and coding estimate.

With respect to the commenters who raised concerns that our estimate did not fully consider other potential causes of increased real case-mix, such as patients requiring less-complex services receiving care in other settings, “healthier” patients enrolling in MA plans in increasing numbers, and health reform efforts, we note that our methodology for estimating documentation and coding does not, by definition, include real case-mix, regardless of the actual real case-mix level. As MedPAC stated in its comment:

“Our analysis of hospital claims for fiscal year 2008 confirms CMS's findings. To see how much the aggregate CMI and payments increased in 2008 due solely to hospitals' DCI, we used fiscal year 2008 claims—from the December 2008 update of the 2008 MedPAR file—to calculate the national aggregate CMI based on the 2008 MS-DRGs and weights. Using the same claims, we also calculated the aggregate CMI based on the 2007 DRGs and weights. The difference between the two CMIs is 2.8 percent. By definition, this change in reported case mix is not real because the cases are the same.”

The question is how much of the 2.8 percent increase is due to a documentation and coding effect and how much is due to a measurement effect. Both MedPAC and our actuaries, based on prior year data, estimate the measurement effect to be 0.3 percent, yielding our 2.5 percent FY 2008 documentation and coding effect.

With respect to the commenter who indicated that real case-mix growth was 1.0 percent to 1.5 percent, the primary reason cited was the interaction of the resequencing of secondary diagnoses, changes in MS-DRG definitions, and limitations on the number of codes used by CMS for payment and ratesetting. There is a yearly review for making MS-DRG changes. As we note in section II.B.2. of this preamble, the actual process of forming MS-DRGs is highly iterative and involves statistical results from test data and clinical judgment. In addition, while hospitals may submit up to 25 diagnosis codes and 25 procedure codes on the claim, our payment system uses only the first 9 diagnosis code positions and the first 6 procedure code positions for payment purposes. The commenter observed that the combination of this system limitation with the yearly review of MS-DRGs has a sequencing effect. The commenter did not believe that the resequencing of secondary diagnoses was a documentation and coding effect. We disagree. Resequencing is merely a change in the hospital's ordering of the codes that will be used for payment purposes. It causes a payment change unrelated to any change in the underlying condition of a patient. As we have stated on numerous occasions, we do not believe that these types of documentation and coding changes are the result of inappropriate behavior on the part of hospitals. However, to the extent resequencing occurs, it is appropriately included in our documentation and coding increase.

Comment: Multiple commenters were disappointed that CMS was unable to obtain relevant findings based on CDAC data to quantify real case-mix change.

Response: As we stated in the proposed rule, when we attempted to use the CDAC data to distinguish increase in real case-mix growth from increases due to documentation and coding in the overall case-mix number, we found aberrant data and significant inconsistency across the FY 1999-FY 2007 analysis period. It was not possible to distinguish changes in documentation and coding from changes in real case-mix in the CDAC data. Therefore, we concluded that the CDAC data would not support analysis of real case-mix growth that could be used in our retrospective evaluation of the FY 2008 claims data. While we acknowledge the disappointment of the commenters, we note that we did not receive any alternative analysis directly measuring real case-mix growth that did not rely on assumptions with respect to the other factors that influence overall case-mix growth.

Comment: Some commenters suggested that rural providers are typically presented with less complex cases and have fewer opportunities to benefit from improved coding opportunities.

Response: As MedPAC stated in its comment, “In addition, we estimated the 2008 DCI effect using the same methods for various subgroups of hospitals. Although the DCI estimates varied somewhat among the groups, the variation was generally small. Thus, the DCI response appears to be widely consistent among all types of hospitals.” Our own analyses confirm MedPAC's finding that the documentation and coding response appears to be generally consistent among different types of hospitals, including urban and rural hospitals. Using the same methodology described earlier, the difference in the DCI response between urban and rural hospitals was not significant, similar to our findings discussed elsewhere that the differences for MDHs and SCHs were not significant.

We also note that we discussed the issue of a uniform adjustment for DCI response in the FY 2008 IPPS final rule (72 FR 47184), published prior to the TMA, Abstinence Education, and QI Programs Extension Act of 2007. In that discussion, we noted that “While improvements in documentation and coding that increase case mix may be variable, section 1886(d)(3)(A)(vi) of the Act only allows us to apply the adjustments that are a result of changes in the coding or classification of discharges that do not reflect real changes in case mix to the standardized amounts.”

Section 7 of the TMA, Abstinence Education, and QI Programs Extension Act of 2007 specifically references section 1886(d)(3)(A)(vi), stating that the Secretary shall “make an appropriate adjustment under paragraph (3)(A)(vi) of such section 1886(d).” Section 1886(d)(3)(A)(iv)(II) of the Act directed CMS to eliminate separate standardized amounts for large urban areas and other areas beginning in FY 2004, creating the current uniform standardized amount that is applicable to all hospitals. Therefore, even if the data did indicate a different DCI response for urban and rural hospitals, the law continues to only allow us to apply the prospective adjustments that are a result of changes in the coding or classification of discharges that do not reflect real changes in case-mix to the standardized amount.

5. Adjustments for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act

Based on our most current evaluation of FY 2008 Medicare claims data, the estimated 2.5 percent change in FY 2008 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeds the −0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. Under section 7(b)(1)(A) of Public Law 119-90, the Secretary is required to make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act to the average standardized amounts for subsequent fiscal years in order to eliminate the full effect of the documentation and coding changes on future payments. In addition, we note that the Secretary has the authority to make this prospective adjustment in FY 2010 under section 1886(d)(3)(A)(vi) of the Act. As we have consistently stated since the initial implementation of the MS-DRG system, we do not believe it is appropriate for expenditures to increase due to MS-DRG-related changes in documentation and coding that do not reflect real changes in case-mix.

We also estimate that the additional change in case-mix due to changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009 will be 2.3 percent, which would exceed by 1.4 percentage points the −0.9 percent prospective documentation and coding adjustment for FY 2009 applied under section 7(a) of 100. We have the statutory authority to adjust the FY 2010 rates for this estimated 1.4 percentage point increase. However, given that 100 requires a retrospective claims evaluation for the additional adjustments described in section II.D.6. of this preamble, we stated in the proposed rule that we believed our evaluation of the extent of the overall national average changes in case-mix for FY 2009 should also be based on a retrospective evaluation of all FY 2009 claims data. Because we do not receive all FY 2009 claims data prior to publication of this final rule, we indicated we would address any difference between the additional increase in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009 and the −0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 in the FY 2011 rulemaking cycle.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on the proposed −1.9 percent prospective adjustment to the standardized amounts under section 1886(d) of the Act to address the effects of documentation and coding changes unrelated to changes in real case-mix in FY 2008. In addition, we solicited public comments on addressing in the FY 2011 rulemaking cycle any differences between the increase in FY 2009 case-mix due to changes in documentation and coding changes that do not reflect real changes in case-mix for discharges occurring during FY 2009 and the −0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90. We present below a summation of the public comments we received on these issues and our responses.

Comment: MedPAC summarized its comments on when CMS should reduce payment rates to prevent further overpayments and to recover overpayments occurring in 2008 and 2009 as follows: “We support CMS's proposal to reduce IPPS payments in 2010 by 1.9 percent to prevent further overpayments. While we and the CMS actuaries believe that a 1.9 percent reduction will not fully prevent overpayments from continuing in 2010, this is a reasonable first step toward reducing overpayments.”

Response: While we agree with MedPAC's comment that our proposed −1.9 percent adjustment would be a reasonable first step with respect to the documentation and coding increases associated with the implementation of the MS-DRGs, nevertheless, as discussed below, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data. If the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for FY 2008 and FY 2009 combined adjustment.

Comment: Most commenters opposed the proposed −1.9 percent prospective FY 2010 adjustment for FY 2008 documentation and coding increases, but supported the proposal not to apply a FY 2010 prospective adjustment for estimated FY 2009 documentation and coding increases. The commenters expressed concern over the financial impact of the proposed −1.9 percent adjustment and the methodology for calculating the adjustment. The comments on the financial impact were generally similar to those contained in the comment from the AHA, which stated that “The proposed rule includes a 1.9 percent cut to both operating and capital payments in FY 2010 and beyond—$23 billion over 10 years—to correct the base rate for payments made in FY 2008 that CMS claims are the effect of documentation and coding changes that do not reflect real changes in case mix. In combination with other policy changes, this cut results in hospitals being paid $1 billion less in FY 2010 than in FY 2009 * * * We recognize that CMS could have taken action to reduce payments more than proposed in this rule. We appreciate that CMS did not propose cuts for documentation and coding changes in FY 2009 or cuts to recoup the estimated documentation and coding overpayments in FY 2008. However, given the severity of the 1.9 percent proposed cut, and in light of the fact that our analysis shows real increases in patient severity, we ask that the agency significantly mitigate its proposed documentation and coding cut.”

Other commenters recommended that CMS seek to extend the timeframe beyond 2 years to phase in the estimated −6.6 percent adjustment to the standardized amount.

Response: Our actuaries have determined, and MedPAC has confirmed, that the implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008. The impact of these changes exceeds the −0.6 percent prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90. As described earlier, analysis of more recent claims data confirms that the difference is −1.9 percent. We addressed the comments on our methodology in the section II.D.4. of this preamble.

We fully understand that our proposed adjustment of −1.9 percent would reduce the increase in payments that affected hospitals would have received in FY 2009 in the absence of the adjustment. Although we are required to make a prospective adjustment to eliminate the full effect of coding or classification changes that did not reflect real changes in case-mix for discharges occurring during FY 2008, we believe we have some discretion regarding when to implement this adjustment. Section 7(b)(1)(A) of Public Law 110-90 requires that if the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different than the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, the Secretary shall make an “appropriate” adjustment under section 1886(d)(3)(A)(vi) of the Act.

After consideration of the public comments we received on these issues, we have determined that it would be appropriate to postpone adopting documentation and coding adjustments as authorized under section 7(a) of Public Law 110-90 and section 1886(d)(3)(A)(vi) of the Act until a full analysis of case-mix changes can be completed. While we have the statutory authority to make this 1.9 percent prospective adjustment entirely in FY 2010, we believe it would be prudent to wait until we have complete data on the magnitude of the documentation and coding effect in FY 2009. If the documentation and coding effect were less in FY 2009 than our current estimates, it could lessen the anticipated adjustment that we currently estimate we would have to make for FY 2008 and FY 2009 combined. In future rulemaking, we will consider applying a prospective adjustment based upon a complete analysis of FY 2008 and FY 2009 claims data over an extended time period, such as 5 years, beginning in FY 2011. During this phase-in period, we intend to address any difference between the increase in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009 and the −0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 in the FY 2011 rulemaking cycle.

We appreciate the commenters' support of our decision not to apply a FY 2010 prospective adjustment for estimated FY 2009 documentation and coding increases until we have performed a retrospective evaluation of the FY 2009 claims data.

6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90

As indicated above, the estimated 2.5 percent change (estimated from analysis of more recent data than the data used for the proposed rule) due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeds the −0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. Our actuaries currently estimate that this 1.9 percentage point increase resulted in an increase in aggregate payments of approximately $2.2 billion. As described earlier, section 7(b)(1)(B) of Public Law 110-90 requires an additional adjustment for discharges occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount of this increase in aggregate payments (including interest).

Although section 7(b)(1)(B) of Public Law 110-90 requires us to make this adjustment in FYs 2010, 2011, and/or 2012, we have discretion as to when during this 3 year period we will apply the adjustment. For example, we could make adjustments to the standardized amounts under section 1886(d) of the Act in FY 2010, 2011, and 2012. Alternatively, we could delay offsetting the increase in FY 2008 aggregate payments by applying the adjustment required under section 7(b)(1)(B) of Public Law 110-90 only to FYs 2011 and 2012.

We did not propose to make an adjustment to the FY 2010 average standardized amounts to offset, in whole or in part, the estimated increase in aggregate payments for discharges occurring in FY 2008, but stated in the proposed rule that we intended to address this issue in future rulemaking for FYs 2011 and 2012. That is, we stated we would address recouping the additional expenditures that occurred in FY 2008 as a result of the 1.9 percentage point difference between the actual changes in documentation and coding that do not reflect real changes in case-mix, or 2.5 percent, and the −0.6 percent adjustment applied under Public Law 110-90 in FY 2011 and/or FY 2012, as required by law. We indicated that, while we have the statutory authority to make this −1.9 percent recoupment adjustment entirely in FY 2010, we are delaying the adjustment until FY 2011 and FY 2012 because we do not have any data yet on the magnitude of the documentation and coding effect in FY 2009. If the documentation and coding effect were less in FY 2009 than our current estimates, it could lessen the anticipated recoupment adjustment that we currently estimate we would have to make for FY 2008 and FY 2009 combined. As we have the authority to recoup the aggregate effect of this 1.9 percentage point difference in FY 2008 IPPS payments in FY 2011 or FY 2012 (with interest), delaying this adjustment would have no effect on Federal budget outlays. In the proposed rule, we indicated that we intended to wait until we have a complete year of data on the FY 2009 documentation and coding effect before applying a recoupment adjustment for IPPS spending that occurred in FY 2008 or we estimate will occur in FY 2009.

As discussed above, section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an additional adjustment to the standardized amounts under section 1886(d) of the Act to offset the estimated increase or decrease in aggregate payments for FY 2009 (including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustments applied under section 7(a) of Public Law 110-90. This determination must be based on a retrospective evaluation of claims data. Because we will not receive all FY 2009 claims data prior to publication of this final rule, as we indicate in the proposed rule, we intend to address any increase or decrease in FY 2009 payments in future rulemaking for FY 2011 and 2012 after we perform a retrospective evaluation of the FY 2009 claims data. Our actuaries currently estimate that this adjustment will be approximately −3.3 percent. This reflects the difference between the estimated 4.8 percent cumulative actual documentation and coding changes for FY 2009 (2.5 percent for FY 2008 and an additional 2.3 percent for FY 2009) and the cumulative −1.5 percent documentation and coding adjustments applied under section 7(a) of Public Law 110-90 (−0.6 percent in FY 2008 and −0.9 percent in FY 2009). We note that the actual adjustments are multiplicative and not additive. This more recent estimated 4.8 percent cumulative actual documentation and coding changes for FY 2009 includes the impact of the changes in documentation and coding first occurring in FY 2008 because we believe hospitals will continue these changes in documentation and coding in subsequent fiscal years. Consequently, these documentation and coding changes will continue to impact payments under the IPPS absent a prospective adjustment to account for the effect of these changes.

We note that, unlike the −1.9 adjustment to the standardized amounts under section 7(b)(1)(A) of Public Law 110-90 described earlier, any adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90 would not be cumulative, but would be removed for subsequent fiscal years once we have offset the increase in aggregate payments for discharges for FY 2008 expenditures and FY 2009 expenditures, if any.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on our proposal not to offset the 1.9 percent increase in aggregate payments (including interest) for discharges occurring in FY 2008 resulting from the adoption of the MS-DRGs, but to instead address this issue in future rulemaking for FYs 2011 and 2012.

Comment: MedPAC stated in its comments on the adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90: “In addition, it would be desirable for CMS to minimize year-to-year changes in payment adjustments it must make to recover overpayments that were made in 2008 and 2009. To achieve this goal, CMS should consider spreading the recovery of 2008 overpayments over 3 years, beginning in 2010.”

Response: We appreciate MedPAC's comment that it would be desirable to minimize year-to-year changes in payment adjustments due to the recoupment adjustments. However, as we stated in the proposed rule, we continue to believe it would be more appropriate to examine the FY 2009 claims data fully before making a determination as to the appropriate timing of the FY 2008 recoupment adjustment. Postponing this adjustment until a retrospective evaluation of the claims data from both FY 2008 and FY 2009 are available would allow us to make annual adjustments more appropriately in FY 2011 and FY 2012.

Comment: As noted above, some commenters recommended that CMS seek to extend the timeframe beyond 2 years to phase in the estimated −6.6 percent adjustment to the standardized amount. The commenters asked CMS to seek necessary legislative action to accommodate such a policy.

Response: As discussed in the proposed rule, we are required under section 7(b)(1)(B) of Public Law 110-90 to recapture the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is greater than the prior adjustments. This retrospective recoupment process must be completed by the end of FY 2012. The large majority of the remaining adjustment to the standardized amount reflects retrospective adjustment. At this time, we have no plans to seek legislative action to change the time period for this adjustment.

Comment: Most commenters expressed concern with the significant negative financial impacts that would be incurred by providers if CMS adopted that proposed −1.9 percent documentation and coding adjustment in FY 2010. The commenters cited providers' already small or negative margins for Medicare payments, and requested that CMS not further reduce payments during the current period of economic instability and reduced State funding. Other commenters indicated that it would be appropriate to delay any adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90 until after CMS has the opportunity to fully examine the FY 2009 claims data.

Response: We recognize that any adjustment to account for the documentation and coding effect observed in the FY 2008 and FY 2009 claims data may result in significant future payment reduction for providers. However, as discussed in the proposed rule, we are required under section 7(b)(1)(B) of Public Law 110-90 to recapture the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is greater than the prior adjustments. We agree with the commenters who requested that CMS delay any adjustment and, for the reasons stated above, expect to address this issue through the FY 2011 rulemaking.

7. Background on the Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates

Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: The Federal rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; the updated hospital-specific rate based on FY 1996 costs per discharge; or the updated hospital-specific rate based on FY 2006 costs per discharge. Under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the updated hospital-specific rate based on the greatest of the FY 1982, FY 1987, or FY 2002 costs per discharge. In the FY 2008 IPPS final rule with comment period (72 FR 47152 through 47188), we established a policy of applying the documentation and coding adjustment to the hospital-specific rates. In that final rule with comment period, we indicated that because SCHs and MDHs use the same DRG system as all other hospitals, we believe they should be equally subject to the budget neutrality adjustment that we are applying for adoption of the MS-DRGs to all other hospitals. In establishing this policy, we relied on section 1886(d)(3)(A)(vi) of the Act, which provides us with the authority to adjust “the standardized amount” to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix.

However, in the final rule that appeared in the Federal Register on November 27, 2007 (72 FR 66886), we rescinded the application of the documentation and coding adjustment to the hospital-specific rates retroactive to October 1, 2007. In that final rule, we indicated that, while we still believe it would be appropriate to apply the documentation and coding adjustment to the hospital-specific rates, upon further review, we decided that the application of the documentation and coding adjustment to the hospital-specific rates is not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of the Act, which only mentions adjusting “the standardized amount” under section 1886(d) of the Act and does not mention adjusting the hospital-specific rates.

In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that we continued to have concerns about this issue. Because hospitals paid based on the hospital-specific rate use the same MS-DRG system as other hospitals, we believe they have the potential to realize increased payments from documentation and coding changes that do not reflect real increases in patients' severity of illness. In section 1886(d)(3)(A)(vi) of the Act, Congress stipulated that hospitals paid based on the standardized amount should not receive additional payments based on the effect of documentation and coding changes that do not reflect real changes in case-mix. Similarly, we believe that hospitals paid based on the hospital-specific rates should not have the potential to realize increased payments due to documentation and coding changes that do not reflect real increases in patients' severity of illness. While we continue to believe that section 1886(d)(3)(A)(vi) of the Act does not provide explicit authority for application of the documentation and coding adjustment to the hospital-specific rates, we believe that we have the authority to apply the documentation and coding adjustment to the hospital-specific rates using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. The special exceptions and adjustment provision authorizes us to provide “for such other exceptions and adjustments to [IPPS] payment amounts * * * as the Secretary deems appropriate.” In the FY 2009 IPPS final rule (73 FR 48448 through 48449), we indicated that, for the FY 2010 rulemaking, we planned to examine our FY 2008 claims data for hospitals paid based on the hospital-specific rate. We further indicated that if we found evidence of significant increases in case-mix for patients treated in these hospitals that do not reflect real changes in case-mix, we would consider proposing application of the documentation and coding adjustments to the FY 2010 hospital-specific rates under our authority in section 1886(d)(5)(I)(i) of the Act.

In response to public comments received on the FY 2009 IPPS proposed rule, we stated in the FY 2009 IPPS final rule that we would consider whether such a proposal is warranted for FY 2010. To gather information to evaluate these considerations, we indicated that we planned to perform analyses on FY 2008 claims data to examine whether there has been a significant increase in case-mix for hospitals paid based on the hospital-specific rate. If we found that application of the documentation and coding adjustment to the hospital-specific rates for FY 2010 is warranted, we indicated that we would include a proposal to do so in the FY 2010 IPPS proposed rule.

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2010 and Subsequent Fiscal Years

In the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 24098 through 24100), we discussed our performance of a retrospective evaluation of the FY 2008 claims data for SCHs and MDHs using the same methodology described earlier for other IPPS hospitals. We found that, independently for both SCHs and MDHs, the change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 slightly exceeded the proposed 2.5 percent result discussed earlier, but did not significantly differ from that result.

Again, for the proposed rule, we found that the within-base DRG increases were almost entirely responsible for the case-mix change. In the proposed rule, we presented two Figures to display our results.

Therefore, consistent with our statements in prior IPPS rules, we proposed to use our authority under section 1886(d)(5)(I)(i) of the Act to prospectively adjust the hospital-specific rates by the proposed −2.5 percent in FY 2010 to account for our estimated documentation and coding effect in FY 2008 that does not reflect real changes in case-mix. We proposed to leave this adjustment in place for subsequent fiscal years in order to ensure that changes in documentation and coding resulting from the adoption of the MS-DRGs do not lead to an increase in aggregate payments for SCHs and MDHs not reflective of an increase in real case-mix. The proposed −2.5 percent adjustment to the hospital-specific rates exceeded the −1.9 percent adjustment to the national standardized amount under section 7(b)(1)(A) of Public Law 110-90 because, unlike the national standardized rates, the FY 2008 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), we solicited public comment on the proposed −2.5 percent prospective adjustment to the hospital-specific rates under section 1886(d)(5)(I)(i) of the Act and our proposal to address in the FY 2011 rulemaking cycle any changes in FY 2009 case-mix due to changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009. We also indicated that we intended to update our analysis with FY 2008 data on claims paid through March 2008 [sic] for the FY 2010 IPPS final rule. (We note that the March 2008 update claims paid data date in the proposed rule should have been March 2009.)

Consistent with our approach for IPPS hospitals discussed earlier, we are also delaying adoption of a documentation and coding adjustment to the hospital-specific rate until FY 2011. Similar to our approach for IPPS hospitals, we will consider, through future rulemaking, phasing in the documentation and coding adjustment over an appropriate period. As we indicated earlier, we also will address, through future rulemaking, any changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009. We noted that, unlike the national standardized rates, the FY 2009 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs. However, as we note earlier with regard to IPPS hospitals, if the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for the FY 2008 and FY 2009 combined adjustment. Therefore, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data for hospitals receiving hospital-specific rates.

Comment: One commenter request that CMS rescind the documentation and coding adjustment for SCHs and MDHs. The commenter contended that, due to the special recognition and protection afforded to these provider types by the Medicare program, CMS should more closely reexamine any negative payment adjustment that may threaten the viability of these providers. Commenters also questioned the statutory authority to apply this adjustment to SCHs and MDHs. The commenters argued that because Congress included specific statutory authority to adjust the standardized amount in section 1886(d)(3)(A)(vi) of the Act, CMS is precluded from using the broader “adjustments” language in section 1886(d)(5)(I)(i) of the Act to apply those same adjustments to the hospital-specific rate.

Response: We disagree with the commenter that the Secretary's broad authority to make exceptions and adjustment to payment amounts under section 1886(d)(3)(A)(vi) of the Act cannot be applied in this instance. We have discussed the basis for applying such an adjustment in prior rules (in the FY 2009 proposed rule (73 FR 23540), the FY 2009 final rule (73 FR 48448), and the FY 2010 proposed rule (74 FR 24098)) and do not agree that the language in section 1886(d)(3)(A)(vi) of the Act limits our authority under section 1886(d)(5)(I)(i) of the Act to make such an adjustment. We recognize that SCHs and MDHs are entitled through legislation to receive the hospital-specific rate in order to compensate for their unique service requirements in the provider community. Similar to our approach with IPPS hospitals, through future rulemaking, we will consider a phase-in of the documentation and coding adjustment over an appropriate period, beginning in FY 2011, and will continue to separately analyze SCH and MDH claims data to assure that any future adjustment is appropriate for these provider types.

9. Background on the Application of the Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

Puerto Rico hospitals are paid based on 75 percent of the national standardized amount and 25 percent of the Puerto Rico-specific standardized amount. As noted previously, the documentation and coding adjustment we adopted in the FY 2008 IPPS final rule with comment period relied upon our authority under section 1886(d)(3)(A)(vi) of the Act, which provides the Secretary the authority to adjust “the standardized amounts computed under this paragraph” to eliminate the effect of changes in coding or classification that do not reflect real changes in case-mix. Section 1886(d)(3)(A)(vi) of the Act applies to the national standardized amounts computed under section 1886(d)(3) of the Act, but does not apply to the Puerto Rico-specific standardized amount computed under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 payment rates, we made an inadvertent error and applied the FY 2008 −0.6 percent documentation and coding adjustment to the Puerto Rico-specific standardized amount, relying on our authority under section 1886(d)(3)(A)(vi) of the Act. However, section 1886(d)(3)(A)(vi) of the Act authorizes application of a documentation and coding adjustment to the national standardized amount and does not apply to the Puerto Rico specific standardized amount. In the FY 2009 IPPS final rule (73 FR 48449), we corrected this inadvertent error by removing the −0.6 percent documentation and coding adjustment from the FY 2008 Puerto Rico-specific rates.

While section 1886(d)(3)(A)(vi) of the Act is not applicable to the Puerto Rico-specific standardized amount, we believe that we have the authority to apply the documentation and coding adjustment to the Puerto Rico-specific standardized amount using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. Similar to SCHs and MDHs that are paid based on the hospital-specific rate, we believe that Puerto Rico hospitals that are paid based on the Puerto Rico-specific standardized amount should not have the potential to realize increased payments due to documentation and coding changes that do not reflect real increases in patients' severity of illness. Consistent with the approach described for SCHs and MDHs, in the FY 2009 IPPS final rule (73 FR 48449), we indicated that we planned to examine our FY 2008 claims data for hospitals in Puerto Rico. We indicated in the FY 2009 IPPS proposed rule (73 FR 23541) that if we found evidence of significant increases in case-mix for patients treated in these hospitals, we would consider proposing application of the documentation and coding adjustments to the FY 2010 Puerto Rico-specific standardized amount under our authority in section 1886(d)(5)(I)(i) of the Act.

10. Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective evaluation of the FY 2008 claims data for Puerto Rico hospitals using the same methodology described earlier for IPPS hospitals paid under the national standardized amounts under section 1886(d) of the Act. We found that, for Puerto Rico hospitals, the increase in payments for discharges occurring during FY 2008 due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 was approximately 1.1 percent. When we calculated the within-base DRG changes and the across-base DRG changes for Puerto Rico hospitals, we found that responsibility for the case-mix change between FY 2007 and FY 2008 is much more evenly shared. Across-base DRG shifts accounted for 44 percent of the changes, and within-base DRG shifts accounted for 56 percent. Thus, the change in the percentage of discharges with an MCC was not as large as that for other IPPS hospitals. In Figure 4 in the proposed rule, we showed that, for Puerto Rico hospitals, there was a 3 percentage point increase in the discharges with an MCC from 22 percent to 25 percent and a corresponding decrease of 3 percentage points from 58 percent to 55 percent in discharges without a CC or an MCC.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24101), we solicited public comment on the proposed −1.1 percent prospective adjustment to the hospital-specific rates under section 1886(d)(5)(I)(i) of the Act and our intent to address in the FY 2011 rulemaking cycle any changes in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009. We also stated that we intended to update our analysis with FY 2008 data on claims paid through March 2009 for the FY 2010 IPPS final rule.

Given these documentation and coding increases, consistent with our statements in prior IPPS rules, we will use our authority under section 1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-specific rate. However, in parallel to our decision to postpone adjustments to the Federal standardized amount, we are adopting a similar policy for the Puerto Rico-specific rate and will consider the phase-in of this adjustment over an appropriate time period through future rulemaking. The adjustment would be applied to the Puerto Rico-specific rate that accounts for 25 percent of payments to Puerto Rico hospitals, with the remaining 75 percent based on the national standardized amount. Consequently, the overall reduction to the payment rates for Puerto Rico hospitals to account for documentation and coding changes will be slightly less than the reduction for IPPS hospitals paid based on 100 percent of the national standardized amount. We note that, as with the hospital-specific rates, the Puerto Rico-specific standardized amount had not previously been reduced based on estimated changes in documentation and coding associated with the adoption of the MS-DRGs. However, as we note earlier for IPPS hospitals and hospitals receiving hospital-specific rates, if the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for the FY 2008 and FY 2009 combined adjustment. Therefore, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data for Puerto Rico hospitals.

Consistent with our approach for IPPS hospitals discussed above, we will address in the FY 2011 rulemaking cycle any change in FY 2009 case-mix due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009. We note that, unlike the national standardized rates, the FY 2009 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background

In the FY 2009 IPPS final rule (73 FR 48450), we continued to implement significant revisions to Medicare's inpatient hospital rates by completing our 3-year transition from charge-based relative weights to cost-based relative weights. Beginning in FY 2007, we implemented relative weights based on cost report data instead of based on charge information. We had initially proposed to develop cost-based relative weights using the hospital-specific relative value cost center (HSRVcc) methodology as recommended by MedPAC. However, after considering concerns expressed in the public comments we received on the proposal, we modified MedPAC's methodology to exclude the hospital-specific relative weight feature. Instead, we developed national CCRs based on distinct hospital departments and engaged a contractor to evaluate the HSRVcc methodology for future consideration. To mitigate payment instability due to the adoption of cost-based relative weights, we decided to transition cost-based weights over 3 years by blending them with charge-based weights beginning in FY 2007. (We refer readers to the FY 2007 IPPS final rule for details on the HSRVcc methodology and the 3-year transition blend from charge-based relative weights to cost-based relative weights (71 FR 47882 through 47898).)

In FY 2008, we adopted severity-based MS-DRGs, which increased the number of DRGs from 538 to 745. Many commenters raised concerns as to how the transition from charge-based weights to cost-based weights would continue with the introduction of new MS-DRGs. We decided to implement a 2-year transition for the MS-DRGs to coincide with the remainder of the transition to cost-based relative weights. In FY 2008, 50 percent of the relative weight for each DRG was based on the CMS DRG relative weight and 50 percent was based on the MS-DRG relative weight.

In FY 2009, the third and final year of the transition from charge-based weights to cost-based weights, we calculated the MS-DRG relative weights based on 100 percent of hospital costs. We refer readers to the FY 2007 IPPS final rule (71 FR 47882) for a more detailed discussion of our final policy for calculating the cost-based DRG relative weights and to the FY 2008 IPPS final rule with comment period (72 FR 47199) for information on how we blended relative weights based on the CMS DRGs and MS-DRGs.

a. Summary of the RTI Study of Charge Compression and CCR Refinement

As we transitioned to cost-based relative weights, some commenters raised concerns about potential bias in the weights due to “charge compression,” which is the practice of applying a higher percentage charge markup over costs to lower cost items and services, and a lower percentage charge markup over costs to higher cost items and services. As a result, the cost-based weights would undervalue high-cost items and overvalue low-cost items if a single CCR is applied to items of widely varying costs in the same cost center. To address this concern, in August 2006, we awarded a contract to RTI to study the effects of charge compression in calculating the relative weights and to consider methods to reduce the variation in the CCRs across services within cost centers. RTI issued an interim draft report in January 2007 with its findings on charge compression (which was posted on the CMS Web site at: http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In that report, RTI found that a number of factors contribute to charge compression and affect the accuracy of the relative weights. RTI's findings demonstrated that charge compression exists in several CCRs, most notably in the Medical Supplies and Equipment CCR.

In its interim draft report, RTI offered a number of recommendations to mitigate the effects of charge compression, including estimating regression-based CCRs to disaggregate the Medical Supplies Charged to Patients, Drugs Charged to Patients, and Radiology cost centers, and adding new cost centers to the Medicare cost report, such as adding a “Devices, Implants and Prosthetics” line under “Medical Supplies Charged to Patients” and a “CT Scanning and MRI” subscripted line under “Radiology-Diagnostics”. (For more details on RTI's findings and recommendations, we refer readers to the FY 2009 IPPS final rule (73 FR 48452).) Despite receiving public comments in support of the regression-based CCRs as a means to immediately resolve the problem of charge compression, particularly within the Medical Supplies and Equipment CCR, we did not adopt RTI's recommendation to create additional regression-based CCRs for several reasons. We were concerned that RTI's analysis was limited to charges on hospital inpatient claims, while typically hospital cost report CCRs combine both inpatient and outpatient services. Further, because both the IPPS and the OPPS rely on cost-based weights, we preferred to introduce any methodological adjustments to both payment systems at the same time. RTI's analysis of charge compression has since been expanded to incorporate outpatient services. RTI evaluated the cost estimation process for the OPPS cost-based relative weights, including a reassessment of the regression-based CCR models using both outpatient and inpatient charge data. This interim report was made available in April 2008 during the public comment period on the FY 2009 IPPS proposed rule and can be found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200804.pdf. The IPPS-specific chapters, which were separately displayed in the April 2008 interim report, as well as the more recent OPPS chapters, were included in the July 3, 2008 RTI final report entitled, “Refining Cost-to-Charge Ratios for Calculating APC [Ambulatory Payment Classification] and DRG Relative Payment Weights,” that became available at the time of the development of the FY 2009 IPPS final rule. The RTI final report can be found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.

RTI's final report distinguished between two types of research findings and recommendations: those pertaining to the accounting or cost report data and those related to statistical regression analysis. Importantly, RTI found that, under the IPPS and the OPPS, accounting improvements to the cost reporting data reduce some of the sources of aggregation bias without having to use regression-based adjustments. In general, with respect to the regression-based adjustments, RTI confirmed the findings of its March 2007 report that regression models are a valid approach for diagnosing potential aggregation bias within selected services for the IPPS and found that regression models are equally valid for setting payments under the OPPS. RTI also suggested that regression-based CCRs could provide a short-term correction until accounting data could be sufficiently refined to support more accurate CCR estimates under both the IPPS and the OPPS.

RTI also noted that cost-based weights are only one component of a final prospective payment rate. There are other rate adjustments (wage index, IME, and DSH) to payments derived from the revised cost-based weights and the cumulative effect of these components may not improve the ability of final payment to reflect resource cost. With regard to APCs and MS-DRGs that contain substantial device costs, RTI cautioned that the other rate adjustments largely offset the effects of charge compression among hospitals that receive these adjustments. RTI endorsed short-term regression-based adjustments, but also concluded that more refined and accurate accounting data are the preferred long-term solution to mitigate charge compression and related bias in hospital cost-based weights.

As a result of this research, RTI made 11 recommendations. For a more detailed summary of RTI's findings, recommendations, and public comments we received on the report, we refer readers to the FY 2009 IPPS final rule (73 FR 48452 through 48453).

b. Summary of the RAND Corporation Study of Alternative Relative Weight Methodologies

One of the reasons that we did not implement regression-based CCRs at the time of the FY 2008 IPPS final rule with comment period was our inability to investigate how regression-based CCRs would interact with the implementation of MS-DRGs. In the FY 2008 final rule with comment period (72 FR 47197), we stated that we engaged the RAND Corporation as the contractor to evaluate the HSRV methodology in conjunction with regression-based CCRs, and that we would consider its analysis as we prepared for the FY 2009 IPPS rulemaking process. In the FY 2009 IPPS final rule (73 FR 48453 through 48457), we provided a summary of the RAND report and the public comments we received in response to the FY 2009 IPPS proposed rule. The report may be found on RAND's Web site at: http://www.rand.org/pubs/working_papers/WR560/.

RAND evaluated six different methods that could be used to establish relative weights, CMS' current relative weight methodology of 15 national CCRs and 5 alternatives, including a method in which the 15 national CCRs are disaggregated using the regression-based methodology, and a method using hospital-specific CCRs for the 15 cost center groupings. In addition, RAND analyzed our standardization methodologies that account for systematic cost differences across hospitals. The purpose of standardization is to eliminate systematic facility-specific differences in cost so that these cost differences do not influence the relative weights. The three standardization methodologies analyzed by RAND include: The “hospital payment factor” methodology currently used by CMS, under which a hospital's wage index factor, and IME and/or DSH factor, are divided out of its estimated DRG cost; the HSRV methodology, which standardizes the cost for a given discharge by the hospital's own costliness rather than by the effect of the systematic cost differences across groups of hospitals; and the HSRVcc methodology, which removes hospital-level cost variation by calculating hospital-specific charge-based relative values for each DRG at the cost center level and standardizing them for differences in case-mix. Under the HSRVcc methodology, a national average charge-based relative weight is calculated for each cost center.

Overall, RAND found that none of the alternative methods of calculating the relative weights represented a marked improvement in payment accuracy over the current method, and there was little difference across methods in their ability to predict cost at either the discharge-level or the hospital-level. In their regression analysis, RAND found that after controlling for hospital payment factors, the relative weights are compressed (that is, understated). However, RAND also found that the hospital payment factors are overstated and increase more rapidly than cost. Therefore, while the relative weights are compressed, these payment factors offset the compression such that total payments to hospitals increase more rapidly than hospitals' costs.

RAND found that relative weights using the 19 national disaggregated regression-based CCRs result in significant redistributions in payments among hospital groupings. However, RAND did not believe the regression-based charge compression adjustments significantly improve payment accuracy. With regard to standardization methodologies, while RAND found that there is no clear advantage to the HSRV method or the HSRVcc method of standardizing cost compared to the current hospital payment factor standardization method, its analysis did reveal significant limitations of CMS' current hospital payment factor standardization method. The current standardization method has a larger impact on the relative weights and payment accuracy than any of the other alternatives that RAND analyzed because the method “over-standardizes” by removing more variability for hospitals receiving a payment factor than can be empirically supported as being cost-related (particularly for IME and DSH). RAND found that instead of increasing proportionately with cost, the payment factors CMS currently uses (some of which are statutory), increase more rapidly than cost, thereby reducing payment accuracy. RAND concluded that further analysis is needed to isolate the cost-related component of the IPPS payment adjustments (some of which has already been done by MedPAC), use them to standardize cost, and revise the analysis of payment accuracy to reflect only the cost-related component.

2. Summary of FY 2009 Changes and Discussion for FY 2010

In the FY 2009 IPPS final rule (73 FR 48458 through 48467), in response to the RTI's recommendations concerning cost report refinements, and because of RAND's finding that regression-based adjustments to the CCRs do not significantly improve payment accuracy, we discussed our decision to pursue changes to the cost report to split the cost center for Medical Supplies Charged to Patients into one line for “Medical Supplies Charged to Patients” and another line for “Implantable Devices Charged to Patients.” We acknowledged, as RTI had found, that charge compression occurs in several cost centers that exist on the Medicare cost report. However, as we stated in the final rule, we focused on the CCR for Medical Supplies and Equipment because RTI found that the largest impact on the MS-DRG relative weights could result from correcting charge compression for devices and implants. In determining what should be reported in these respective cost centers, we adopted the commenters' recommendation that hospitals should use revenue codes established by AHA's National Uniform Billing Committee to determine what should be reported in the “Medical Supplies Charged to Patients” and the “Implantable Devices Charged to Patients” cost centers.

When we developed the FY 2009 IPPS final rule, we considered all of the public comments we received both for and against adopting regression-based CCRs. Also noteworthy is RAND's belief that regression-based CCRs may not significantly improve payment accuracy, and that it is equally, if not more, important to consider revisions to the current IPPS hospital payment factor standardization method in order to improve payment accuracy. We continue to believe that, ultimately, improved and more precise cost reporting is the best way to minimize charge compression and improve the accuracy of the cost weights. Accordingly, we did not propose to adopt regression-based CCRs for the calculation of the FY 2010 IPPS relative weights.

However, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24103), we expressed our concern about RAND's finding that there are significant limitations of CMS' current hospital payment factor standardization method. As summarized above, RAND found that the current standardization method “over-standardizes” by removing more variability for hospitals receiving a payment factor than can be empirically supported as being cost-related (particularly for IME and DSH). RAND found that instead of increasing proportionately with cost, the payment factors CMS currently uses (some of which are statutory), increase more rapidly than cost, thereby reducing payment accuracy. Further analysis is needed to isolate the cost-related component of the IPPS payment adjustments, use them to standardize cost, and revise the analysis of payment accuracy to reflect only the cost-related component. However, RAND cautioned that “re-estimating” these payment factors “raises important policy issues that warrant additional analyses” (page 49 of RAND's report, which is available on the Web site at: http://www.rand.org/pubs/working_papers/WR560/), particularly to “determine the analytically justified levels using the MS-DRGs” (page 86 of the RAND report). In addition, we noted that RTI, in its July 2008 final report, also observed that the adjustment factors under the IPPS (the wage index, IME, and DSH adjustments) complicate the determination of cost and these factors “within the rate calculation may offset the effects of understated weights due to charge compression” (page 109 of RTI's final report, which is available at the Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf). While it may be more accurate to standardize using the empirically justified levels of the IME and DSH adjustments, consideration needs to be given to the extent to which these payment factors offset the compression of the relative weights.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24103 and 24104), we stated that we understood that MedPAC performed an analysis to identify empirically justifiable formulas for determining appropriate IME and DSH adjustments. For example, in its March 2007 report (and reiterated in its March 2009 report), MedPAC asserts that the current level of the IME adjustment factor, 5.5 percent for every 10 percent increase in resident-to-bed ratio, overstates IME payments by more than twice the empirically justified level, resulting in approximately $3 billion in overpayments. The empirical level of the IME adjustment is estimated to be 2.2 percent for every 10 percent increase in the resident-to-bed ratio. We stated that we cannot propose to change the IME and DSH factors used for actual payment under the IPPS because these factors are mandated by law. However, under section 1886(d)(4) of the Act, we have the authority to determine the appropriate weighting factor for each MS-DRG (including which factors or method we will employ in making annual adjustments to the MS-DRGs so as to reflect changes in the relative use of hospital resources). In addition, section 1886(d)(7)(B) of the Act precludes judicial review of our methodology for determining the appropriate weighting factors. Therefore, we do have some flexibility in what factors may be used for standardization purposes. For purposes of standardization only, we stated that one option may be for CMS to use the empirically justified IME adjustment of 2.2 percent, such that only the cost-related component of teaching hospitals is removed from the claim charges prior to calculating the relative weights. Similarly, for the DSH adjustment, in its March 2007 report, MedPAC found that costs per case increase about 0.4 percent for each 10 percent increase in the low-income patient percentage. This is significantly less than the percentage increase expressed by the current factors used in the DSH payment formulas. (According to MedPAC, in FY 2004, about $5.5 billion in DSH payments were made above the empirically justified level.) In looking only at urban hospitals with greater than 100 beds, which manifest the strongest positive correlation between cost and low income patient share, MedPAC found that costs increase about 1.4 percent for every 10 percent increment of the low-income patient percentage. MedPAC did not find a positive cost relationship between low-income patient percentage and costs per case for urban hospitals with less than 100 beds and/or for rural hospitals. Therefore, for purposes of standardizing for the DSH adjustment, we stated that an option we may consider is to incorporate an adjustment factor of 1.4 percent for urban hospitals with greater than 100 beds, and to remove the DSH payment adjustment altogether for other hospitals that otherwise currently qualify for DSH payment. We also noted that while we cannot predict the effect of using the empirical factors for IME and DSH in the standardized methodology on the relative weights without further analysis, dividing out (that is, excluding) reduced IME and DSH payment factors from a hospital's total payment would result in a greater share of teaching and DSH hospitals' costs used in calculating the relative weights. With respect to the wage index, because there are multiple wage index factors, one for each geographic area, determining the true cost associated with geographic location and standardizing for those costs is much more challenging. While we did not propose changes for FY 2010, in light of the previous discussion of the current IME and DSH adjustments in the standardization process, we solicited public comments as to how the standardization process can be improved to more precisely remove cost differences across hospitals, thereby improving the accuracy of the relative weights in subsequent fiscal years.

Charge Compression

Comment: Commenters continue to oppose the regression-based CCR approach to calculate the relative weights. The commenters cited the results of the RAND report on alternative relative weight methodologies in which RAND found that “none of the alternative weight methodologies represent a marked improvement over the current system.” In addition, the commenters noted the RTI study, which concluded that more refined and accurate accounting data would be the preferred long-term solution to mitigate charge compression.

Some commenters also continue to support our policy finalized in the FY 2009 IPPS final rule to address charge compression (that is, the creation of separate cost centers for Implantable Devices Charged to Patients and Medical Supplies Charged to Patients).

Response: We appreciate the comments with respect to regression-based CCRs and the use of refined cost report data. However, we note that we have not proposed any changes to the existing cost-based relative weight methodology for FY 2010.

Comment: Some commenters sought clarification on which revenue codes should be used to report various implantable devices. Some commenters disagreed with the definition of a high-cost device that only applied to implantables because the commenters believed that there are other high-cost devices that are not implantable, but should be included in the device cost center.

Response: We did not propose any policy changes with respect to the use of revenue codes or alternative ways for identifying high-cost devices. Therefore, we are not responding to these comments at this time. We refer readers to the discussion in the FY 2009 IPPS final rule concerning our current policy on these matters (73 FR 48462 and 48462).

Comment: Commenters responded to our solicitation for options on possibly revising the current standardization methodology. MedPAC supported the option of standardizing hospitals' service charges using the empirical estimates of DSH and IME rather than their actual payment amounts. MedPAC also expressed support for the use of the HSRV methodology for calculating relative weights because it would obviate the need to standardize hospitals' charges and it would allow for costs to be comparable across hospitals. Other commenters continue to oppose the HSRV methods of standardization. These commenters believe that the HSRV methodology is inappropriate for a cost-based methodology and only applicable in charge-based systems that account for mark-up practices. Some of these commenters expressed general concern about revising the current standardization methodology because CMS has implemented numerous changes to the relative weights and DRGs in recent years, including moving to cost-based relative weights and to MS-DRGs, making it difficult for hospitals to predict their payments. Commenters suggested that, because hospitals have been dealing with other Medicare payment changes, such as quality reporting, and in light of health reform legislation, CMS wait before modifying the relative weight methodology to allow payments under the cost-based relative weights to stabilize and to allow hospitals to better predict their payments.

Response: In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we expressed our concerns regarding RAND's finding that there are significant limitations of CMS' current hospital payment factor standardization method. As summarized above, RAND found that the current standardization method “over-standardizes” by removing more variability for hospitals receiving a payment factor than can be empirically supported as being cost-related (particularly for IME and DSH). We further stated that given MedPAC's analysis that identifies empirically justifiable formulas for determining appropriate IME and DSH adjustments, perhaps one option for improving the accuracy of the standardization process is to use the empirically justified IME and DSH factors. We did not propose any changes for FY 2010, although we solicited public comments as to how the standardization process can be changed to improve the accuracy of the relative weights in subsequent fiscal years. Therefore, the commenters need not be concerned that we are introducing yet another significant change to the calculation of the relative weights or the MS-DRGs for FY 2010. We appreciate the public comments received, and we will consider the commenters' concerns as we continue to study the issue.

Comment: One commenter expressed concern regarding the effects of standardizing the relative weights by only removing the empirical costs of DSH and IME, rather than removing the entire effects of DSH and IME. The commenter was concerned that, by removing the empirical costs of DSH and IME in setting the relative weights, the non-DSH and nonteaching hospitals would be adversely affected by lower relative weights and a lower standardized amount. The commenter requested that thorough analysis be done and shared with the industry before CMS proposed any changes to the standardization method.

Response: As we stated in the proposed rule, we cannot predict the effect of using the empirical factors for IME and DSH in the standardized methodology on the relative weights without further analysis. We acknowledge that dividing out (that is, excluding) reduced IME and DSH payment factors from a hospital's total payment would result in a greater share of teaching and DSH hospitals' payments being characterized as costs that would then be used in calculating the relative weights. We also are unsure as to whether a change in the relative weights would affect the standardized amount. In any case, should we propose changes to the current standardization process, we will make our analysis and impacts available to the public for comment, in accordance with our general practice.

3. Timeline for Revising the Medicare Cost Report

As mentioned in the FY 2009 IPPS final rule (73 FR 48467), we are currently in the process of comprehensively reviewing the Medicare hospital cost report, and the finalized policy from the FY 2009 IPPS final rule to split the current cost center for Medical Supplies Charged to Patients into one line for “Medical Supplies Charged to Patients” and another line for “Implantable Devices Charged to Patients,” as part of our initiative to update and revise the hospital cost report. Under an effort initiated by CMS to update the Medicare hospital cost report to eliminate outdated requirements in conjunction with provisions of the Paperwork Reduction Act (PRA), we stated that we have been planning to propose the actual changes to the cost reporting form, the attending cost reporting software, and the cost reporting instructions in Chapter 40 of the Medicare Provider Reimbursement Manual (PRM), Part II. Under the effort to update the cost report and eliminate outdated requirements in conjunction with the provisions of the PRA, we stated that changes to the cost reporting form and cost reporting instructions would be made available to the public for comment. Thus, the public would have an opportunity to suggest comprehensive reforms (which they had advocated in the FY 2009 IPPS final rule in response to our proposals), and would similarly be able to make suggestions for ensuring that these reforms are made in a manner that is not disruptive to hospitals' billing and accounting systems, and are first and foremost within the guidelines of GAAP, which are consistent with the Medicare principles of reimbursement, and sound accounting practices.

In the FY 2009 IPPS final rule (73 FR 48468), we stated that we expect the revised cost reporting forms that reflect one cost center for “Medical Supplies Charged to Patients” and one cost center for “Implantable Devices Charged to Patients” would not be available until cost reporting periods beginning after the Spring of 2009. At the time the proposed rule was issued, we anticipated that the transmittal to create this new cost center would be issued in June 2009. Because there is approximately a 3-year lag between the availability of cost report data for IPPS and OPPS ratesetting purposes in a given fiscal year or calendar year, we stated that we may be able to derive two distinct CCRs, one for medical supplies and one for devices, for use in calculating the FY 2013 IPPS relative weights and the CY 2013 OPPS relative weights. Until the revised cost reporting forms are published, we stated that hospitals must include costs and charges of separately chargeable medical supplies and implantable medical devices in the cost center for “Medical Supplies Charged to Patients” (section 2202.8 of the PRM-I), and effective for cost reporting periods specified in the revised cost reporting forms, hospitals must include costs and charges of separately chargeable medical supplies in the cost center for “Medical Supplies Charged to Patients” and of separately chargeable implantable medical devices in the new “Implantable Devices Charged to Patients” cost center.

Comment: A number of commenters addressed the new cost reporting forms in which implantable device costs that had been reported on Medical Supplies Charged to Patients under the current cost reporting forms will now be reported on a new line for “Implantable Devices Charged to Patients”. The commenters recommended that CMS specifically mandate in the cost reporting instructions that hospitals report their medical supplies and implantable devices separately to ensure that hospitals will report their costs in both cost centers.

Response: In the revised Form CMS-2552-96 and the new Form CMS-2552-10 cost reporting instructions, we will clearly indicate that low cost medical supplies should be reported on the line for Medical Supplies Charged to Patients, and that high cost medical devices should be reported on the Implantable Devices Charged to Patients line. The cost reporting instructions will provide further guidance on differentiating between high cost items and low cost items.

Comment: Several commenters urged CMS to work with the hospital industry as CMS revises the Medicare hospital cost report. The commenters expressed disappointment that CMS has not worked with the hospital industry at the outset of revising the Medicare hospital cost report. The commenters urged CMS not to make piecemeal changes to the Medicare hospital cost report; rather, CMS should make changes that align with hospitals' protocols and payment methodologies to improve the accuracy of the cost-based MS-DRG relative weights. The commenters requested that the public have the opportunity to comment on cost reporting forms and instructions before they are implemented. In addition, the commenters urged that CMS work with the National Uniform Billing Committee (NUBC) to develop standards for the use of revenue codes and to mandate standardized cost centers.

Response: In the FY 2009 IPPS proposed and final rules (73 FR 23546 and 73 FR 48461), we stated that we began a comprehensive review of the Medicare hospital cost report, and splitting the current cost center for Medical Supplies Charged to Patients into one line for “Medical Supplies Charged to Patients” and another line for “Implantable Devices Charged to Patients” is part of that initiative to update and revise the cost report. We also stated that under the effort to update the cost report and eliminate outdated requirements in conjunction with the PRA, changes to the cost report form and cost report instructions would be made available to the public for comment. Thus, the public would have an opportunity to suggest the more comprehensive reforms that they are advocating, and would similarly be able to make suggestions for ensuring that these reforms are made in a manner that is not disruptive to hospitals' billing and accounting systems, and are within the guidelines of GAAP, which are consistent with the Medicare principles of reimbursement, and sound accounting practices. In fact, the new draft hospital cost report Form CMS-2552-10 went on public display through the Federal Register on July 2, 2009, for a 60-day review and comment period, which ends August 31, 2009. Those wishing to review and comment on the document can do so at http://www.cms.hhs.gov/PaperworkReductionActof1995. We are willing to work with and consider comments from finance and cost report experts from the hospital community as we work to improve and modify the hospital cost report and standardize the use of revenue codes. The cost center for Implantable Devices Charged to Patients will be available for use for cost reporting periods beginning on or after May 1, 2009. The revised hospital cost report Form CMS-2552-10 will be available for cost reporting periods beginning on or after February 1, 2010.

Comment: Some comments that expressed concerns with the delay of the cost reporting changes which would, in turn, delay the ability to use supply and device CCRs in the ratesetting process. The commenters stated that, in the FY 2009 IPPS final rule, CMS had anticipated using the revised CCR for the FY 2012 rule. However, due to delays in the issuance of instructions on cost reporting, CMS now believes that new CCRs for Medical Supplies Charged to Patients and Implantable Devices Charged to Patients may be used in the FY 2013 IPPS proposed and final rules. The commenters urged CMS to issue instructions to hospitals on a timely basis so that the new cost centers may be implemented as quickly as possible for FY 2013 ratesetting purposes. The commenters also suggested that, if CMS anticipates further delays in implementing the new cost centers, CMS implement regression-based CCRs as a short-term solution to address charge compression until data from the new cost centers become available. The commenters were also concerned that the new cost center may not be implemented consistently across hospitals and urged CMS to use analytical methods to test and supplement hospital cost center data in rate setting. For example, the commenters suggested that CMS use regression-based CCRs to measure the accuracy of the device cost center for the FY 2013 relative weights.

Response: We are sympathetic to the commenters' concerns and regret the delay in the issuance of the revised cost reporting forms. However, we are making progress on this front. As we stated in response to a previous comment, the new draft hospital cost report Form CMS-2552-10 went on display at the Federal Register on July 2, 2009, for a 60-day review and comment period, which ends August 31, 2009. Those wishing to review and comment on the document can do so at http://www.cms.hhs.gov/PaperworkReductionActof1995. After the revised cost report is available for use by all hospitals, and we begin to use the data to create CCRs for use in the calculation of the relative weights, we will analyze and monitor how hospitals are reporting their data and what effect the data are having on the separate CCRs for medical supplies and implantable devices. Comparison of the CCRs derived from the revised cost report to regression-based CCRs might be one method of gauging the accuracy and effectiveness of the separate cost centers for Medical Supplies Charged to Patients and Implantable Devices Charged to Patients.

Comment: Several commenters asked for clarification on the new “Implantable Devices Charged to Patients” cost center that was finalized in the FY 2009 IPPS final rule and will be part of the new Medicare Hospital Cost Report form. The commenters asked that CMS clarify the statement in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule that “hospitals must include costs and charges of separately chargeable medical supplies and implantable medical devices in the cost center for `Medical Supplies Charged to Patients' ” as referenced in PRM-I Section 2202.8. The commenters were confused by the reference to PRM-I Section 2202.8 because that section defines ancillary services, with no mention of medical supplies. In addition, one commenter noted the hospitals are currently testing their systems to report costs and charges for implantable devices and asked whether it would be acceptable for hospitals to establish a cost center for “Implantable Devices Charged to Patients” at line 55.01 of the current cost report until the revised cost report is available. The commenter understood that the subscripted cost center would be rolled up into Line 55 for the purposes of calculating the relative weights until the new cost report is available.

Response: We included the reference to Section 2202.8 of the PRM-I, which defines ancillary services, to remind hospitals that any items reported in the Medical Supplies Charged to Patients cost center are items (high cost or low cost) that are separately chargeable ancillary services. In accordance with Section 2202.8 of the PRM-I, ancillary services are those services for which a separate charge is customarily made in addition to the routine service charge. With respect to subscripting Line 55 to establish a cost center for Implantable Devices Charged to Patients, we have provided Line 55.30 to report Implantable Devices Charged to Patients on Form CMS-2552-96 and Line 69 on the proposed new Form CMS-2552-10.

Comment: Some commenters suggested that CMS engage in outreach and educational activities to hospitals on the changes to the cost report and reporting of charges with respect to the medical device and medical supply cost centers so that hospitals can appropriately report data. The commenters recommended that the outreach activities go beyond the “distribution of bulletins that are used to inform providers about changes to the Medicare program.”

Response: Although it is a bit early to plan specific outreach activities at this point, given that the proposed rule for the revised cost reporting forms has only been released on July 2, 2009, we agree that such educational activities are important, and we have been considering some options for educating the provider community involving the fiscal intermediaries and MACs and the cost report vendors. We look forward to working with the provider community in these initiatives.

Accordingly, we are not implementing any changes to the relative weight calculation for FY 2010. We will continue to focus on possible ways to improve the weights through cost reporting and look forward to reviewing the comments received on the draft revised cost reporting forms. In addition, we will continue to think about possible ways to refine the standardization process as a means to improve the accuracy of the relative weights. As stated above, any further changes we decide to make to any portion of the relative weights calculation will be promulgated first through notice and comment rulemaking, which will allow the public sufficient opportunity to review relevant analyses and impacts of such potential changes.

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

1. Statutory Authority

Section 1886(d)(4)(D) of the Act addresses certain hospital-acquired conditions (HACs), including infections. By October 1, 2007, the Secretary was required to select, in consultation with the Centers for Disease Control (CDC), at least two conditions that: (a) are high cost, high volume, or both; (b) are assigned to a higher paying MS-DRG when present as a secondary diagnosis (that is, conditions under the MS-DRG system that are CCs or MCCs); and (c) could reasonably have been prevented through the application of evidence-based guidelines. The list of conditions can be revised, again in consultation with CDC, from time to time as long as the list contains at least two conditions.

Medicare continues to assign a discharge to a higher paying MS-DRG if a selected HAC is present on admission (POA). However, since October 1, 2008, Medicare no longer assigns an inpatient hospital discharge to a higher paying MS-DRG if a selected condition is not POA. Thus, if a selected HAC that was not present on admission manifests during the hospital stay, the case is paid as though the secondary diagnosis was not present. However, if any nonselected CC/MCC appears on the claim, the claim will be paid at the higher MS-DRG rate; to cause a lower MS-DRG payment, all CCs/MCCs on the claim must be selected conditions for the HAC payment provision.

Since October 1, 2007, hospitals have been required to submit information on Medicare claims specifying whether diagnoses were POA. The POA indicator reporting requirement and the HAC payment provision apply to IPPS hospitals only. Non-IPPS hospitals, including CAHs, LTCHs, IRFs, IPFs, cancer hospitals, children's hospitals, hospitals in Maryland operating under waivers, rural health clinics, federally qualified health centers, RNHCIs, and Department of Veterans Affairs/Department of Defense hospitals, are exempt from POA reporting and the HAC payment provision. Throughout this section, the term “hospital” refers to an IPPS hospital.

2. HAC Selection Process

In the FY 2007 IPPS proposed rule (71 FR 24100), we sought public input regarding conditions with evidence-based prevention guidelines that should be selected in implementing section 1886(d)(4)(D) of the Act. The public comments we received were summarized in the FY 2007 IPPS final rule (71 FR 48051 through 48053).

In the FY 2008 IPPS proposed rule (72 FR 24716 through 24726), we sought public comment on conditions that we proposed to select. In the FY 2008 IPPS final rule with comment period (72 FR 47200 through 47218), we selected 8 categories to which the HAC payment provisions would apply.

In the FY 2009 IPPS proposed rule (73 FR 23547), we proposed several additional candidate HACs as well as refinements to the previously selected HACs. In the FY 2009 IPPS final rule (73 FR 48471), we expanded and refined several of the previously selected HACs, and we selected 2 additional categories of HACs. A complete list of the 10 current categories of HACs is included in section II.F.4. of this preamble.

3. Collaborative Process

CMS experts have worked closely with public health and infectious disease professionals from across the Department of Health and Human Services, including CDC, AHRQ, and the Office of Public Health and Science, to identify the candidate preventable HACs, review comments, and select HACs. CMS and CDC have also collaborated on the process for hospitals to submit a POA indicator for each diagnosis listed on IPPS hospital Medicare claims and on the payment implications of the various POA reporting options.

On December 17, 2007, CMS and CDC hosted a jointly-sponsored HAC and POA Listening Session to receive input from interested organizations and individuals. On December 18, 2008, CMS, CDC, and AHRQ hosted a second jointly-sponsored HAC and POA Listening Session to receive input from interested organizations and individuals. The agenda, presentations, audio file, and written transcript of the December 18, 2008 Listening Session are available on the CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond/07_EducationalResources.asp#TopOfPage.

4. Selected HAC Categories

The following table lists the current HACs.

HAC CC/MCC(ICD-9-CM code)
Foreign Object Retained After Surgery 998.4 (CC), 998.7 (CC).
Air Embolism 999.1 (MCC).
Blood Incompatibility 999.6 (CC).
Pressure Ulcer Stages III IV 707.23 (MCC), 707.24 (MCC).
Falls and Trauma: Codes within these ranges on the CC/MCC list:
—Fracture 800-829.
—Dislocation 830-839.
—Intracranial Injury 850-854.
—Crushing Injury 925-929.
—Burn 940-949.
—Electric Shock 991-994.
Catheter-Associated Urinary Tract Infection (UTI) 996.64 (CC).
Also excludes the following from acting as a CC/MCC:112.2 (CC),590.10 (CC),590.11 (MCC),590.2 (MCC),590.3 (CC),590.80 (CC),590.81 (CC),595.0 (CC),597.0 (CC),599.0 (CC).
Vascular Catheter-Associated Infection 999.31 (CC).
Manifestations of Poor Glycemic Control 250.10-250.13 (MCC),250.20-250.23 (MCC),251.0 (CC),249.10-249.11 (MCC),249.20-249.21 (MCC).
Surgical Site Infections  
Surgical Site Infection, Mediastinitis, Following Coronary Artery Bypass Graft (CABG) 519.2 (MCC). And one of the following procedure codes:36.10-36.19.
Surgical Site Infection Following Certain Orthopedic Procedures 996.67 (CC),998.59 (CC). And one of the following procedure codes: 81.01-81.08, 81.23-81.24, 81.31-81.38, 81.83, 81.85.
Surgical Site Infection Following Bariatric Surgery for Obesity Principal Diagnosis—278.01, 998.59 (CC) And one of the following procedure codes: 44.38, 44.39, or 44.95.
Deep Vein Thrombosis and Pulmonary Embolism Following Certain Orthopedic Procedures 415.11 (MCC),415.19 (MCC),453.40-453.42 (CC). And one of the following procedure codes: 00.85-00.87, 81.51-81.52, or 81.54.

We refer readers to section II.F.6. of the FY 2008 IPPS final rule with comment period (72 FR 47202 through 47218) and to section II.F.7. of the FY 2009 IPPS final rule (73 FR 48474 through 48486) for detailed analyses supporting the selection of each of these HACs.

The list of selected HAC categories is dependent upon CMS' list of diagnoses designated as CC/MCCs. As changes and/or new diagnosis codes are proposed and finalized to the list of CC/MCCs, these changes need to be reflected in the list of selected HAC categories. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106), we proposed the addition of ICD-9-CM codes 813.46 (Torus fracture of ulna) and 813.47 (Torus fracture of radius and ulna) to more precisely define the previously selected HAC category of falls and trauma. We refer readers to Table 6A in the Addendum to this final rule for the adoption of ICD-9-CM codes 813.46 and 813.47 as CCs.

Comment: Commenters supported the addition of ICD-9-CM codes 813.46 and 813.47 to more precisely define the falls and trauma HAC category.

Response: We appreciate the commenters' support of a more precise definition of the falls and trauma category. We are finalizing the addition of ICD-9-CM codes 813.46 and 813.47 to more precisely define the falls and trauma HAC category.

5. Public Input Regarding Selected and Potential Candidate HACs

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24104 through 24106), we did not propose to add or remove categories of HACs. However, we indicated that we continue to encourage public dialogue about refinements to the HAC list. During and after the December 18, 2008 Listening Session, we received many oral and written stakeholder comments about both previously selected and potential candidate HACs. In response to the Listening Session, commenters strongly supported using information gathered from early experience with the HAC payment provision to inform maintenance of the HAC list and consideration of future potential candidate HACs. Further, commenters emphasized the need for a robust program evaluation prior to modifying the HAC list. Strong support was also expressed for a program evaluation in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106).

Comment: Commenters overwhelmingly expressed strong support for a robust program evaluation before modifying the HAC list. Many commenters stated that CMS' approach to employ a studied program analysis during FY 2010 allows hospitals additional time to develop processes for improving performance on previously selected HACs.

Response: We appreciate the support we have received for our decision to undertake a program evaluation. The Medicare HAC policy aims to ensure patients are receiving high quality care, and the program evaluation will enable us to understand the impact of the program.

Comment: Several commenters made specific suggestions for the program evaluation. A number of commenters suggested that the program evaluation should consider assessing the policy's impact on patient treatment and potential unintended consequences. Some commenters indicated that CMS should validate POA indicator data and explore how information learned from POA coding could be used to better understand and prevent certain HACs. Commenters encouraged CMS to examine the extent to which the program is increasing adherence to evidence-based guidelines. Commenters also encouraged CMS to ensure transparency in the development of its program evaluation and to allow for public comment at various stages of the evaluation. Some commenters requested that the final program evaluation results be shared publicly.

Response: We appreciate the specific suggestions provided regarding the program evaluation. These recommendations will be taken into consideration as the program evaluation is developed. We agree with commenters that monitoring unintended consequences and assessing adherence to evidence-based guidelines should be a priority for the program evaluation. We also agree that validation of POA coding, as well as examining each POA indicator, are areas of critical importance for the program evaluation. We appreciate the public's interest in the program evaluation and plan to include updates and findings from the evaluation on CMS' Hospital-Acquired Conditions and Present on Admission Indicator Web site available at: http://www.cms.hhs.gov/HospitalAcqCond/.

6. POA Indicator Reporting

Collection of POA indicator data is necessary to identify which conditions were acquired during hospitalization for the HAC payment provision as well as for broader public health uses of Medicare data. Through Change Request No. 5679 (released on June 20, 2007), CMS issued instructions requiring IPPS hospitals to submit POA indicator data for all diagnosis codes on Medicare claims. CMS also issued Change Request No. 6086 (released on June 13, 2008) regarding instructions for processing non-IPPS claims. Specific instructions on how to select the correct POA indicator for each diagnosis code are included in the ICD-9-CM Official Guidelines for Coding and Reporting, available on the CDC Web site at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide07.pdf (the POA reporting guidelines begin on page 92). Additional information regarding POA indicator reporting and application of the POA reporting options is available on the CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond. CMS has historically not provided coding advice. Rather, CMS collaborates with the American Hospital Association (AHA) through the Coding Clinic for ICD-9-CM. CMS has been collaborating with the AHA to promote the Coding Clinic for ICD-9-CM as the source for coding advice about the POA indicator.

There are five POA indicator reporting options, as defined by the ICD-9-CM Official Guidelines for Coding and Reporting:

Indicator Descriptor
Y Indicates that the condition was present on admission.
W Affirms that the hospital has determined based on data and clinical judgment that it is not possible to document when the onset of the condition occurred.
N Indicates that the condition was not present on admission.
U Indicates that the documentation is insufficient to determine if the condition was present at the time of admission.
1 Signifies exemption from POA reporting. CMS established this code as a workaround to blank reporting on the electronic 4010A1. A list of exempt ICD-9-CM diagnosis codes is available in the ICD-9-CM Official Guidelines for Coding and Reporting.

In the FY 2009 IPPS final rule (73 FR 48486 through 48487), we adopted as final our proposal to: (1) Pay the CC/MCC MS-DRGs for those HACs coded with “Y” and “W” indicators; and (2) not pay the CC/MCC MS-DRGs for those HACs coded with “N” and “U” indicators. Though we did not make any proposals regarding the HAC POA payment determinations in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, commenters addressed this aspect of the HAC payment provision.

Comment: Commenters suggested that CMS should consider paying for HACs coded with the “U” indicator.

Response: We adopted a policy of not paying for the “U” option because we believe that this approach encourages documentation and will ensure more accurate public health data. We refer readers to the FY 2009 IPPS final rule (73 FR 48486 through 48487) for further discussion of our coding policy. In addition, as part of CMS' program evaluation of the HAC payment provision, we intend to analyze the “U” POA reporting options (section II.F.4. of this preamble).

In addition to providing specific suggestions on what CMS should consider for the program evaluation, commenters also offered suggestions on how to address POA data beyond the program evaluation.

Comment: A few commenters recommended that AHRQ continue to develop strategies to improve the accuracy of documenting POA.

Response: Through the collaborative partnership that CMS has developed with AHRQ around the program evaluation, we will continue to work with AHRQ to identify strategies to improve the accuracy of documenting POA reporting.

Comment: Some comments suggested that CMS consider publicly releasing aggregate POA data to decrease the incidence of preventable HACs. The commenters indicated that one effective approach for decreasing the incidence of preventable HACs would be to provide each hospital with aggregate POA rates based on peer comparisons.

Response: We agree with the suggestion that the public release of aggregate POA data should be considered as one prong in a multi-pronged strategy to decrease the incidence of preventable HACs. We refer readers to the FY 2009 IPPS final rule (73 FR 48488) for a detailed discussion regarding public reporting of POA indicator data.

7. Additional Considerations Addressing the HAC and POA Payment Provision

In addition to receiving comments on the program evaluation (II.F.5) and uses of POA indicator data (II.F.6), we also received comments addressing many other topics related to HAC and POA. This section summarizes those topics and provides responses.

Comment: Commenters suggested that CMS consider the evaluation of new technologies that detect, prevent, and treat HACs as a research priority.

Response: We agree with commenters that evaluating all methods to reduce preventable HACs, including new technologies, is a top priority for CMS. We refer readers to section II.I. of this preamble for additional information on CMS' new technology add-on payment policy.

Comment: Some commenters addressed expansion of the principles behind the HAC payment provision to other settings of care and other entitlement benefits, beyond fee-for-service Medicare. One commenter specifically expressed concern that the Medicare HAC policy may have unintended consequences for the pediatric population, as similar policies are being adopted by State Medicaid agencies. The commenter suggested that these Medicaid policies may discourage physicians from treating complicated pediatric patients for whom the risk of certain HACs cannot be eliminated using evidence-based guidelines.

Response: The Medicare HAC policy applies only to hospitals that are subject to the IPPS. While CMS does not develop or implement individual State Medicaid policies, we do endorse alignment of incentives across all systems of care and between the Medicare and Medicaid programs.

Comment: Commenters recommended that CMS clarify how hospitals may appeal a HAC payment determination for a particular patient who is not eligible for higher payment through assignment to the higher CC/MCC level of the MS-DRG.

Response: We thank the commenters for seeking clarification regarding appeals and the HAC payment provision. We refer readers to the FY 2008 IPPS final rule with comment period (72 FR 47216) for further information on existing procedures for review of HAC payment adjustments.

Comment: Several commenters believed that some of CMS' selected HACs may not be fully preventable and recommended that CMS' payment methodology include risk adjustment.

Response: We agree with the commenters that a risk adjustment methodology may lead to greater precision of HAC payment determinations and refer readers to the FY 2009 IPPS final rule (73 FR 48487 through 48488) for a detailed discussion of HACs and risk adjustment at both the individual and population levels.

Comment: A few commenters urged CMS to focus on more global hospital-wide assessments of harm, such as rate-based measurement of HACs, rather than targeting individual HAC events.

Response: We agree with the commenters that capturing rates of HACs may more accurately assess the level of harm within a given institution and refer readers to the FY 2009 IPPS final rule (73 FR 48488) for a detailed discussion of the advantages and disadvantages of rate-based measurement of HACs.

Comment: Commenters expressed support for expansion of the HAC list to include categories such as ventilator-associated pneumonia, failure to rescue, surgical site infection following implantation of devices, Clostridium difficile-associated disease, and malnutrition.

Response: We thank the commenters for their continued engagement and monitoring of candidate HACs. We will continue to monitor these conditions as an aspect of the program evaluation and may consider discussion of these candidate HACs in future rulemaking.

Comment: A few commenters encouraged CMS to adopt a pay-for-performance initiative that is complementary to the current HAC program and incorporates specific initiatives outlined in the HHS Action Plan to Prevent Healthcare-Associated Infections. One commenter suggested that mandatory reporting of case rates should be incorporated into pay-for-performance initiatives.

Response: We agree with the commenters that pay-for-performance and value-based purchasing (VBP) programs may be one of several payment tools for reducing preventable HACs and refer readers to the FY 2009 IPPS final rule (73 FR 48487 through 48488) for a detailed discussion of how VBP initiatives such as the Hospital VBP Plan Report to Congress can address preventable HACs.

G. Changes to Specific MS-DRG Classifications

1. MDC 5 (Diseases and Disorders of the Circulatory System): Intraoperative Fluorescence Vascular Angiography (IFVA)

As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106 through 24107) we received a request to reassign cases reporting the use of intraoperative fluorescence vascular angiography (IFVA) with coronary artery bypass graft (CABG) procedures from MS-DRGs 235 and 236 (Coronary Bypass without Cardiac Catheterization with and without MCC, respectively) into MS-DRG 233 (Coronary Bypass with Cardiac Catheterization with MCC) and MS-DRG 234 (Coronary Bypass with Cardiac Catheterization without MCC). Effective October 1, 2007, procedure code 88.59 (Intra-operative fluorescence vascular angiography (IFVA)) describes this technology.

IFVA technology consists of a mobile device imaging system with software. The technology is used to test cardiac graft patency and technical adequacy at the time of coronary artery bypass grafting (CABG). While this system does not involve fluoroscopy or cardiac catheterization, it has been suggested by the manufacturer and clinical studies that it yields results that are similar to those achieved with selective coronary arteriography and cardiac catheterization. Intraoperative coronary angiography provides information about the quality of the anastomosis, blood flow through the graft, distal perfusion and durability. For additional detailed information regarding IFVA technology, we refer readers to the September 28-29, 2006 ICD-9-CM Coordination and Maintenance Committee meeting handout at the following Web site: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage.

We examined data on cases identified by procedure code 88.59 in MS-DRGs 233, 234, 235, and 236 in the FY 2008 MedPAR file. As shown in the table below, for both MS-DRGs 235 and 236, the cases utilizing IFVA technology identified by procedure code 88.59 have a shorter length of stay and lower average costs compared to all cases in MS-DRGs 235 and 236. There were a total of 10,312 cases in MS-DRG 235 with an average length of stay of 11.12 days with average costs of $33,846. There were 88 cases in MS-DRG 235 identified by procedure code 88.59 with an average length of stay of 9.82 days with average costs of $29,258. In MS-DRG 236, there were a total of 24,799 cases with an average length of stay of 6.52 days and average costs of $22,329. There were 159 cases in MS-DRG 236 identified by procedure code 88.59 with an average length of stay of 6.30 days and average costs of $20,404. The data clearly demonstrate that the IFVA cases identified by procedure code 88.59 are assigned appropriately to MS-DRGs 235 and 236. We also examined data on cases identified by procedure code 88.59 in MS-DRGs 233 and 234. Similarly, in MS-DRGs 233 and 234, cases identified by procedure code 88.59 reflect shorter lengths of stay and lower average costs compared to all of the other cases in those MS-DRGs. There were a total of 17,453 cases in MS-DRG 233 with an average length of stay of 13.65 days with average costs of $41,199. There were 60 cases in MS-DRG 233 identified by procedure code 88.59 with an average length of stay of 12.82 days and average costs of $38,842. In MS-DRG 234, there were a total of 27,003 cases with an average length of stay of 8.70 days and average costs of $28,327. There were 69 cases in MS-DRG 234 identified by procedure code 88.59 with an average length of stay of 8.75 days and average costs of $25,308. As a result of our analysis, the data demonstrate that the IFVA cases identified by procedure code 88.59 are appropriately assigned to MS-DRGs 233 and 234.

MS-DRG Number of cases Average length of stay Average cost*
235—All cases 10,312 11.12 $33,846
235—Cases with code 88.59 88 9.82 29,258
235—Cases without code 88.59 10,224 11.14 33,886
236—All cases 24,799 6.52 22,329
236—Cases with code 88.59 159 6.30 20,404
236—Cases without code 88.59 24,640 6.52 22,341
MS-DRG Number of cases Average length of stay Average cost*
* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based weighting methodology. The cost-based weights were adopted over a 3-year transition period in1/3increments between FY 2007 and FY 2009. The average cost represents the average standardized charges on the claims reduced to cost using the cost center-specific CCRs for a specific DRG. The standardization process includes adjustments for IME, DSH, and wage index as applied to individual hospitals. This estimation of cost is the same method used in the computation of the relative weights. We are using cost-based data instead of our historical charge-based data to evaluate proposed MS-DRG classification changes.
233—All cases 17,453 13.65 41,199
233—Cases with code 88.59 60 12.82 38,842
233—Cases without code 88.59 17,393 13.65 41,207
234—All cases 27,003 8.70 28,327
234—Cases with code 88.59 69 8.75 25,308
234—Cases without code 88.59 26,934 8.70 28,334

We believe that if the cases identified by procedure code 88.59 were proposed to be reassigned from MS-DRGs 235 and 236 to MS-DRGs 233 and 234, they would be significantly overpaid. In addition, because the cases in MS-DRGs 235 and 236 did not actually have a cardiac catheterization performed, a proposal to reassign cases identified by procedure code 88.59 would result in lowering the relative weights of MS-DRGs 233 and 234 where a cardiac catheterization is truly performed.

In summary, the data do not support moving IFVA cases identified by procedure code 88.59 from MS-DRGs 235 and 236 into MS-DRGs 233 and 234.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited the public to submit comments on our proposal not to make any MS-DRG modifications for cases reporting procedure code 88.59 for FY 2010. Below, we provide a summation of the public comments we received and our responses.

Comment: A number of commenters believed that the use of IFVA in conjunction with CABG procedures leads to positive outcomes. Many of the commenters stated that they had performed IFVA and that, by using IFVA along with the CABG procedure, they were able to reduce their patients' lengths of stay and reduce complications, which in turn reduced hospitals costs. The commenters stated that the CMS published data indicated that patients who undergo a CABG procedure along with IFVA “showed consistently shortened length of stay and the resulting cost savings.” The commenters stated that, despite cost savings from the routine treatment of CABG patients with IFVA, their facilities were not prepared to purchase this technology unless there were additional Medicare payments.

The commenters did not dispute the fact that the CMS data showed IFVA cases used considerably less resources than cases undergoing a cardiac catheterization. However, the commenters expressed concern that CMS did not suggest a mechanism to encourage hospitals to invest in the IFVA equipment by providing additional payment for the utilization of IFVA.

Some commenters urged CMS to explore alternative methods of payment to facilities for utilizing the IFVA technology.

Another commenter representing a specialty society indicated that several of its members, who are cardiothoracic surgeons, had differing opinions on the value of IFVA as an adjunctive procedure to CABG surgery. This commenter stated that, due to a lack of information regarding the efficacy of IFVA within its cardiac surgery database, the commenter was unable to appropriately assess the effectiveness of the technology.

Response: We appreciate and acknowledge the commenters' concerns. We would like to point out that the costs associated with the IFVA technology, when utilized with coronary artery bypass (CABG) procedures, are already accounted for within the MS-DRGs for the CABG procedure. In other words, cases reporting procedure code 88.59, when performed with a CABG procedure, are currently grouped to one of the MS-DRGs describing a CABG procedure. Our claims data indicate that IFVA cases have average costs very similar to other cases within the MS-DRGs to which they are currently assigned. Our data do not support classifying code 88.59 as a cardiac catheterization so that all cases where IFVA is performed would be assigned to the CABG DRGs with cardiac catheterization (MS-DRGs 233 and 234). The cardiac catheterization cases have consistently higher costs than cases that only utilize IFVA with CABG.

In response to concerns that CMS did not provide an alternative for facilities to account for costs associated with IFVA use in conjunction with CABG surgery, in our evaluation of data for possible proposals for modifications to the MS-DRGs, we did not find data to support a MS-DRG change for IFVA. The request we received was to reassign cases reporting the use of IFVA with CABG procedures from MS-DRGs 235 and 236 into MS-DRG 233 and MS-DRG 234. To make this change, we would have to add the IFVA procedure to the list of cardiac catheterization procedures listed under MS-DRGs 233 and 234. As the commenters noted in its own submitted comments, the data presented in the FY 2010 proposed rule (74 FR 24107), for cases where IFVA (code 88.59) was reported with a CABG procedure, demonstrated that these cases resulted in shorter lengths of stay and lower average costs compared to all cases within the specified CABG MS-DRGs. As such, it would be inappropriate to reassign cases reporting the use of IFVA to higher weighted MS-DRGs merely as an incentive for hospitals to invest in the IFVA technology.

With regards to the commenter's suggestion that CMS give consideration to the utilization of the cardiac surgery database to analyze IFVA, we refer the commenter and readers to section V.A.1-5 of the FY 2010 proposed rule (74 FR 24165 through 24176) for a discussion of CMS' Hospital Value-Based Purchasing (VBP) Plan, a policy that strives to align payment incentives with the quality of care as well as the resources used to deliver care to encourage high-value health care.

In conclusion, many commenters expressed support for the limited MS-DRG changes proposed for FY 2010, given the major changes that took place with the recent implementation of the MS-DRG system. Our analysis of claims data indicates that IFVA cases have average costs very similar to other cases within the MS-DRGs to which they are currently assigned, and the data do not support the request to classify IFVA as a cardiac catheterization at this time. Therefore, as final policy for FY 2010, we are finalizing our proposal to not make any changes to MS-DRGs 233, 234, 235, or 236 for cases reporting the use of intraoperative fluorescence vascular angiography (IFVA), procedure code 88.59.

2. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue): Infected Hip and Knee Replacements

As discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24107 through 24109), we received a request that we examine the issue of patients who have undergone hip or knee replacement procedures that have subsequently become infected and who are then admitted for inpatient services for removal of the prosthesis. The requestor stated that these patients are presented with devastating complications and require extensive resources to treat. The infection often results in the need for multiple re-operations, prolonged use of intravenous and oral antibiotics, extended rehabilitation, and frequent followups. Furthermore, the requestor stated that, even with extensive treatment, the outcomes can still be poor for some of these patients. The requestor stated that patients who are admitted for inpatient services with an infected hip or knee prosthesis must first undergo a procedure to remove the prosthesis and to insert an antibiotic spacer to treat the infection and maintain a space for the new prosthesis. The new prosthesis cannot be inserted until after the infection has been treated. Patients who are admitted for inpatient services with a hip or knee infection and then undergo a removal of the prosthesis are captured by the following procedure codes:

  • 80.05 (Arthrotomy for removal of prosthesis, hip)
  • 80.06 (Arthrotomy for removal of prosthesis, knee)

In addition, code 84.56 (Insertion or replacement of (cement) spacer)) would be used for any insertion of a spacer that would be reported if an antibiotic spacer were inserted.

The issue of hip and knee infections and revisions was discussed in the FY 2009 IPPS final rule (73 FR 48498 through 48507) in response to a more complicated request that we received involving the creation and modification of several joint DRGs. Because data did not support the requestor's suggested changes, we did not make any modifications to the joint DRGs at that time.

The current requestor asked that we move cases involving the removal of hip and knee prostheses (procedure codes 80.05 and 80.06) from their current assignment in MS-DRGs 480, 481, and 482 (Hip and Femur Procedures Except Major Joint with MCC, with CC, without CC/MCC, respectively) and in MS-DRGs 495, 496, and 497 (Local Excision of Internal Fixation Device Except Hip and Femur with MCC, with CC, and with CC/MCC, respectively) and assign them to MS-DRGs 463, 464, and 465 (Wound Debridement and Skin Graft Except Hand, for Musculo-Connective Tissue Disease with MCC, with CC, without CC/MCC, respectively). MS-DRGs 463, 464, and 465 include cases that are treated with a debridement for infection. The requestor stated that these cases are clinically similar to those captured by procedure codes 80.05 and 80.06 where the prosthesis is removed and a new prosthesis is not inserted because of an infection.

The requestor specifically asked that we remove the hip arthrotomy code 80.05 from MS-DRGs 480, 481, and 482, and assign it to MS-DRGs 463, 464, and 465. The requestor also recommended that we remove the knee arthrotomy code 80.06 from MS-DRGs 495, 496, and 497 and assign it to MS-DRGs 463, 464, and 465.

If we were to accept the requestor's suggestion, joint replacement cases in which the patients were admitted for inpatient services to remove the prosthesis because of an infection would be assigned to the higher paying debridement MS-DRGs (MS-DRGs 463, 464, and 465). As mentioned earlier, these MS-DRGs contain other cases involving treatment for infections.

For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we examined hip replacement cases identified by procedure code 80.05 in MS-DRGs 480, 481, and 482, and knee replacement cases identified by procedure code 80.06 in MS-DRGs 495, 496, and 497 using the FY 2008 MedPAR file. Our data from the FY 2008 MedPAR file support the requestor's suggestion that these cases have similar costs to those in MS-DRGs 463, 464, and 465, and that they are significantly more expensive to treat than those in their current MS-DRG assignments. The following table summarizes those findings:

MS-DRG Number of cases Average length of stay Average cost*
* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based weighting methodology. The cost-based weights were adopted over a 3-year transition period in1/3increments between FY 2007 and FY 2009. The average cost represents the average standardized charges on the claims reduced to cost using the cost center-specific CCRs for a specific DRG. The standardization process includes adjustments for IME, DSH, and wage index as applied to individual hospitals. This estimation of cost is the same method used in the computation of the relative weights. We are using cost-based data instead of our historical charge-based data to evaluate proposed MS-DRG classification changes.
463—All Cases 4,834 16.59 $26,696
464—All Cases 4,934 9.52 15,065
465—All Cases 1,696 5.45 9,041
480—All Cases 31,181 8.89 17,168
480—Cases with code 80.05 643 13.35 26,053
480—Cases without code 80.05 30,538 8.80 16,981
481—All Cases 72,406 5.68 11,259
481—Cases with code 80.05 871 8.34 17,202
481—Cases without code 80.05 71,535 5.65 11,187
482—All Cases 37,443 4.65 9,320
482—Cases with code 80.05 282 6.82 13,718
482—Cases without code 80.05 37,161 4.63 9,287
495—All Cases 2,140 10.40 18,729
495—Cases with code 80.06 513 11.53 23,508
495—Cases without code 80.06 1,627 10.04 17,432
496—All Cases 5,518 5.73 10,827
496—Cases with code 80.06 1,346 6.67 14,454
496—Cases without code 80.06 4,172 5.42 9,657
497—All Cases 5,856 2.84 7,148
497—Cases with code 80.06 688 5.08 12,234
497—Cases without code 80.06 5,168 2.54 6,470

The data show that hip replacement cases with procedure code 80.05 in MS-DRGs 480, 481, and 482 have average costs of $26,053, $17,202, and $13,718, respectively, compared to overall average costs of $17,168 in MS-DRG 480; $11,259 in MS-DRG 481; and $9,320 in MS-DRG 482. The data also show that knee replacement cases with procedure code 80.06 in MS-DRGs 495, 496, and 497 have average costs of $23,508, $14,454, and $12,234, respectively, compared to average costs of all cases of $18,729 in MS-DRG 495, $10,827 in MS-DRG 496, and $7,148 in MS-DRG 497. All cases in MS-DRGs 463, 464, and 465 had average costs of $26,696, $15,065, and $9,041, respectively.

The results of this analysis of data support the reassignment of procedure codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465. Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24107 through 24109), we proposed to move procedure codes 80.05 and 80.06 from their current assignments in MS-DRGs 480, 481, and 482 and 495, 496, and 497, and assign them to MS-DRGs 463, 464, and 465. We also proposed to revise the code title of procedure code 80.05 to read “Arthrotomy for removal of prosthesis without replacement, hip” and the title of procedure code 80.06 to read “Arthrotomy for removal of prosthesis without replacement, knee”, effective October 1, 2009, as in shown in Table 6F of the Addendum to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule.

Comment: A number of commenters supported our recommendation to move codes 80.05 and 80.06 from their current assignments in MS-DRGs 480, 481, and 482 and 495, 496, and 497 and assign them to MS-DRGs 463, 464, and 465. The commenters also supported the proposed changes to the code titles for both codes 80.05 and 80.06, effective October 1, 2009.

One commenter supported this MS-DRG change for the treatment of infection following hip and knee arthroplasty patients because, according to the commenter, considerable resources are required to care for these patients whose deep infections are one of the most devastating complications associated with hip and knee arthroplasty. The commenter further stated that the current hospital payment rate provides a disincentive for hospitals to admit patients with infected total joint replacements and creates an economic burden on tertiary care referral centers treating these patients. Several other commenters also agreed that these cases are significantly more expensive to treat than other cases in the current MS-DRG assignments. One commenter stated that this reassignment will more accurately reflect the costs associated with treating the removal of hip and knee prostheses.

Some of the commenters who supported the proposed changes stated that, given the recent major changes to the MS-DRGs, it was appropriate for CMS to propose a limited number of MS-DRG classification changes for FY 2010. The commenters had no objections to the proposal to move codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465.

Response: We appreciate the support of the commenters and agree that it is appropriate to move codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465.

Comment: Several commenters who supported this proposed MS-DRG assignment change also recommended that CMS consider revising the titles for MS-DRGs 463, 464, and 465 to reflect the proposed reassignment change. The commenters suggested the following MS-DRG titles for MS-DRGs 463, 464, and 465: “Wound Debridement, Skin Graft, and/or Removal of Infected Prosthesis Except hand for Musculoskeletal-Connective Tissue Disease with MCC, with CC, or without CC/MCC,” respectively.

Response: The MS-DRG titles are general in nature and usually do not describe all the diagnoses and procedure codes included in each MS-DRG. We do not use the full MS-DRG titles within the IPPS. Rather, we use abbreviated titles, as is shown in Table 5 of the Addendum to this FY 2010 IPPS/RY 2010 LTCH PPS final rule. Our abbreviated titles are constrained by the fact that they must be 68 characters long. The current abbreviated title for MS-DRG 465 is already 68 characters long. The MS-DRG 465 abbreviated title is as follows: Wnd debrid skn graft exc hand, for musculo-conn tiss dis w/o CC/MM. As a result, we are unable to accommodate the commenter's suggestion by making a clear MS-DRG abbreviated title that includes all of the recommended language within our 68 character limitation. We also note that not all prosthesis removals are being moved to MS-DRGs 463, 364, and 465. We are only moving knee and hip prosthesis removals to these MS-DRGs. Therefore, we believe that the suggested new title may be misleading because it implies all types of prosthesis removals are in these MS-DRGs. Therefore, we are maintaining the current titles for MS-DRGs 463, 464, and 465.

After consideration of the public comments we received, we are finalizing our proposal to move procedure codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465. We are also finalizing our proposal to revise the titles of procedure codes 80.05 and 80.06. The revised title for procedure code 80.05 is “Arthrotomy for removal of prosthesis without replacement, hip”. The revised title for procedure code 80.06 is “Arthrotomy for removal of prosthesis without replacement, knee”. These modifications and revisions are effective October 1, 2009, as reflected in Table 6F of the Addendum to this final rule.

3. Medicare Code Editor (MCE) Changes

As explained under section II.B.1. of the preamble of this final rule, the Medicare Code Editor (MCE) is a software program that detects and reports errors in the coding of Medicare claims data. Patient diagnoses, procedure(s), and demographic information are entered into the Medicare claims processing systems and are subjected to a series of automated screens. The MCE screens are designed to identify cases that require further review before classification into a DRG. In the FY 2020 IPPS/LTCH PPS proposed rule (74 FR 24109 through 24110), for FY 2010, we proposed to make the following changes to the MCE edits:

a. Diagnoses Allowed for Males Only Edit

There are four diagnosis codes that were inadvertently left off of the MCE edit titled “Diagnoses Allowed for Males Only.” These codes are located in the chapter of the ICD-9-CM diagnosis codes entitled “Diseases of Male Genital Organs.” In the FY 2009 IPPS final rule, we indicated that we were adding the following four codes to this MCE edit:

  • 603.0 (Encysted hydrocele)
  • 603.1 (Infected hydrocele)
  • 603.8 (Other specified types of hydrocele)
  • 603.9 (Hydrocele, unspecified).

We had no reported problems or confusion with the omission of these codes from this section of the MCE, but in order to have an accurate product, we indicated that we were adding these codes for FY 2009. However, through an oversight, we failed to implement the indicated FY 2009 changes to the MCE by adding codes 603.0, 603.1, 603.8, and 603.9 to the MCE edit of diagnosis allowed for males only. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we acknowledged this omission and again proposed to make the changes.

We did not receive any public comments on the proposed changes to the edit for Diagnosis Allowed for Males Only. Therefore, we are finalizing our proposal to add diagnosis codes 603.0, 603.1, 603.8, and 603.9 to this MCE edit for FY 2010.

b. Manifestation Codes as Principal Diagnosis Edit

Manifestation codes describe the manifestation of an underlying disease, not the disease itself. Therefore, manifestation codes should not be used as a principal diagnosis. The National Center for Health Statistics (NCHS) has removed the advice “code first associated disorder” from three codes, thereby making them acceptable principal diagnosis codes. These codes are:

  • 365.41 (Glaucoma associated with chamber angle anomalies)
  • 365.42 (Glaucoma associated with anomalies of iris)
  • 365.43 (Glaucoma associated with other anterior segment anomalies)

In order to make conforming changes to the MCE, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24109), we proposed to remove codes 365.41, 365.42, and 365.43 from the Manifestation Code as Principal Diagnosis Edit.

We did not receive any public comments on the proposed changes to the edit for Manifestation Codes as Principal Diagnosis. Therefore, we are finalizing our proposal to remove manifestation codes 365.41, 365.42, and 365.43 from the principal diagnosis edit. These codes will be acceptable as principal diagnosis, effective October 1, 2010.

c. Invalid Diagnosis or Procedure Code

The MCE checks each diagnosis, including the admitting diagnosis, and each procedure against a table of valid ICD-9-CM codes. If an entered code does not agree with any code on the list, it is assumed to be invalid or that the 4th or 5th digit of the code is invalid or missing.

An error was discovered in this edit. ICD-9-CM code 00.01 (Therapeutic ultrasound of vessels of head and neck) was inadvertently left out of the MCE tables. The inclusion of this code in the MCE tables would have generated an error message at the Medicare contractor level, but we had instructed the Medicare contractors to override this edit for discharges on or after October 1, 2008. To make a conforming change to the MCE, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24109), we proposed to add code 00.01 to the table of valid codes.

We did not receive any public comments on our proposed changes to the edit for Invalid Diagnosis or Procedure Codes. Therefore, we are finalizing our proposal to add code 00.01 to the table of valid codes for FY 2010.

d. Unacceptable Principal Diagnosis

There are selected codes that describe a circumstance that influences an individual's health status but not a current illness or injury and codes that are not specific manifestations but may describe illnesses due to an underlying cause. These codes are considered unacceptable as a principal diagnosis.

For FY 2008, a series of diagnostic codes were created at subcategory 209, Neuroendocrine Tumors. An instructional note under this subcategory stated that coders were to “Code first any associated multiple endocrine neoplasia syndrome (258.01-258.03)”. Medicare contractors had interpreted this note to mean that none of the codes in subcategory 209 were acceptable principal diagnoses and had entered these codes on the MCE edit for unacceptable principal diagnoses. We later deemed this interpretation to be incorrect. We had not intended that the series of codes at subcategory 209 were only acceptable as secondary diagnoses.

To avoid future misinterpretation, in the FY 2010 IPPS/RY 2919 LTCH PPS proposed rule (74 FR 24109 through 24110), we proposed to remove the following codes from the MCE edit for unacceptable principal diagnoses.

  • 209.00 (Malignant carcinoid tumor of the small intestine, unspecified portion)
  • 209.01 (Malignant carcinoid tumor of the duodenum)
  • 209.02 (Malignant carcinoid tumor of the jejunum)
  • 209.03 (Malignant carcinoid tumor of the ileum)
  • 209.10 (Malignant carcinoid tumor of the large intestine, unspecified portion)
  • 209.11 (Malignant carcinoid tumor of the appendix)
  • 209.12 (Malignant carcinoid tumor of the cecum)
  • 209.13 (Malignant carcinoid tumor of the ascending colon)
  • 209.14 (Malignant carcinoid tumor of the transverse colon)
  • 209.15 (Malignant carcinoid tumor of the descending colon)
  • 209.16 (Malignant carcinoid tumor of the sigmoid colon)
  • 209.17 (Malignant carcinoid tumor of the rectum)
  • 209.20 (Malignant carcinoid tumor of unknown primary site)
  • 209.21 (Malignant carcinoid tumor of the bronchus and lung)
  • 209.22 (Malignant carcinoid tumor of the thymus)
  • 209.23 (Malignant carcinoid tumor of the stomach)
  • 209.24 (Malignant carcinoid tumor of the kidney)
  • 209.25 (Malignant carcinoid tumor of foregut, not otherwise specified)
  • 209.26 (Malignant carcinoid tumor of midgut, not otherwise specified)
  • 209.27 (Malignant carcinoid tumor of hindgut, not otherwise specified)
  • 209.29 (Malignant carcinoid tumor of other sites)
  • 209.30 (Malignant poorly differentiated neuroendocrine carcinoma, any site)
  • 209.40 (Benign carcinoid tumor of the small intestine, unspecified portion)
  • 209.41 (Benign carcinoid tumor of the duodenum)
  • 209.42 (Benign carcinoid tumor of the jejunum)
  • 209.43 (Benign carcinoid tumor of the ileum)
  • 209.50 (Benign carcinoid tumor of the large intestine, unspecified portion)
  • 209.51 (Benign carcinoid tumor of the appendix)
  • 209.52 (Benign carcinoid tumor of the cecum)
  • 209.53 (Benign carcinoid tumor of the ascending colon)
  • 209.54 (Benign carcinoid tumor of the transverse colon)
  • 209.55 (Benign carcinoid tumor of the descending colon)
  • 209.56 (Benign carcinoid tumor of the sigmoid colon)
  • 209.57 (Benign carcinoid tumor of the rectum)
  • 209.60 (Benign carcinoid tumor of unknown primary site)
  • 209.61 (Benign carcinoid tumor of the bronchus and lung)
  • 209.62 (Benign carcinoid tumor of the thymus)
  • 209.63 (Benign carcinoid tumor of the stomach)
  • 209.64 (Benign carcinoid tumor of the kidney)
  • 209.65 (Benign carcinoid tumor of foregut, not otherwise specified)
  • 209.66 (Benign carcinoid tumor of midgut, not otherwise specified)
  • 209.67 (Benign carcinoid tumor of hindgut, not otherwise specified)
  • 209.69 (Benign carcinoid tumor of other sites)

In the meantime, CMS has issued instructions in the form of an internal working document called a joint signature memorandum to the Medicare contractors to override this edit and process claims containing codes from the subcategory 209 series as acceptable principal diagnoses.

We acted quickly to negate the effects of this edit, as it was an erroneous edit to the MCE resulting in unintended consequences. We did not receive any public comments on the proposed change to the edit for Unacceptable Principal Diagnosis. Therefore, we are finalizing our proposal to remove the codes listed above (that is, codes 209.00 through 209.69) from the MCE edit for Unacceptable Principal Diagnosis.

e. Creation of New Edit Titled “Wrong Procedure Performed”

On January 15, 2009, CMS issued three National Coverage Decision memoranda on the coverage of erroneous surgeries on Medicare patients: Wrong Surgical or Other Invasive Procedure Performed on a Patient (CAG-00401N); Surgical or Other Invasive Procedure Performed on the Wrong Body Part (CAG-00402N); and Surgical or Other Invasive Procedure Performed on the Wrong Patient (CAG-00403N). We refer readers to the following CMS Web sites to view the memoranda in their entirety: For the decision memorandum on surgery on the wrong body part: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=222. For the decision memorandum on surgery on the wrong patient: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=221. For the decision memorandum on the wrong surgery performed on a patient: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=223.

To conform to these new coverage decisions, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24110), we proposed to create a new edit to identify cases in which wrong surgeries occurred. The NCHS has revised the title of one E-code and created two new E-codes to identify cases in which incorrect surgeries have occurred. The revised E-code title is:

  • E876.5 (Performance of wrong operation (procedure) on correct patient).

The two new E-codes are as follows:

  • E876.6 (Performance of operation (procedure) on patient not scheduled for surgery).
  • E876.7 (Performance of correct operation (procedure) on wrong side/body part).

For the benefit of the reader, we are providing the following brief background information on external causes of injury and poisoning codes (E- codes). E-codes are intended to provide data for injury research and evaluation of injury prevention strategies. E-codes capture how the injury or poisoning happened (cause), the intent (unintentional or accidental; or intentional, such as suicide or assault), and the place where the event occurred. The use of E-codes is supplemental to the ICD-9-CM diagnosis codes. The National Center for Health Statistics (NCHS)/CDC has created and maintains the ICD-9-CM Official Guidelines for Coding and Reporting, including instructions concerning E-codes, and has made these guidelines available on the Web site at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide08.pdf. The guidelines are a national HIPAA standard. The guidelines are being updated effective October 1, 2009, to recognize the fact that CMS requires the reporting of E-codes as part of its wrong procedure performed national coverage decision. The fourth quarter issue of Coding Clinic for ICD-9-CM will also include information on the new wrong surgery codes as well as the updated Coding Guidelines.

A complete list of all of the E-codes that will be implemented on October 1, 2009, can be found on the CMS Web site home page at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/07_summarytables.asp#TopOfPage in the download titled “New, Deleted, and Invalid Diagnosis and Procedure Codes.”

Currently, an E-code used as a principal diagnosis will receive the MCE Edit “E-code as principal diagnosis”. This edit will remain in effect. However, we proposed a change to the MCE so that E-codes E876.5 through E876.7, whether they are in the principal or secondary diagnosis position, will trigger the “Wrong Procedure Performed” edit. Any claim with this edit will be rejected.

Comment: Several commenters requested that CMS clarify its policy on reporting of E-codes, stating that CMS has never required the reporting of these codes prior to the proposed rule. The commenters also stated that an edit for codes E876.5 through E876.7 should not be applied to claims in which one of these E-codes was listed as the principal diagnosis as there is already an MCE edit that addresses E-codes in this position. One commenter agreed that eliminating the “E-code as Principal Diagnosis” edit that is currently in place will address many issues for reporting E-codes as principal diagnosis.

Response: The commenters are correct that the reporting of E-codes has not previously been required for reporting to CMS. However, as noted above, the E-codes are used for many purposes and are often required by institutions in order to describe a complete patient encounter with health services. We believe that any of the three aforementioned wrong surgery situations presents such an egregious scenario that hospitals will capture this information through the use of the applicable E-codes.

The commenters are correct that E-codes in the principal diagnosis position on the claim will trigger an edit in which claims will be returned to the provider. However, we did not propose to delete this edit; this edit will remain in place along with the Wrong Procedure Performed edit. Claims with E-codes other than codes E876.5 through E876.7 reported in the principal diagnosis position will be subject to the longstanding Principal Diagnosis edit. Claims with codes E876.5 through E876.7 reported in either the principal or secondary diagnosis position will be subject to the Wrong Procedures Performed edit. These claims will be rejected.

Comment: Commenters suggested that the Wrong Procedure Performed edit should be triggered if the E-code is reported in either the E-code position on the claim or in the secondary diagnosis position.

Response: We agree that the edit should be triggered no matter in what position it is reported. However, we encourage reporting of the E-codes in the secondary diagnosis position.

Comment: One commenter suggested that if codes E876.5 through E876.7 were to be reported in the principal diagnosis position, the “E-code as Principal Diagnosis” edit should be invoked and the claim returned to the provider so that the claim could then be resubmitted listing the codes in the correct sequence. The commenter further suggested that the Wrong Procedure Performed edit should only be triggered when the E-codes are reported in the correct position on the claim.

Response: We do not believe this suggestion is in the best interest of the hospital industry. Performance of the wrong surgery is not a reasonable and necessary treatment for the Medicare beneficiary, and these claims will be rejected. To cause the Medicare contractor (the fiscal intermediary or the A/B MAC) to return the claim to the provider, have the provider correct the sequencing of the codes on the claim and return it to the contractor, only to ultimately have the claim be rejected, add steps to a process that results in the same outcome.

Comment: One commenter suggested that updated coding guidance should address the definition of operation/procedure, and [define] what constitutes a wrong procedure for consistent assignment [of the codes] to coincide with industry definitions.

Response: We take this opportunity to point out that the definition of an operation or procedure is a longstanding description, dating from the Uniform Hospital Discharge Data Set promulgated by the Secretary of the U.S. Department of Health, Education, and Welfare in 1974. In addition, with regard to the suggestion that there need to be guidelines regarding the performance of a wrong surgery in any of the three cases described by these codes, we believe that any of these three scenarios are so flagrant that the average individual could determine that a wrong surgery had taken place. Therefore, we do not believe we should wait for a determination by the industry of what constitutes the definition of a wrong surgery.

Comment: One commenter urged CMS to work closely with the other Cooperating Parties for ICD-9-CM to provide guidance for coding, reporting, and sequencing of codes E876.5 through E876.7. Several commenters suggested that CMS begin processing all of the reported diagnosis and procedure codes.

Response: We acknowledge the current CMS system limitations that allow us to process only the first nine diagnosis codes and six procedure codes reported on the hospital bills and that do not allow us to process codes from the external cause of injury field when making an MS-DRG assignment. We have discussed these internal CMS system limitations in previous rules. In anticipation of the implementation of ICD-10 on October 1, 2013, CMS is undertaking extensive efforts to update its systems. These system updates include plans to begin processing up to 25 diagnosis codes and 25 procedure codes as well as the ability to process codes reported in the external cause of injury field. With these system updates, we believe the concerns expressed by commenters concerning CMS' limited processing of reported codes will be resolved. In the meantime, hospitals should continue their current and longstanding practice of reporting the ICD-9-CM diagnosis and procedure codes which affect the MS-DRG assignment among the first nine diagnosis and first six procedure coding fields.

As stated below, CMS will implement a wrong surgery (Wrong Procedure Performed) coverage edit in the MCE on October 1, 2009, that will lead to any claim with a wrong surgery E-code triggering this edit to be rejected.

Should hospitals perform any of the three wrong surgeries and submit claims on which the E-code is omitted or is listed in a field that we do not currently process for the MS-DRG assignment (the code is not reported among the first nine diagnosis codes or the code is reported in the External Cause of Injury field), the case may be subject to retrospective review by the Recovery Audit Contractor (RAC) and then subsequently denied. Patterns of apparent coding abuse may be referred to the Office of Inspector General for HHS for additional investigation.

We also have referred this new Wrong Procedure Performed national coverage decision to the Cooperating Parties for ICD-9-CM who update and maintain the Official ICD-9-CM Coding Guidelines. These guidelines are a national HIPAA standard. The guidelines are being updated effective October 1, 2009, to recognize the fact that CMS requires the reporting of E-codes as part of its wrong procedure performed national coverage decision. The fourth quarter issue of Coding Clinic for ICD-9-CM will also include information on the new wrong surgery codes as well as the updated Coding Guidelines. We believe the clarity provided by the national coverage decisions, the MCE edits, the updated Official ICD-9-CM Coding Guidelines, and the Fourth Quarter Coding Clinic article on the new wrong surgery codes should make clear how the codes are to be used and reported.

After consideration of the public comments we received, we are finalizing our proposal to change the MCE so the E-codes E876.5 through E876.7, whether they are in the principal or secondary diagnosis position, will trigger the “Wrong Procedure Performed” edit. Therefore, any claim with this edit will be rejected, effective October 1, 2009.

f. Procedures Allowed for Females Only Edit

It has come to our attention that code 75.37 (Amnioinfusion) and code 75.38 (Fetal pulse oximetry) were inadvertently omitted from the MCE edit “Procedures Allowed for Females Only.” In order to correct this omission, in the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 24110 through 24111), we proposed to add codes 75.37 and 75.38 to the edit for procedures allowed for females only.

We did not receive any public comments on our proposal. Therefore, for FY 2010, we are adding codes 75-37 and 75.38 to the Procedures Allowed for Females Only edit.

4. Surgical Hierarchies

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

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

A surgical class can be composed of one or more MS-DRGs. For example, in MDC 11, the surgical class “kidney transplant” consists of a single MS-DRG (MS-DRG 652) and the class “major bladder procedures” consists of three MS-DRGs (MS-DRGs 653, 654, and 655). Consequently, in many cases, the surgical hierarchy has an impact on more than one MS-DRG. The methodology for determining the most resource-intensive surgical class involves weighting the average resources for each MS-DRG by frequency to determine the weighted average resources for each surgical class. For example, assume surgical class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 3, 4, and 5. Assume also that the average costs of MS-DRG 1 is higher than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are higher than the average costs of MS-DRG 2. To determine whether surgical class A should be higher or lower than surgical class B in the surgical hierarchy, we would weight the average costs of each MS-DRG in the class by frequency (that is, by the number of cases in the MS-DRG) to determine average resource consumption for the surgical class. The surgical classes would then be ordered from the class with the highest average resource utilization to that with the lowest, with the exception of “other O.R. procedures” as discussed below.

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

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

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

For FY 2010, we did not propose any revisions to the surgical hierarchy.

We did not receive any public comments on our proposal not to make any revisions to the surgical hierarchy and, therefore, are finalizing our proposed decision in this final rule.

5. Complications or Comorbidity (CC) Exclusions List

a. Background

As indicated earlier in the preamble of this final rule, under the IPPS DRG classification system, we have developed a standard list of diagnoses that are considered CCs. Historically, we developed this list using physician panels that classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial complication or comorbidity. A substantial complication or comorbidity was defined as a condition that, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least 1 day in at least 75 percent of the patients. We refer readers to section II.D.2. and 3. of the preamble of the FY 2008 IPPS final rule with comment period for a discussion of the refinement of CCs in relation to the MS-DRGs we adopted for FY 2008 (72 FR 47121 through 47152).

b. CC Exclusions List for FY 2010

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

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

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

The creation of the CC Exclusions List was a major project involving hundreds of codes. We have continued to review the remaining CCs to identify additional exclusions and to remove diagnoses from the master list that have been shown not to meet the definition of a CC. [2]

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24111 through 24112), we proposed to make limited revisions to the CC Exclusions List for FY 2010 to take into account the changes made in the ICD-9-CM diagnosis coding system effective October 1, 2009. (We refer readers to section II.G.7. of the preamble of this final rule for a discussion of ICD-9-CM changes.) We proposed to make these changes in accordance with the principles established when we created the CC Exclusions List in 1987. In addition, we indicated on the CC Exclusions List some changes as a result of updates to the ICD-9-CM codes to reflect the exclusion of codes from being MCCs under the MS-DRG system that we adopted in FY 2008.

Comment: One comment asked CMS if it would be reasonable to consider modifying future GROUPER logic so that patients with multiple secondary diagnoses classified as CCs would be assigned to the MCC level. In other words, the commenter stated, multiple CCs would be considered the same as having an MCC.

Response: We believe this comment is outside the scope of the proposed rule because we did not propose significant revisions to the MS-DRGs. Moreover, as discussed earlier, we made significant refinements to the inpatient payment system when we implemented the MS-DRG system in FY 2008. We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141). As we noted earlier, we received a number of comments recognizing the recent major changes to the MS-DRGs. The commenters stated that, given these recent major changes, it is appropriate for CMS to make only a limited number of MS-DRG classification changes for FY 2010. We believe that reclassifying a case with two or more CCs as an MCC would have a major impact on the MS-DRG system because 51 percent of the cases in the MedPAR file have more than one CC (5,980,824 of 11,801,371 cases in FY 2008). Therefore, we have decided not to modify the GROUPER logic to classify a case with multiple CCs as an MCC for FY 2010.

Comment: Several commenters recommended that CMS consider making further adjustments to the MS-DRG assignments based on obesity. The commenters stated that higher Body Mass Index (BMI) ratings add to the complexity of care for patients, such as those patients undergoing orthopedic procedures. The commenters recommended the following changes to the list of MCCs and CCs.

One commenter recommended that CMS add the following codes to the CC list. Another commenter recommended that CMS add these same codes to the MCC list.

  • 731.3 (Major osseous defects)
  • V85.35 (Body mass index 35.0-35.9, adult)
  • V85.36 (Body mass index 36.0-36.9, adult)
  • V85.37 (Body mass index 37.0-37.9, adult)

Both commenters recommended that CMS add the following codes to the MCC list:

  • V85.38 (Body mass index 38.0-38.9, adult)
  • V85.39 (Body mass index 39.0-39.9, adult)
  • V85.40 (Body mass index 40 and over, adult)

Response: We believe this comment is outside the scope of the specific proposal in the proposed rule because we did not propose significant revisions to the MS-DRGs. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24091), we stated that we were encouraging individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year so they can be carefully considered for possible inclusion in the annual proposed rule and, if included, may be subjected to public review and comment. Therefore, we are not adding these codes to the MCC list or the CC list for FY 2010. We may consider their appropriateness for inclusion in next year's annual IPPS proposed rule.

After consideration of the public comments received, we are adopting the proposed limited revisions to the CC Exclusion List as final for FY 2010 without change.

Tables 6G and 6H, Additions to and Deletions from the CC Exclusion List, respectively, which are effective for discharges occurring on or after October 1, 2009, are not being published in this final rule because of the length of the two tables. Instead, we are making them available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Each of these principal diagnoses for which there is a CC exclusion is shown in Tables 6G and 6H with an asterisk, and the conditions that will not count as a CC, are provided in an indented column immediately following the affected principal diagnosis.

A complete updated MCC, CC, and Non-CC Exclusions List is also available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or after October 1, 2009, the indented diagnoses will not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

To assist readers in identifying the changes to the MCC and CC lists that occurred as a result of updates to the ICD-9-CM codes, as described in Tables 6A, 6C, and 6E of the Addendum to this final rule, we are providing the following summaries of those MCC and CC changes.

Summary of Additions to the MS-DRG MCC List—Table 6I.1 Back to Top
Code Description
277.88 Tumor lysis syndrome.
670.22 Puerperal sepsis, delivered, with mention of postpartum complication.
670.24 Puerperal sepsis, postpartum condition or complication.
670.32 Puerperal septic thrombophlebitis, delivered, with mention of postpartum complication.
670.34 Puerperal septic thrombophlebitis, postpartum condition or complication.
670.80 Other major puerperal infection, unspecified as to episode of care or not applicable.
670.82 Other major puerperal infection, delivered, with mention of postpartum complication.
670.84 Other major puerperal infection, postpartum condition or complication.
756.72 Omphalocele.
756.73 Gastroschisis.
768.73 Severe hypoxic-ischemic encephalopathy.
779.32 Bilious vomiting in newborn.
Summary of Deletions From the MS-DRG MCC List—Table 6I.2 Back to Top
Code Description
768.7 Hypoxic-ischemic encephalopathy (HIE).
Summary of Additions to the MS-DRG CC List—Table 6J.1 Back to Top
Code Description
209.71 Secondary neuroendocrine tumor of distant lymph nodes.
209.72 Secondary neuroendocrine tumor of liver.
209.73 Secondary neuroendocrine tumor of bone.
209.74 Secondary neuroendocrine tumor of peritoneum.
209.79 Secondary neuroendocrine tumor of other sites.
416.2 Chronic pulmonary embolism.
453.50 Chronic venous embolism and thrombosis of unspecified deep vessels of lower extremity.
453.51 Chronic venous embolism and thrombosis of deep vessels of proximal lower extremity.
453.52 Chronic venous embolism and thrombosis of deep vessels of distal lower extremity.
453.6 Venous embolism and thrombosis of superficial vessels of lower extremity.
453.71 Chronic venous embolism and thrombosis of superficial veins of upper extremity.
453.72 Chronic venous embolism and thrombosis of deep veins of upper extremity.
453.73 Chronic venous embolism and thrombosis of upper extremity, unspecified.
453.74 Chronic venous embolism and thrombosis of axillary veins.
453.75 Chronic venous embolism and thrombosis of subclavian veins.
453.76 Chronic venous embolism and thrombosis of internal jugular veins.
453.77 Chronic venous embolism and thrombosis of other thoracic veins.
453.79 Chronic venous embolism and thrombosis of other specified veins.
453.81 Acute venous embolism and thrombosis of superficial veins of upper extremity.
453.82 Acute venous embolism and thrombosis of deep veins of upper extremity.
453.83 Acute venous embolism and thrombosis of upper extremity, unspecified.
453.84 Acute venous embolism and thrombosis of axillary veins.
453.85 Acute venous embolism and thrombosis of subclavian veins.
453.86 Acute venous embolism and thrombosis of internal jugular veins.
453.87 Acute venous embolism and thrombosis of other thoracic veins.
453.89 Acute venous embolism and thrombosis of other specified veins.
569.71 Pouchitis.
569.79 Other complications of intestinal pouch.
670.10 Puerperal endometritis, unspecified as to episode of care or not applicable.
670.12 Puerperal endometritis, delivered, with mention of postpartum complication.
670.14 Puerperal endometritis, postpartum condition or complication.
670.20 Puerperal sepsis, unspecified as to episode of care or not applicable.
670.30 Puerperal septic thrombophlebitis, unspecified as to episode of care or not applicable.
768.70 Hypoxic-ischemic encephalopathy, unspecified.
768.71 Mild hypoxic-ischemic encephalopathy.
768.72 Moderate hypoxic-ischemic encephalopathy.
813.46 Torus fracture of ulna (alone).
813.47 Torus fracture of radius and ulna.
Summary of Deletions From the MS-DRG CC List—Table 6J.2 Back to Top
Code Description
453.8 Other venous embolism and thrombosis of other specified veins.

These summary lists are the same as those lists included in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24111 through 24112).

Comment: One commenter supported the CC designations for new codes 813.46 (Torus fracture of ulna (alone)) and 813.47 (Torus fracture of radius and ulna).

Response: We appreciate the commenter's support.

Alternatively, the complete documentation of the GROUPER logic, including the current CC Exclusions List, is available from 3M/Health Information Systems (HIS), which, under contract with CMS, is responsible for updating and maintaining the GROUPER program. The current MS-DRG Definitions Manual, Version 26.0, is available for $250.00, which includes shipping and handling. Version 26.0 of the manual is also available on a CD for $200.00; a combination hard copy and CD is available for $400.00. Version 27.0 of this manual, which will include the final FY 2010 MS-DRG changes, will be available in CD only for $225.00. These manuals may be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303, or by obtaining an order form at the Web site: http://www.3MHIS.com. Please specify the revision or revisions requested.

6. Review of Procedure Codes in MS DRGs 981 Through 983; 984 Through 986; and 987 Through 989

Each year, we review cases assigned to former CMS DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis) to determine whether it would be appropriate to change the procedures assigned among these CMS DRGs. Under the MS-DRGs that we adopted for FY 2008, CMS DRG 468 was split three ways and became MS-DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 476 became MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 477 became MS-DRGs 987, 988, and 989 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC).

MS-DRGs 981 through 983, 984 through 986, and 987 through 989 (formerly CMS DRGs 468, 476, and 477, respectively) are reserved for those cases in which none of the O.R. procedures performed are related to the principal diagnosis. These DRGs are intended to capture atypical cases, that is, those cases not occurring with sufficient frequency to represent a distinct, recognizable clinical group. MS-DRGs 984 through 986 (previously CMS DRG 476) are assigned to those discharges in which one or more of the following prostatic procedures are performed and are unrelated to the principal diagnosis:

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

All remaining O.R. procedures are assigned to MS-DRGs 981 through 983 and 987 through 989, with MS-DRGs 987 through 989 assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis. [3]

For FY 2010, we did not propose to change the procedures assigned among these MS-DRGs. We did not receive any public comments on our proposal not to change the procedures assigned among the cited MS-DRGs and, therefore, are adopting it as final for FY 2010 in this final rule.

a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 Through 989 to MDCs

We annually conduct a review of procedures producing assignment to MS-DRGs 981 through 983 (formerly CMS DRG 468) or MS-DRGs 987 through 989 (formerly CMS DRG 477) on the basis of volume, by procedure, to see if it would be appropriate to move procedure codes out of these MS-DRGs into one of the surgical MS-DRGs for the MDC into which the principal diagnosis falls. The data are arrayed in two ways for comparison purposes. We look at a frequency count of each major operative procedure code. We also compare procedures across MDCs by volume of procedure codes within each MDC.

We identify those procedures occurring in conjunction with certain principal diagnoses with sufficient frequency to justify adding them to one of the surgical DRGs for the MDC in which the diagnosis falls. For FY 2010, we did not propose to remove any procedures from MS-DRGs 981 through 983 or MS-DRGs 987 through 989. We did not receive any public comments on our proposal and, therefore, are adopting it as final for FY 2010 in this final rule.

b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal diagnosis code, result in assignment to MS-DRGs 981 through 983, 984 through 986, and 987 through 989 (formerly, CMS DRGs 468, 476, and 477, respectively), to ascertain whether any of those procedures should be reassigned from one of these three MS-DRGs to another of the three MS-DRGs based on average charges and the length of stay. We look at the data for trends such as shifts in treatment practice or reporting practice that would make the resulting MS-DRG assignment illogical. If we find these shifts, we would propose to move cases to keep the MS-DRGs clinically similar or to provide payment for the cases in a similar manner. Generally, we move only those procedures for which we have an adequate number of discharges to analyze the data.

For FY 2010, we did not propose to move any procedure codes among these MS-DRGs. We did not receive any public comments on our proposal and, therefore, are adopting it as final for FY 2010 in this final rule.

c. Adding Diagnosis or Procedure Codes to MDCs

Based on our review this year, we did not propose to add any diagnosis codes to MDCs for FY 2010. We did not receive any public comments on this subject.

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

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

The Official Version of the ICD-9-CM contains the list of valid diagnosis and procedure codes. (The Official Version of the ICD-9-CM is available from the Government Printing Office on CD-ROM for $19.00 by calling (202) 512-1800.) Complete information on ordering the CD-ROM is also available at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. The Official Version of the ICD-9-CM is no longer available in printed manual form from the Federal Government; it is only available on CD-ROM. Users who need a paper version are referred to one of the many products available from publishing houses.

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

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

The Committee presented proposals for coding changes for implementation in FY 2010 at a public meeting held on September 24-25, 2008 and finalized the coding changes after consideration of comments received at the meetings and in writing by December 5, 2008. Those coding changes are announced in Tables 6A through 6F in the Addendum to this final rule. The Committee held its 2009 meeting on March 11-12, 2009. New codes for which there was a consensus of public support and for which complete tabular and indexing changes are made by May 2009 will be included in the October 1, 2009 update to ICD-9-CM. Code revisions that were discussed at the March 11-12, 2009 Committee meeting but that could not be finalized in time to include them in the Addendum to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule are included in Tables 6A through 6F of this final rule and are marked with an asterisk (*).

Copies of the minutes of the procedure codes discussions at the Committee's September 24-25, 2008 meeting and March 11-12, 2009 meeting can be obtained from the CMS Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the diagnosis codes discussions at the September 24-25, 2008 meeting and March 11-12, 2009 meeting are found at: http://www.cdc.gov/nchs/icd9.htm. Paper copies of these minutes are no longer available and the mailing list has been discontinued. These Web sites also provide detailed information about the Committee, including information on requesting a new code, attending a Committee meeting, and timeline requirements and meeting dates.

We encourage commenters to address suggestions on coding issues involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 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.brooks2@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2009. The new ICD-9-CM codes are listed, along with their MS-DRG classifications, in Tables 6A and 6B (New Diagnosis Codes and New Procedure Codes, respectively) in the Addendum to this final 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 the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24114), we solicited comments on the proposed classification of these new codes. We did not receive any public comments on the proposed MS-DRG assignments for the new diagnosis and procedure codes. Therefore, in this final rule, we are adopting as final without modification the MS-DRG classifications for the new codes for FY 2010 that were included in the proposed rule and the new codes that were discussed at the spring but were not finalized in time to be included in the proposed rule.

For codes that have been replaced by new or expanded codes, the corresponding new or expanded diagnosis codes are included in Table 6A in the Addendum to this final rule. New procedure codes are shown in Table 6B in the Addendum to this final rule. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes) in the Addendum to this final rule. These invalid diagnosis codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2009. Table 6D in the Addendum to this final rule contains invalid procedure codes. These invalid procedure codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2009. Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles) in the Addendum to this final rule, which also includes the MS-DRG assignments for these revised codes. Table 6F in the Addendum to this final rule includes revised procedure code titles for FY 2010.

In the September 7, 2001 final rule implementing the IPPS new technology add-on payments (66 FR 46906), we indicated we would attempt to include proposals for procedure codes that would describe new technology discussed and approved at the Spring meeting as part of the code revisions effective the following October. As stated previously, ICD-9-CM codes discussed at the March 11-12, 2009 Committee meeting that receive consensus and that were finalized by May 2009 are included in Tables 6A through 6F in the Addendum to this final rule.

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

While section 1886(d)(5)(K)(vii) of the Act states that the addition of new diagnosis and procedure codes on April 1 of each year shall not require the Secretary to adjust the payment, or DRG classification, under section 1886(d) of the Act until the fiscal year that begins after such date, we have to update the DRG software and other systems in order to recognize and accept the new codes. We also publicize the code changes and the need for a mid-year systems update by providers to identify the new codes. Hospitals also have to obtain the new code books and encoder updates, and make other system changes in order to identify and report the new codes.

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

A discussion of this timeline and the need for changes are included in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance Committee minutes. The public agreed that there was a need to hold the fall meetings earlier, in September or October, in order to meet the new implementation dates. The public provided comment that additional time would be needed to update hospital systems and obtain new code books and coding software. There was considerable concern expressed about the impact this new April update would have on providers.

In the FY 2005 IPPS final rule, we implemented section 1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Public Law 108-173, by developing a mechanism for approving, in time for the April update, diagnosis and procedure code revisions needed to describe new technologies and medical services for purposes of the new technology add-on payment process. We also established the following process for making these determinations. Topics considered during the Fall ICD-9-CM Coordination and Maintenance Committee meeting are considered for an April 1 update if a strong and convincing case is made by the requester at the Committee's public meeting. The request must identify the reason why a new code is needed in April for purposes of the new technology process. The participants at the meeting and those reviewing the Committee meeting summary report are provided the opportunity to comment on this expedited request. All other topics are considered for the October 1 update. Participants at the Committee meeting are encouraged to comment on all such requests. There were no requests approved for an expedited April 1, 2009 implementation of an ICD-9-CM code at the September 24-25, 2008 Committee meeting. Therefore, there were no new ICD-9-CM codes implemented on April 1, 2009.

Current addendum and code title information is published on the CMS Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along with the Official ICD-9-CM Coding Guidelines, can be found on the Web site at: http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, and deleted ICD-9-CM codes is also provided to the AHA for publication in the Coding Clinic for ICD-9-CM. AHA also distributes information to publishers and software vendors.

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

These same means of disseminating information on new, revised, and deleted ICD-9-CM codes will be used to notify providers, publishers, software vendors, contractors, and others of any changes to the ICD-9-CM codes that are implemented in April. The code titles are adopted as part of the ICD-9-CM Coordination and Maintenance Committee process. Thus, although we publish the code titles in the IPPS proposed and final rules, they are not subject to comment in the proposed or final rules. We will continue to publish the October code updates in this manner within the IPPS proposed and final rules. For codes that are implemented in April, we will assign the new procedure code to the same DRG in which its predecessor code was assigned so there will be no DRG impact as far as DRG assignment. Any midyear coding updates will be available through the Web sites indicated above and through the Coding Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software systems. We will strive to have the April 1 updates available through these Web sites 5 months prior to implementation (that is, early November of the previous year), as is the case for the October 1 updates.

Comment: A number of commenters addressed concerns regarding the implementation of ICD-10 and the processing more than nine diagnosis and six procedure codes in anticipation of the implementation of ICD-10. Several commenters recommended that CMS begin processing all reported diagnosis and procedure codes on claims, even before the planned implementation of ICD-10-CM and ICD-10-PCS on October 1, 2013. Other commenters recommended that CMS be transparent during all steps of ICD-10 implementation and make provisions for stakeholder comments and input during the transition. One commenter recommended that the final ICD-10 version of MS-DRGs be adopted using notice and comment rulemaking.

Response: We did not address the planned implementation of ICD-10 in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and, therefore, consider these comments beyond the scope of the proposed rule. Therefore, we will not address them in this final rule. We refer readers to the separate CMS final rule published in the Federal Register that announced the implementation of modifications to medical data code set standards to adopt ICD-10-CM and ICD-10-PCS (74 FR 3328 through 3362). CMS is currently undergoing extensive efforts to update its Medicare payment systems as part of the move to ICD-10. Part of these system efforts will involve the expansion of our ability to process more diagnosis and procedure codes. Information on ICD-10 can be found on the CMS Web site at: http://www.cms.hhs.gov/ICD10. The final ICD-10 version of MS-DRGs will be adopted under the formal rulemaking process as part of our annual IPPS updates.

8. Other Issues Not Addressed in the Proposed Rule

We received a number of public comments on issues that were not the subject of proposals in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule.

a. Administration of Tissue Plasminogen Activator (tPA) (rtPA)

We received a public comment requesting that CMS conduct an analysis of diagnosis code V45.88 (Status post administration of tPA (rtPA) in a different facility within the last 24 hours prior to admission to current facility) under MDC 1 (Diseases and Disorders of the Nervous System). This code was created for use beginning October 1, 2008, and the commenter believes that the use of this code during FY 2009 and FY 2010 could potentially result in a new MS-DRG or set of MS-DRGs in FY 2011. The commenter believed that an expedited analysis would help show if the code is being used.

This comment is outside the scope of the proposed rule, as we did not propose any MS-DRG changes based on data analysis of cases including diagnosis code V45.88. Therefore, we will not undertake an evaluation of code V45.88 at this time for FY 2010. As we stated in FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24091), we encourage individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year so they can be carefully considered for possible inclusion in the annual proposed rule and, if included, may be subjected to public review and comment.

b. Coronary Artery Bypass Graft (CABG) With Intraoperative Angiography

We received a number of comments that recommended creating new MS-DRGs to separately identify the use of intraoperative angiography, by any method, in CABG surgery under MDC 5 (Diseases and Disorders of the Circulatory System). Intraoperative angiography is used to assess bypass graft patency. The commenters acknowledged that imaging in the operating room is a fairly new concept. However, the commenters stated that there is a movement to encourage greater use of this technology in conjunction with CABG procedures to identify and correct any technical issues with the graft(s) at the time of surgery. According to the commenters, intraoperative angiography would reduce graft failure complications and hospital readmissions while improving patient care outcomes.

The commenters expressed concern that the costs related to intraoperative angiography are not fully realized in the current structure of the MS-DRGs. One commenter suggested creating four new MS-DRGs to identify the use of intraoperative angiography when performed with CABG surgery. The commenter stated that in the current MS-DRG scheme, there is not a mechanism to determine when intraoperative angiography is performed. Angiography is commonly performed as a separate procedure in a catheterization laboratory and the ICD-9-CM procedure codes do not distinguish between preoperative, intraoperative, and postoperative angiography. Procedure code 88.59 (Intraoperative fluorescence vascular angiography (IFVA)), is one intraoperative angiography technique that allows visualization of the coronary vasculature. The commenter proposed four new MS-DRGs in addition to the existing MS-DRGs for CABG in an attempt to differentiate the utilization of resources between intraoperative angiography and IFVA when utilized with CABG.

Another commenter suggested that CMS should consider completely separating CABG procedures from cardiac catheterization. This commenter indicated that the concept is “worthy of serious consideration because of its relationship to much larger issues in management of coronary artery disease.” Other commenters recommended that CMS assign IFVA cases to the “Other Cardiovascular MS-DRGs,” MS-DRGs 228, 229, and 230.

We believe the requests to create new MS-DRGs in FY 2010 for CABG cases with intraoperative angiography and IFVA are outside the scope of the issues addressed in the proposed rule. The recommendation to move IFVA cases to Other Cardiovascular MS-DRGs 228, 229, and 230 is also out of scope issues addressed in the proposed rule. Therefore, we are not providing responses to these public comments in this final rule. We will consider the requests for new MS-DRGs regarding this topic during the FY 2011 rulemaking process.

c. Insertion of Gastrointestinal Stent

We received a public comment requesting that CMS analyze the need to create new MS-DRGs in FY 2011 to better capture patients who undergo the insertion of a gastrointestinal stent under MDC 6 (Diseases and Disorders of the Digestive System). The stents are inserted in the esophagus, duodenum, biliary tract, or the colon in order to reestablish or maintain patency of these vessels to allow swallowing, drainage, or passage of waste. The commenter requested that the new MS-DRGs be subdivided into three severity levels (with MCC, with CC, and without CC/MCC). The commenter stated it had data that showed cases with gastrointestinal stent insertions have higher costs than other cases within the same MS-DRGs. The commenter also stated that there are a small number of these cases, and acknowledged that there may be some concern about the need to establish new DRGs for such a small number of cases.

This comment relating to a request to create new MS-DRGs in FY 2011 for cases with gastrointestinal stents is outside the scope of the FY 2010 proposed rule. We will consider this request alone with other timely received requests for updates to the FY 2011 MS-DRGs during the FY 2011 rulemaking process. As we stated above, we encourage individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year so they can be carefully considered for possible inclusion in the annual proposed rule and, if included, may be subjected to public review and comment.

H. Recalibration of MS-DRG Weights

In section II.E. of the preamble of this final rule, we state that we fully implemented the cost-based DRG relative weights for FY 2009, which was the third year in the 3-year transition period to calculate the relative weights at 100 percent based on costs. In the FY 2008 IPPS final rule with comment period (72 FR 47267), as recommended by RTI, for FY 2008, we added two new CCRs for a total of 15 CCRs: one for “Emergency Room” and one for “Blood and Blood Products,” both of which can be derived directly from the Medicare cost report.

As we proposed, in developing the FY 2010 system of weights, we used two data sources: claims data and cost report data. As in previous years, the claims data source is the MedPAR file. This file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2008 MedPAR data used in this final rule include discharges occurring on October 1, 2007, through September 30, 2008, based on bills received by CMS through March 31, 2009, from all hospitals subject to the IPPS and short-term, acute care hospitals in Maryland (which are under a waiver from the IPPS under section 1814(b)(3) of the Act). The FY 2008 MedPAR file used in calculating the relative weights includes data for approximately 11,283,982 Medicare discharges from IPPS providers. Discharges for Medicare beneficiaries enrolled in a Medicare Advantage managed care plan are excluded from this analysis. The data exclude CAHs, including hospitals that subsequently became CAHs after the period from which the data were taken. The second data source used in the cost-based relative weighting methodology is the FY 2007 Medicare cost report data files from HCRIS (that is, cost reports beginning on or after October 1, 2006, and before October 1, 2007), which represents the most recent full set of cost report data available. We used the March 31, 2009 update of the HCRIS cost report files for FY 2007 in setting the relative cost-based weights.

The methodology we used to calculate the DRG cost-based relative weights from the FY 2008 MedPAR claims data and FY 2007 Medicare cost report data is as follows:

  • To the extent possible, all the claims were regrouped using the FY 2010 MS-DRG classifications discussed in sections II.B. and G. of the preamble of this final rule.
  • The transplant cases that were used to establish the relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) were limited to those Medicare-approved transplant centers that have cases in the FY 2008 MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or intestinal, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)
  • Organ acquisition costs for kidney, heart, heart-lung, liver, lung, pancreas, and intestinal (or multivisceral organs) transplants continue to be paid on a reasonable cost basis. Because these acquisition costs are paid separately from the prospective payment rate, it is necessary to subtract the acquisition charges from the total charges on each transplant bill that showed acquisition charges before computing the average cost for each MS-DRG and before eliminating statistical outliers.
  • Claims with total charges or total lengths of stay less than or equal to zero were deleted. Claims that had an amount in the total charge field that differed by more than $10.00 from the sum of the routine day charges, intensive care charges, pharmacy charges, special equipment charges, therapy services charges, operating room charges, cardiology charges, laboratory charges, radiology charges, other service charges, labor and delivery charges, inhalation therapy charges, emergency room charges, blood charges, and anesthesia charges were also deleted.
  • At least 95.9 percent of the providers in the MedPAR file had charges for 10 of the 15 cost centers. Claims for providers that did not have charges greater than zero for at least 10 of the 15 cost centers were deleted.
  • Statistical outliers were eliminated by removing all cases that were beyond 3.0 standard deviations from the mean of the log distribution of both the total charges per case and the total charges per day for each MS-DRG.
  • Effective October 1, 2008, because hospital inpatient claims include a POA indicator field for each diagnosis present on the claim, the POA indicator field was reset to “Y” for “Yes” just for relative weight-setting purposes for all claims that otherwise have an “N” (No) or a “U” (documentation insufficient to determine if the condition was present at the time of inpatient admission) in the POA field.

Under current payment policy, the presence of specific HAC codes, as indicated by the POA field values, can generate a lower payment for the claim. Specifically, if the particular condition is present on admission (that is, a “Y” indicator is associated with the diagnosis on the claim), then it is not a “HAC,” and the hospital is paid with the higher severity (and, therefore, the higher weighted MS-DRG). If the particular condition is not present on admission (that is, an “N” indicator is associated with the diagnosis on the claim) and there are no other complicating conditions, the DRG GROUPER assigns the claim to a lower severity (and, therefore, the lower weighted MS-DRG) as a penalty for allowing a Medicare inpatient to contract a “HAC.” While this meets policy goals of encouraging quality care and generates program savings, it presents an issue for the relative weight-setting process. Because cases identified as HACs are likely to be more complex than similar cases that are not identified as HACs, the charges associated with HACs are likely to be higher as well. Thus, if the higher charges of these HAC claims are grouped into lower severity MS-DRGs prior to the relative weight-setting process, the relative weights of these particular MS-DRGs would become artificially inflated, potentially skewing the relative weights. In addition, we want to protect the integrity of the budget neutrality process by ensuring that, in estimating payments, no increase to the standardized amount occurs as a result of lower overall payments in a previous year that stem from using weights and case-mix that are based on lower severity MS-DRG assignments. If this would occur, the anticipated cost savings from the HAC policy would be lost.

To avoid these problems, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24116), we proposed to reset the POA indicator field to “Y” just for relative weight-setting purposes for all claims that otherwise have an “N” or a “U” in the POA field. This “forces” the more costly HAC claims into the higher severity MS-DRGs as appropriate, and the relative weights calculated for each MS-DRG more closely reflect the true costs of those cases.

We did not receive any public comments on our proposal to reset the POA indicator field to “Y” for relative weight-setting purposes for all claims that otherwise have an “N” or a “U” in the POA field. We are finalizing this proposal for FY 2010 accordingly.

Once the MedPAR data were trimmed and the statistical outliers were removed, the charges for each of the 15 cost groups for each claim were standardized to remove the effects of differences in area wage levels, IME and DSH payments, and for hospitals in Alaska and Hawaii, the applicable cost-of-living adjustment. Because hospital charges include charges for both operating and capital costs, we standardized total charges to remove the effects of differences in geographic adjustment factors, cost-of-living adjustments, and DSH payments under the capital IPPS as well. Charges were then summed by MS-DRG for each of the 15 cost groups so that each MS-DRG had 15 standardized charge totals. These charges were then adjusted to cost by applying the national average CCRs developed from the FY 2007 cost report data.

The 15 cost centers that we used in the relative weight calculation are shown in the following table. The table shows the lines on the cost report and the corresponding revenue codes that we used to create the 15 national cost center CCRs.

BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

We developed the national average CCRs as follows:

Taking the FY 2007 cost report data, we removed CAHs, Indian Health Service hospitals, all-inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We included hospitals located in Maryland as we are including their charges in our claims database. We then created CCRs for each provider for each cost center (see prior table for line items used in the calculations) and removed any CCRs that were greater than 10 or less than 0.01. We normalized the departmental CCRs by dividing the CCR for each department by the total CCR for the hospital for the purpose of trimming the data. We then took the logs of the normalized cost center CCRs and removed any cost center CCRs where the log of the cost center CCR was greater or less than the mean log plus/minus 3 times the standard deviation for the log of that cost center CCR. Once the cost report data were trimmed, we calculated a Medicare-specific CCR. The Medicare-specific CCR was determined by taking the Medicare charges for each line item from Worksheet D-4 and deriving the Medicare-specific costs by applying the hospital-specific departmental CCRs to the Medicare-specific charges for each line item from Worksheet D-4. Once each hospital's Medicare-specific costs were established, we summed the total Medicare-specific costs and divided by the sum of the total Medicare-specific charges to produce national average, charge-weighted CCRs.

After we multiplied the total charges for each MS-DRG in each of the 15 cost centers by the corresponding national average CCR, we summed the 15 “costs” across each MS-DRG to produce a total standardized cost for the MS-DRG. The average standardized cost for each MS-DRG was then computed as the total standardized cost for the MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The average cost for each MS-DRG was then divided by the national average standardized cost per case to determine the relative weight.

The new cost-based relative weights were then normalized by an adjustment factor of 1.54381 so that the average case weight after recalibration was equal to the average case weight before recalibration. The normalization adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.

The 15 national average CCRs for FY 2010 are as follows:

Group CCR
Routine Days 0.553
Intensive Days 0.480
Drugs 0.200
Supplies Equipment 0.348
Therapy Services 0.415
Laboratory 0.163
Operating Room 0.282
Cardiology 0.181
Radiology 0.161
Emergency Room 0.278
Blood and Blood Products 0.424
Other Services 0.426
Labor Delivery 0.462
Inhalation Therapy 0.201
Anesthesia 0.136

As we explained in section II.E. of the preamble of this final rule, we have completed our 2-year transition to the MS-DRGs. For FY 2008, the first year of the transition, 50 percent of the relative weight for an MS-DRG was based on the two-thirds cost-based weight/one-third charge-based weight calculated using FY 2006 MedPAR data grouped to the Version 24.0 (FY 2007) DRGs. The remaining 50 percent of the FY 2008 relative weight for an MS-DRG was based on the two-thirds cost-based weight/one-third charge-based weight calculated using FY 2006 MedPAR grouped to the Version 25.0 (FY 2008) MS-DRGs. In FY 2009, the relative weights were based on 100 percent cost weights computed using the Version 26.0 (FY 2009) MS-DRGs.

When we recalibrated the DRG weights for previous years, we set a threshold of 10 cases as the minimum number of cases required to compute a reasonable weight. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24123), we proposed to use that same case threshold in recalibrating the MS-DRG weights for FY 2010. Using the FY 2008 MedPAR data set, there are 8 MS-DRGs that contain fewer than 10 cases. Under the MS-DRGs, we have fewer low-volume DRGs than under the CMS DRGs because we no longer have separate DRGs for patients age 0 to 17 years. With the exception of newborns, we previously separated some DRGs based on whether the patient was age 0 to 17 years or age 17 years and older. Other than the age split, cases grouping to these DRGs are identical. The DRGs for patients age 0 to 17 years generally have very low volumes because children are typically ineligible for Medicare. In the past, we have found that the low volume of cases for the pediatric DRGs could lead to significant year-to-year instability in their relative weights. Although we have always encouraged non-Medicare payers to develop weights applicable to their own patient populations, we have heard frequent complaints from providers about the use of the Medicare relative weights in the pediatric population. We believe that eliminating this age split in the MS-DRGs will provide more stable payment for pediatric cases by determining their payment using adult cases that are much higher in total volume. Newborns are unique and require separate MS-DRGs that are not mirrored in the adult population. Therefore, it remains necessary to retain separate MS-DRGs for newborns. All of the low-volume MS-DRGs listed below are for newborns. In FY 2010, because we do not have sufficient MedPAR data to set accurate and stable cost weights for these low-volume MS-DRGs, we proposed to compute weights for the low-volume MS-DRGs by adjusting their FY 2009 weights by the percentage change in the average weight of the cases in other MS-DRGs. The crosswalk table is shown below:

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

Comment: Some commenters questioned whether Medicare Advantage claims were used to calculate the MS-DRG relative weights for FY 2010 in the proposed rule. The commenters noted that CMS' policy has been to exclude Medicare Advantage claims from the relative weights calculation, but believed that CMS may have inadvertently included those claims in the calculation in the proposed rule. The commenters believed that if the Medicare Advantage claims were included, the amount paid under the IPPS will be overstated. The commenters recommended that CMS ensure that Medicare Advantage claims are excluded from the relative weights calculation. However, the commenters requested that CMS continue to include the Medicare Advantage claims in the MedPAR dataset for analysis purposes.

Response: Historically, we have excluded data from Medicare Advantage claims from the calculation of the relative weights. As has been stated in the preamble of previous IPPS rules and, most recently, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24115), “Discharges for Medicare beneficiaries enrolled in a Medicare Advantage managed care plan are excluded from this analysis.” Consistent with this language, in the FY 2010 proposed rule, we intended to exclude Medicare Advantage claims from the calculation of the relative weights for FY 2010 as well. However, the December 2008 update of the FY 2008 MedPAR data that was used as the source for calculating the relative weights contained a significant number of Medicare Advantage claims. This inclusion is a result of hospitals being required to submit informational only claims for all Medicare Advantage patients they treated for discharges occurring on or after October 1, 2006, under Change Request 5647, Transmittal 1311. As a result, we inadvertently included claims from discharges of patients enrolled in Medicare Advantage plans in the calculation of the proposed FY 2010 relative weights. We have corrected this oversight in the calculation of the final FY 2010 relative weights and, therefore, no Medicare Advantage claims data are included in the calculations in this final rule. Specifically, we added an edit to the relative weight calculation to remove any claims that have a GHO_Paid indicator value of “1,” which effectively removes Medicare Advantage claims from the relative weights calculations. We are continuing to include Medicare Advantage claims in the Expanded Modified MedPAR file that is available to researchers for purchase under a data use agreement with CMS.

We did not receive any public comments on this section. Therefore, we are adopting the national average CCRs as proposed, with the MS-DRG weights recalibrated based on these CCRs.

I. Add-On Payments for New Services and Technologies

1. Background

Sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and ensuring adequate payment for new medical services and technologies (sometimes collectively referred to in this section as “new technologies”) under the IPPS. Section 1886(d)(5)(K)(vi) of the Act specifies that a medical service or technology will be considered new if it meets criteria established by the Secretary after notice and opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that the process must apply to a new medical service or technology if, “based on the estimated costs incurred with respect to discharges involving such service or technology, the DRG prospective payment rate otherwise applicable to such discharges under this subsection is inadequate.” We note that beginning with FY 2008, CMS transitioned from CMS-DRGs to MS-DRGs.

The regulations implementing these provisions specify three criteria for a new medical service or technology to receive an additional payment: (1) The medical service or technology must be new; (2) the medical service or technology must be costly such that the DRG rate otherwise applicable to discharges involving the medical service or technology is determined to be inadequate; and (3) the service or technology must demonstrate a substantial clinical improvement over existing services or technologies. These three criteria are explained below in the ensuing paragraphs in further detail.

Under the first criterion, as reflected in 42 CFR 412.87(b)(2), a specific medical service or technology will be considered “new” for purposes of new medical service or technology add-on payments until such time as Medicare data are available to fully reflect the cost of the technology in the MS-DRG weights through recalibration. Typically, there is a lag of 2 to 3 years from the point a new medical service or technology is first introduced on the market (generally on the date that the technology receives FDA approval/clearance) and when data reflecting the use of the medical service or technology are used to calculate the MS-DRG weights. For example, data from discharges occurring during FY 2008 are used to calculate the FY 2010 MS-DRG weights in this final rule. Section 412.87(b)(2) of the regulations therefore provides that “a medical service or technology may be considered new within 2 or 3 years after the point at which data begin to become available reflecting the ICD-9-CM code assigned to the new medical service or technology (depending on when a new code is assigned and data on the new medical service or technology become available for DRG recalibration). After CMS has recalibrated the DRGs, based on available data to reflect the costs of an otherwise new medical service or technology, the medical service or technology will no longer be considered `new' under the criterion for this section.”

The 2-year to 3-year period during which a medical service or technology can be considered new would ordinarily begin on the date on which the medical service or technology received FDA approval or clearance. (We note that, for purposes of this section of the final rule, we generally refer to both FDA approval and FDA clearance as FDA “approval.”) However, in some cases, initially there may be no Medicare data available for the new service or technology following FDA approval. For example, the newness period could extend beyond the 2-year to 3-year period after FDA approval is received in cases where the product initially was generally unavailable to Medicare patients following FDA approval, such as in cases of a national noncoverage determination or a documented delay in bringing the product onto the market after that approval (for instance, component production or drug production has been postponed following FDA approval due to shelf life concerns or manufacturing issues). After the MS-DRGs have been recalibrated to reflect the costs of an otherwise new medical service or technology, the medical service or technology is no longer eligible for special add-on payment for new medical services or technologies (as specified under § 412.87(b)(2)). For example, an approved new technology that received FDA approval in October 2008 and entered the market at that time may be eligible to receive add-on payments as a new technology for discharges occurring before October 1, 2011 (the start of FY 2012). Because the FY 2012 MS-DRG weights would be calculated using FY 2010 MedPAR data, the costs of such a new technology would be fully reflected in the FY 2012 MS-DRG weights. Therefore, the new technology would no longer be eligible to receive add-on payments as a new technology for discharges occurring in FY 2012 and thereafter.

Under the second criterion, § 412.87(b)(3) further provides that, to be eligible for the add-on payment for new medical services or technologies, the MS-DRG prospective payment rate otherwise applicable to the discharge involving the new medical services or technologies must be assessed for adequacy. Under the cost criterion, to assess the adequacy of payment for a new technology paid under the applicable MS-DRG prospective payment rate, we evaluate whether the charges for cases involving the new technology exceed certain threshold amounts. In the FY 2004 IPPS final rule (68 FR 45385), we established the threshold at the geometric mean standardized charge for all cases in the MS-DRG plus 75 percent of 1 standard deviation above the geometric mean standardized charge (based on the logarithmic values of the charges and converted back to charges) for all cases in the MS-DRG to which the new medical service or technology is assigned (or the case-weighted average of all relevant MS-DRGs, if the new medical service or technology occurs in more than one MS-DRG).

However, section 503(b)(1) of Public Law 108-173 amended section 1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, CMS will apply “a threshold * * * that is the lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of one standard deviation for the diagnosis-related group involved.” (We refer readers to section IV.D. of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a discussion of the revision of the regulations to incorporate the change made by section 503(b)(1) of Pub. L. 108-173.) Table 10 that was included in the notice published in the Federal Register on October 3, 2008, contains the final thresholds that are being used to evaluate applications for new technology add-on payments for FY 2010 (73 FR 57888).

We note that section 124 of Public Law 110-275 extended, through FY 2009, wage index reclassifications under section 508 of Public Law 108-173 (the MMA) and special exceptions contained in the final rule promulgated in the Federal Register on August 11, 2004 (69 FR 49105 and 49107) and extended under section 117 of Public Law 110-173 (the MMSEA). The wage data affect the standardized amounts (as well as the outlier offset and budget neutrality factors that are applied to the standardized amounts), which we use to compute the cost criterion thresholds. Therefore, the thresholds reflected in Table 10 in the Addendum to the FY 2009 IPPS final rule were tentative. As noted earlier, on October 3, 2008, we published a Federal Register notice (73 FR 57888) that contained a new Table 10 with revised thresholds that reflect the wage index rates for FY 2009 as a result of implementation of section 124 of Public Law 110-275. The revised thresholds also were published on the CMS Web site. The revised thresholds published in Table 10 in the October 3, 2008 Federal Register notice were used to determine if an applicant for new technology add-on payments discussed in this FY 2010 final rule met the cost criterion threshold for new technology add-on payments for FY 2010.

In the September 7, 2001 final rule that established the new technology add-on payment regulations (66 FR 46917), we discussed the issue of whether the HIPAA Privacy Rule at 45 CFR parts 160 and 164 applies to claims information that providers submit with applications for new technology add-on payments. Specifically, we explained that health plans, including Medicare, and providers that conduct certain transactions electronically, including the hospitals that would be receiving payment under the FY 2001 IPPS final rule, are required to comply with the HIPAA Privacy Rule. We further explained how such entities could meet the applicable HIPAA requirements by discussing how the HIPAA Privacy Rule permitted providers to share with health plans information needed to ensure correct payment, if they had obtained consent from the patient to use that patient's data for treatment, payment, or health care operations. We also explained that, because the information to be provided within applications for new technology add-on payment would be needed to ensure correct payment, no additional consent would be required. The HHS Office for Civil Rights has since amended the HIPAA Privacy Rule, but the results remain. The HIPAA Privacy Rule no longer requires covered entities to obtain consent from patients to use or disclose protected health information for treatment, payment, or health care operations, and expressly permits such entities to use or to disclose protected health information for any of these purposes. (We refer readers to 45 CFR 164.502(a)(1)(ii), and 164.506(c)(1) and (c)(3), and the Standards for Privacy of Individually Identifiable Health Information published in the Federal Register on August 14, 2002, for a full discussion of changes in consent requirements.)

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

The new medical service or technology add-on payment policy under the IPPS provides additional payments for cases with relatively high costs involving eligible new medical services or technologies while preserving some of the incentives inherent under an average-based prospective payment system. The payment mechanism is based on the cost to hospitals for the new medical service or technology. Under § 412.88, if the costs of the discharge (determined by applying cost to charge ratios (“CCRs”) as described in § 412.84(h)) exceed the full DRG payment (including payments for IME and DSH, but excluding outlier payments), Medicare will make an add-on payment equal to the lesser of: (1) 50 percent of the estimated costs of the new technology (if the estimated costs for the case including the new technology exceed Medicare's payment); or (2) 50 percent of the difference between the full DRG payment and the hospital's estimated cost for the case. Unless the discharge qualifies for an outlier payment, Medicare payment is limited to the full MS-DRG payment plus 50 percent of the estimated costs of the new technology.

Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments to annual MS-DRG classifications and relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. Therefore, in the past, we accounted for projected payments under the new medical service and technology provision during the upcoming fiscal year, while at the same time estimating the payment effect of changes to the MS-DRG classifications and recalibration. The impact of additional payments under this provision was then included in the budget neutrality factor, which was applied to the standardized amounts and the hospital-specific amounts. However, section 503(d)(2) of Public Law 108-173 provides that there shall be no reduction or adjustment in aggregate payments under the IPPS due to add-on payments for new medical services and technologies. Therefore, following section 503(d)(2) of Public Law 108-173, add-on payments for new medical services or technologies for FY 2005 and later years have not been subjected to budget neutrality.

In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we modified our regulations at § 412.87 to codify our current practice of how CMS evaluates the eligibility criteria for new medical service or technology add-on payment applications. We also amended § 412.87(c) to specify that all applicants for new technology add-on payments must have FDA approval for their new medical service or technology by July 1 of each year prior to the beginning of the fiscal year that the application is being considered.

Applicants for add-on payments for new medical services or technologies for FY 2011 must submit a formal request, including a full description of the clinical applications of the medical service or technology and the results of any clinical evaluations demonstrating that the new medical service or technology represents a substantial clinical improvement, along with a significant sample of data to demonstrate that the medical service or technology meets the high-cost threshold. Complete application information, along with final deadlines for submitting a full application, will be posted as it becomes available on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to identify the new medical services or technologies under review before the publication of the proposed rule for FY 2011, the Web site also will list the tracking forms completed by each applicant.

The Council on Technology and Innovation (CTI) at CMS oversees the agency's cross-cutting priority on coordinating coverage, coding and payment processes for Medicare with respect to new technologies and procedures, including new drug therapies, as well as promoting the exchange of information on new technologies between CMS and other entities. The CTI, composed of senior CMS staff and clinicians, was established under section 942(a) of Public Law 108-173. The Council is co-chaired by the Director of the Office of Clinical Standards and Quality (OCSQ) and the Director of the Center for Medicare Management (CMM), who is also designated as the CTI's Executive Coordinator.

The specific processes for coverage, coding, and payment are implemented by CMM, OCSQ, and the local claims-payment contractors (in the case of local coverage and payment decisions). The CTI supplements, rather than replaces, these processes by working to assure that all of these activities reflect the agency-wide priority to promote high-quality, innovative care. At the same time, the CTI also works to streamline, accelerate, and improve coordination of these processes to ensure that they remain up to date as new issues arise. To achieve its goals, the CTI works to streamline and create a more transparent coding and payment process, improve the quality of medical decisions, and speed patient access to effective new treatments. It is also dedicated to supporting better decisions by patients and doctors in using Medicare-covered services through the promotion of better evidence development, which is critical for improving the quality of care for Medicare beneficiaries.

CMS plans to continue its Open Door forums with stakeholders who are interested in CTI's initiatives. In addition, to improve the understanding of CMS' processes for coverage, coding, and payment and how to access them, the CTI has developed an “innovator's guide” to these processes. The intent is to consolidate this information, much of which is already available in a variety of CMS documents and in various places on the CMS Web site, in a user-friendly format. This guide was published in August 2008 and is available on the CMS Web site at: http://www.cms.hhs.gov/CouncilonTechInnov/Downloads/InnovatorsGuide8_25_08.pdf.

As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we invite any product developers or manufacturers of new medical technologies to contact the agency early in the process of product development if they have questions or concerns about the evidence that would be needed later in the development process for the agency's coverage decisions for Medicare.

The CTI aims to provide useful information on its activities and initiatives to stakeholders, including Medicare beneficiaries, advocates, medical product manufacturers, providers, and health policy experts. Stakeholders with further questions about Medicare's coverage, coding, and payment processes, or who want further guidance about how they can navigate these processes, can contact the CTI at CTI@cms.hhs.gov or from the “Contact Us” section of the CTI home page (http://www.cms.hhs.gov/CouncilonTechInnov/).

Comment: One commenter recommended that CMS deem a device to be a substantial clinical improvement “* * * if it has been granted a humanitarian device exemption or priority review based on the fact that it represents breakthrough technologies, that offer significant advantages over existing approved alternatives, for which no alternatives exist, or the availability of which is in the best interests of the patients.”

Response: As stated in the FY 2008 IPPS final rule (72 FR 47302), the FDA provides a number of different types of approvals to devices, drugs and other medical products. At this time, we do not believe that any particular type of FDA approval alone would automatically demonstrate a substantial clinical improvement for the Medicare population. However, as noted in previous final rules, we do take FDA approval into consideration in our evaluation of new technology applications. We note that a Humanitarian Device Exemption (HDE) approval only requires that “the probable benefit outweighs the risk of injury or illness” as opposed to the safety and effectiveness standard that exists for pre-market approval (PMA). Among other requirements, the labeling of a humanitarian use device must state that the effectiveness of the device for the specific indication has not been demonstrated. While an HDE approval certainly does not preclude us from considering a technology for an add-on payment, neither does it suggest that the product automatically meets the requirement to be judged a substantial clinical improvement. Under the substantial clinical improvement criterion, we will continue to evaluate a technology with an HDE approval by measuring it against the specific criteria we listed for determining substantial clinical improvement at 66 FR 46914.

Comment: A number of commenters addressed topics relating to the marginal cost factor for the new technology add-on payment, the potential implementation of ICD-10-CM, the use of external data in determining the cost threshold, paying new technology add-on payments for two to three years, mapping new technologies to the appropriate MS-DRG and the use of the date that a ICD-9-CM code is assigned to a technology or the FDA approval date (whichever is later) as the start of the newness period.

Response: We did not request public comments nor propose to make any changes to any of the issues summarized above. Because these comments are outside of the scope of the provisions included in the proposed rule, we are not providing a complete summary of the comments or responding to them in this final rule.

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

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

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

In order to provide an opportunity for public input regarding add-on payments for new medical services and technologies for FY 2010 prior to publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we published a notice in the Federal Register on November 28, 2008 (73 FR 72490), and held a town hall meeting at the CMS Headquarters Office in Baltimore, MD, on February 17, 2009. In the announcement notice for the meeting, we stated that the opinions and alternatives provided during the meeting would assist us in our evaluations of applications by allowing public discussion of the substantial clinical improvement criterion for each of the FY 2010 new medical service and technology add-on payment applications before the publication of the FY 2010 IPPS proposed rule.

Approximately 90 individuals registered to attend the town hall meeting in person, while additional individuals listened over an open telephone line. Each of the five FY 2010 applicants presented information on its technology, including a discussion of data reflecting the substantial clinical improvement aspect of the technology. We considered each applicant's presentation made at the town hall meeting, as well as written comments submitted on each applicant's application, in our evaluation of the new technology add-on applications for FY 2010 in the FY 2010 proposed rule and in this final rule.

In response to the published notice and the new technology town hall meeting, we received two written comments regarding applications for FY 2010 new technology add-on payments. We summarized these comments or, if applicable, indicated that there were no comments received, at the end of each discussion of the individual applications in the FY 2010 IPPS/RY LTCH PPS proposed rule. We did not receive any general comments about the application of the substantial clinical improvement criterion.

A further discussion of our evaluation of the applications and the documentation for new technology add-on payments submitted for FY 2010 approval is provided under the specified areas under this section.

3. FY 2010 Status of Technologies Approved for FY 2009 Add-On Payments

We approved one application for new technology add-on payments for FY 2009: CardioWest [TM] Temporary Total Artificial Heart System (CardioWest [TM] TAH-t).

SynCardia Systems, Inc. submitted an application for approval of the CardioWest [TM] temporary Total Artificial Heart system (TAH-t). The TAH-t is a technology that is used as a bridge to heart transplant device for heart transplant-eligible patients with end-stage biventricular failure. The TAH-t pumps up to 9.5 liters of blood per minute. This high level of perfusion helps improve hemodynamic function in patients, thus making them better heart transplant candidates.

The TAH-t was approved by the FDA on October 15, 2004, for use as a bridge to transplant device in cardiac transplant-eligible candidates at risk of imminent death from biventricular failure. The TAH-t is intended to be used in hospital inpatients. One of the FDA's post-approval requirements is that the manufacturer agrees to provide a post-approval study demonstrating success of the device at one center can be reproduced at other centers. The study was to include at least 50 patients who would be followed up to 1 year, including (but not limited to) the following endpoints: survival to transplant; adverse events; and device malfunction.

In the past, Medicare did not cover artificial heart devices, including the TAH-t. However, on May 1, 2008, CMS issued a final national coverage determination (NCD) expanding Medicare coverage of artificial hearts when they are implanted as part of a study that is approved by the FDA and is determined by CMS to meet CMS' Coverage with Evidence Development (CED) clinical research criteria. (The final NCD is available on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211.)

We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, because Medicare's previous coverage policy with respect to this device had precluded payment from Medicare, we did not expect the costs associated with this technology to be currently reflected in the data used to determine the relative weights of MS-DRGs. As we have indicated in the past, and as we discussed in the FY 2009 IPPS final rule, although we generally believe that the newness period would begin on the date that FDA approval was granted, in cases where the applicant can demonstrate a documented delay in market availability subsequent to FDA approval, we would consider delaying the start of the newness period. This technology's situation represented such a case. We also noted that section 1886(d)(5)(K)(ii)(II) of the Act requires that we provide for the collection of cost data for a new medical service or technology for a period of at least 2 years and no more than 3 years “beginning on the date on which an inpatient hospital code is issued with respect to the service or technology.” Furthermore, the statute specifies that the term “inpatient hospital code” means any code that is used with respect to inpatient hospital services for which payment may be made under the IPPS and includes ICD-9-CM codes and any subsequent revisions. Although the TAH-t has been described by the ICD-9-CM code(s) since the time of its FDA approval, because the TAH-t had not been covered under the Medicare program (and, therefore, no Medicare payment had been made for this technology), this code could not be “used with respect to inpatient hospital services for which payment” is made under the IPPS, and thus we assumed that none of the costs associated with this technology would be reflected in the Medicare claims data used to recalibrate the MS-DRG relative weights for FY 2009. For this reason, as discussed in the FY 2009 IPPS final rule, despite the FDA approval date of the technology, we determined that TAH-t would still be eligible to be considered “new” for purposes of the new technology add-on payment because the TAH-t met the newness criterion on the date that Medicare coverage began, consistent with issuance of the final NCD, effective on May 1, 2008.

After evaluation of the newness, costs, and substantial clinical improvement criteria for new technology add-on payments for the TAH-t and consideration of the public comments we received on the FY 2009 IPPS proposed rule, we approved the TAH-t for new technology add-on payments for FY 2009 (73 FR 48557). We indicated that we believed the TAH-t offered a new treatment option that previously did not exist for patients with end-stage biventricular failure. However, we indicated that we recognized that Medicare coverage of the TAH-t is limited to approved clinical trial settings. The new technology add-on payment status does not negate the restrictions under the NCD nor does it obviate the need for continued monitoring of clinical evidence for the TAH-t. We remain interested in seeing whether the clinical evidence demonstrates that the TAH-t continues to be effective. If evidence is found that the TAH-t may no longer offer a substantial clinical improvement, we reserve the right to discontinue new technology add-on payments, even within the 2 to 3 year period that the device may still be considered to be new.

The new technology add-on payment for the TAH-t for FY 2009 is triggered by the presence of ICD-9-CM procedure code 37.52 (Implantation of total heart replacement system), condition code 30, and the diagnosis code reflecting clinical trial—V70.7 (Examination of participant in clinical trial). For FY 2009, we finalized a maximum add-on payment of $53,000 (that is, 50 percent of the estimated operating costs of the device of $106,000) for cases that involve this technology. As noted above, the TAH-t is still eligible to be considered “new” for purposes of the new technology add-on payment because the TAH-t met the newness criterion on the date that Medicare coverage began, consistent with issuance of the final NCD, effective on May 1, 2008.

We did not receive any public comments on our proposal to continue new technology add-on payments for the TAH-t for FY 2010. Therefore, as we proposed, for FY 2010, we are continuing the new technology add-on payments for cases involving the TAH-t in FY 2010 with a maximum add-on payment of $53,000.

4. FY 2010 Applications for New Technology Add-On Payments

We received six applications to be considered for new technology add-on payment for FY 2010. However, one applicant, Emphasys Medical, withdrew its application for the Zephyr® Endobronchial Valve (Zephyr® EBV) prior to the publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. Since the Zephyr® EBV application was withdrawn prior to the town hall meeting and publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we did not discuss the application in the proposed rule and also will not discuss it in this final rule.

During the public comment period, three additional applicants withdrew their applications from further consideration for FY 2010 new technology add-on payments. A discussion and final determination of the remaining two applications is presented below.

a. The AutoLITT [TM] System

Monteris Medical submitted an application for new technology add-on payments for FY 2010 for the AutoLITT [TM] . However, the applicant withdrew its application for new technology add-on payments during the public comment period.

Comment: One commenter supported the AutoLITT [TM] application. The commenter stated that AutoLITT [TM] represented an advance because it provides the ability to “steer and rotate the beam to the size and shape of the tumor” and that such ability is a significant advance from the current non-directional systems. The commenter noted that it had “no longitudinal or systemic studies to verify precisely the degree of improvement in patient care,” but that use of the AutoLITT [TM] had led to a quicker recovery time and fewer complications in its experience with the device. Specifically, the commenter stated that it was able to discharge patients within 24 to 48 hours which is faster than with traditional therapies.

Response: We appreciate the commenter's response to the proposed rule. We note again that the applicant withdrew its application from consideration for new technology add-on payments for FY 2010. Accordingly, we are not providing a response to the comment.

b. CLOLAR® (Clofarabine) Injection

Genzyme Oncology submitted an application for new technology add-on payments for FY 2010 for CLOLAR® (clofarabine) injection. However, the applicant withdrew its application for new technology add-on payments during the public comment period. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule in section II.I.4.b. of the preamble, we included a detailed discussion relating to our policy for determining whether a new technology is substantially similar to an existing technology in our analysis of whether CLOLAR would meet the newness criterion. Because the CLOLAR application has been withdrawn, we will not make a determination regarding substantially similarity to determine newness for that application. Instead, we have provided our discussion of substantial similarity below and have summarized and responded to comments received on that topic.

Substantial Similarity Discussion

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that the newness criterion is intended to apply to technologies that have been available to Medicare beneficiaries for no more than 2 to 3 years. Therefore, a technology that applies for a supplemental FDA approval must demonstrate that the new approval is not substantially similar to the prior approval.

As discussed above, the new technology add-on payment is available to new medical services or technologies that satisfy the three criteria set forth in our regulations at § 412.87(b) (that is, newness, high-costs, and substantial clinical improvement). Typically, we begin our analysis with an evaluation of whether an applicant's technology meets what we refer to as the “newness criterion” under § 412.87(b)(2) (that is, whether Medicare data are available to fully reflect the cost of the technology in the MS-DRG weights through recalibration). Generally, we believe that the costs of a technology begin to be reflected in the hospital charge data used to recalibrate the MS-DRG relative weights when the technology becomes available on the market, usually on or soon after the date on which it receives FDA approval.

Congress provided for the new technology add-on payment in order to ensure that Medicare beneficiaries have access to new technologies. As discussed previously, there often is a lag time of 2 to 3 years before the costs of new technologies are reflected in the recalibration of the relevant MS-DRGs. Because a new technology often has higher costs than existing technologies, during this lag time the current MS-DRG payment may not adequately reflect the costs of the new technology. The new technology add-on payment addresses this concern by ensuring that hospitals receive an add-on payment under the IPPS for costly new technologies that represent a substantial clinical improvement over existing technologies until such time when the cost of the technology is reflected within the MS-DRG relative weights. When an existing technology receives FDA approval for a new indication, similar concerns may arise. If, prior to the FDA approval for the new indication, the technology has not been used to treat Medicare patients for purposes consistent with the new indication, the relevant MS-DRGs may not reflect the cost of the technology. Consequently, Medicare beneficiaries may not have adequate access to the technology when used for purposes consistent with the new indication. Allowing the new technology add-on payment for the technology when used for the new indication would address this concern. For these reasons, we believe that treating an existing technology as “new” when approved by the FDA for a new indication may be warranted under certain circumstances.

In the September 7, 2001 final rule (66 FR 46915), we stated that a new use of an existing technology may be eligible for the new technology add-on payment under certain conditions. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that we believe it is appropriate to consider an existing technology for the new technology add-on payments when its new use is not substantially similar to existing uses of the technology. In the FY 2006 IPPS final rule (70 FR 47351), we explained our policy regarding substantial similarity in detail and its relevance for assessing if the hospital charge data used in the development of the relative weights for the relevant DRGs reflect the costs of the technology. In that final rule, we stated that, for determining substantial similarity, we consider (1) whether a product uses the same or a similar mechanism of action to achieve a therapeutic outcome, and (2) whether a product is assigned to the same or a different DRG. We indicated that both of the above criteria should be met in order for a technology to be considered “substantially similar” to an existing technology. However, in that same final rule, we also noted that, due to the complexity of issues regarding the substantial similarity component of the newness criterion, it may be necessary to exercise flexibility when considering whether technologies are substantially similar to one another. Specifically, we stated that we may consider additional factors depending on the circumstances specific to each application.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that we believe that in determining whether a new use of an existing technology is substantially similar to existing uses of the technology, it may be relevant to consider not only the two criteria discussed in the FY 2006 IPPS final rule, but also certain additional factors. Specifically, we stated that it may also be appropriate to analyze whether, as compared to existing uses of the technology, the new use involves the treatment of the same or similar type of disease and the same or similar patient population. Accordingly, we proposed to add a third factor of consideration to our analysis of whether a new technology is substantially similar to one or more existing technologies. Specifically, we proposed to consider whether the new use of the technology involves the treatment of the same or similar type of disease and the same or similar patient population (74 FR 24130) in addition to considering the already established factors described in the FY 2006 IPPS final rule. We explained that if all three components are present and the new use is deemed substantially similar to one or more of the existing uses of the technology (that is beyond the newness period), we would conclude that the technology is not new and, therefore, is not eligible for the new technology add-on payment. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that we considered, but rejected, the inclusion of the third factor in the FY 2006 IPPS final rule on the grounds that we believed that it was more relevant to analyze whether the costs of the technology were already reflected in the relative weights of the MS-DRGs. However, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that upon further consideration, we believe that both the type of disease and patient population for which a technology is used are also relevant in determining whether one indication of a technology is “substantially similar” to another.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that the discussion of substantial similarity in the FY 2006 IPPS final rule related to comparing two separate technologies made by different manufacturers. Nevertheless, we stated that the criteria discussed in the FY 2006 IPPS final rule also are relevant when comparing the similarity between a new use and existing uses of the same technology (or a very similar technology manufactured by the same manufacturer). In other words, we stated that it is necessary to establish that the new indication for which the technology has received FDA approval is not substantially similar to that of the prior indication. We explained that such a distinction is necessary to determine the appropriate start date of the newness period in evaluating whether the technology would qualify for add-on payments (that is, the date of the “new” FDA approval or that of the prior approval), or whether the technology could qualify for separate new technology add-on payments under each indication.

Comment: Several commenters supported our proposal to add a third factor of consideration to our analysis of whether a technology is substantially similar to another technology or to a previous version of the same technology with a new FDA indication. The commenters commended CMS for proposing to add the third factor and encouraged CMS to apply all three factors to future decisions regarding proposed new technologies. One commenter encouraged CMS to consider codifying all three substantial similarity factors in the regulations. Another commenter asked that CMS clarify whether the proposed criterion applied both to products that receive a second or follow-on indication as well as to separate and distinct products that have the same or similar mechanism of action, but are intended to treat a separate disease or patient population. The commenter also noted that, in FY 2006, it recommended that CMS include an additional factor when determining whether products were substantially similar, specifically, whether the products conferred the same level of substantial clinical improvement. The commenter asserted that the addition of this would “ensure that products found to represent a true advancement in clinical care—even if they utilize a similar mechanism of action, could be eligible for new technology add-on payments.”

Response: We thank the commenters for their support of our proposal.

In response to the comment asking for clarification about whether the proposed additional factor under substantial similarity would apply solely to a technology approved for a new indication or to two separate and distinct products, we refer the commenter to our discussion above in which we stated, “the discussion of substantial similarity in the FY 2006 IPPS final rule related to comparing two separate technologies made by different manufacturers. Nevertheless, we believe the criteria discussed in the FY 2006 IPPS final rule also are relevant when comparing the similarity between a new use and existing uses of the same technology (or a very similar technology manufactured by the same manufacturer). In other words, we believe that it is necessary to establish that the new indication for which the technology has received FDA approval is not substantially similar to that of the prior indication.” Therefore, all three factors of substantial similarity will apply in both scenarios.

In response to the comment that suggested we analyze whether two products (or one product with two different indications) confer the same level of substantial clinical improvement, we note that substantial similarity is considered under the newness criterion (that is, to determine if a technology may still be considered “new” for purposes of the new technology add-on payment). As we stated in FY 2006 final IPPS rule, we base 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 clinical 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 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.

In response to the comment that suggested that we codify the factors we use to evaluate substantial similarity, we note that we did not propose to amend the new technology add-on regulations in the proposed rule. However, we will consider making such a proposal in a future rulemaking period.

We are finalizing our proposal to add a third factor of consideration to our analysis of whether a new technology is substantially similar to one or more existing technologies. Specifically, in making a determination of whether a new technology is substantially similar to an existing technology, we will consider whether the new use of the technology involves the treatment of the same or similar type of disease and the same or similar patient population (74 FR 24130), in addition to considering the already established factors described in the FY 2006 IPPS final rule (that is, (1) whether a product uses the same or a similar mechanism of action to achieve a therapeutic outcome; and (2) whether a product is assigned to the same or a different DRG).

c. LipiScan [TM] Coronary Imaging System

InfraReDx, Inc. submitted an application for new technology add-on payments for FY 2010 for the LipiScan [TM] Coronary Imaging System (LipiScan [TM] ). The LipiScan [TM] device is a diagnostic tool that uses Intravascular Near Infrared Spectroscopy (INIRS) during a cardiac catheterization to scan the artery wall in order to determine coronary plaque composition. The purpose of the device is to identify lipid-rich areas in the artery because such areas have been shown to be more prone to rupture. The procedure does not require flushing or occlusion of the artery. INIRS identifies the chemical content of plaque by focusing near infrared light at the vessel wall and measuring reflected light at different wavelengths (that is, spectroscopy). The LipiScan [TM] system collects approximately 1,000 measurements per 12.5 mm of pullback, with each measurement interrogating an area of 1 to 2 mm [2] of lumen surface perpendicular to the longitudinal axis of the catheter. When the catheter is in position, the physician activates the pullback and rotation device and the scan is initiated providing 360 degree images of the length of the artery. The rapid acquisition speed for the image freezes the motion of the heart and permits scanning of the artery in less than 2 minutes. When the catheter pullback is completed, the console displays the scan results, which are referred to as a “chemogram” image. The chemogram image requires reading by a trained user, but, according to the applicant, was designed to be simple to interpret.

With regard to the newness criterion, the LipiScan TM received a 510K FDA clearance for a new indication on April 25, 2008, and was available on the market immediately thereafter. On June 23, 2006, InfraReDx, Inc. was granted a 510K FDA clearance for the “InfraReDx Near Infrared (NIR) Imaging System.” Both devices are under the common name of “Near Infrared Imaging System” according to the 510K summary document from the FDA. However, the InfraReDx NIR Imaging System device that was approved by the FDA in 2006 was approved “for the near infrared imaging of the coronary arteries,” whereas the LipiScan TM device cleared by the FDA in 2008 is for a modified indication. The modified indication specified that LipiScan TM is “intended for the near-infrared examination of coronary arteries * * *, the detection of lipid-core-containing plaques of interest * * * [and] for the assessment of coronary artery lipid core burden.”

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24132), we expressed our concerns regarding whether LipiScan TM is substantially similar to its predicate device that was approved by FDA in 2006. Specifically, it appears that the two devices, which are manufactured by the same company, do not differ in either design or functionality, according to the approval order documents from the FDA. In the 2008 approval order, the FDA stated, “The LipiScan Coronary Imaging System utilizes the same basic catheter design as the predicate, the InfraReDx NIR Imaging System (June 23, 2006). These devices have a similar intended use, use the same operating principal, incorporate the same basic catheter design, have the same shelf life, and are packaged using the same materials and processes. The modifications from the InfraReDx NIR Imaging System to the LipiScan Coronary Imaging System are the improved catheter design, improved user interface (including PBR and console), and the additional testing required to support an expanded indication for use.” Therefore, it appears that the only difference between the two approvals may be a modification of the intended use.

As mentioned earlier in our discussion of substantial similarity in section II.I.4.b. of this final rule, our policy regarding substantial similarity discussed in the FY 2006 final rule (70 FR 47351 through 47532) outlined two criteria as it relates to two separate technologies that are made by different manufacturers that were used to guide our determination of whether two technologies were substantially similar to one another. Although the LipiScan TM is a diagnostic device and not a therapeutic device we believe that the substantial similarity component of the newness criterion still applies.

Both the prior and the new FDA indications for LipiScan TM use the same or a similar mechanism of action to achieve a desired therapeutic outcome, and both treat patients that would generally be assigned to the same MS-DRG. Similarly, both indications of LipiScan TM are intended to treat the same disease in the same patient population. Consequently, in the 2010 IPPS/RY 2010 LTCH PPPS proposed rule, we stated that we have concerns as to whether or not the two intended uses are substantially similar, especially considering that the technologies appear essentially identical. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comment on whether or not the latest 510K FDA clearance should be considered “substantially similar” to its predicate technology approved by the FDA in 2006 (74 FR 24133).

Comment: One commenter, the manufacturer, gave comments regarding whether LipiScan TM was substantially similar to its predicate device and whether it met the newness criterion for new technology add-on payments. The manufacturer included the following table to illustrate the differences between the version of the device that was approved in 2006 and the version that was approved in 2008:

2006 NIRS device Marketed 2008 LipiScan
Console No display of results of scan Results displayed immediately.
Catheter Saline-filled with microbubble problem obscuring many scans Air-filled with no microbubble problem.
Algorithm No algorithmic processing of NIR signals—no means of certifying that lipid core plaque is present Algorithm validated in over 1,000 autopsy measurements proving that NIRS can detect lipid core plaque, and providing diagnosis of lipid core plaque to the MD during the case.

In addition, the commenter asserted that the version of the device that was approved by the FDA in 2006 was “never marketed, donated or sold to hospitals because it had numerous shortcomings that were not overcome until [the date of its second FDA clearance, April 25, 2008].” Finally, the commenter noted that Medicare claims do not contain any charge for LipiScan TM prior to that date.

Response: Because the manufacturer has provided statements that LipiScan TM was not marketed until after its second FDA clearance, we believe that it is no longer necessary to determine whether the version of the device that was cleared by the FDA in 2008 is substantially similar to that which was cleared in 2006. As noted by the applicant, CMS uses the date of FDA approval or the date that a technology is marketed (if the manufacturer can document there was a delay in bringing the technology to market after FDA approval) and thus available to Medicare beneficiaries as the start of the newness period. In this case, the manufacturer has provided such documentation. Therefore, we believe that based on the evidence that supports that LipiScan TM was not marketed or otherwise available to Medicare beneficiaries until April 25, 2008, LipiScan TM meets the newness criterion.

We note that the LipiScan TM technology is identified by ICD-9-CM procedure code 38.23 (Intravascular spectroscopy), which became effective October 1, 2008, and cases involving the use of this device generally map to MS-DRG 246 (Percutaneous Cardiovascular Procedures with Drug-Eluting Stent(s) with MCC or 4+ Vessels/Stents); MS-DRG 247 (Percutaneous Cardiovascular Procedures with Drug-Eluting Stent(s) without MCC); MS-DRG 248 (Percutaneous Cardiovascular Procedures with Non-Drug-Eluting Stent(s) with MCC or 4+ Vessels/Stents); MS-DRG 249 (Percutaneous Cardiovascular Procedures with Non-Drug-Eluting Stent(s) without MCC); MS-DRG 250 (Percutaneous Cardiovascular Procedures without Coronary Artery Stent with MCC); and MS-DRG 251 (Percutaneous Cardiovascular Procedures without Coronary Artery Stent without MCC).

In an effort to demonstrate that the technology meets the cost criterion, the applicant used the FY 2009 After Outliers Removed (AOR) file (posted on the CMS Web site) for cases potentially eligible for LipiScan TM. The applicant believes that every case within DRGs 246, 247, 248, 249, 250, and 251 are eligible for LipiScan TM. In addition, the applicant believes that LipiScan TM will be evenly distributed across patients in each of the six MS-DRGs (16.6 percent within each MS-DRG). Using data from the AOR file, the applicant found the average standardized charge per case for MS-DRGs 246, 247, 248, 249, 250, and 251 was $65,364, $42,162, $58,754, $37,048, $61,016, and $35,878 respectively, equating to an average standardized charge per case of $50,037. The applicant indicated that the average standardized charge per case does not include charges related to LipiScan TM; therefore, it is necessary to add the charges related to the device to the average standardized charge per case in evaluating the cost threshold criterion. Although the applicant submitted data related to the estimated cost of LipiScan TM per case, the applicant noted that the cost of the device was proprietary information. Based on a sampling of two hospitals that have used the device, the applicant used a markup of 120 percent of the costs and estimates $5,280 in charges related to LipiScan TM. Because the applicant lacked a significant sample of cases to determine the charges associated with the device, we expressed our concerns in the proposed rule as to whether or not the estimate of $5,280 in charges related to the device was a valid estimate (74 FR 24133).

Adding the estimated charges related to the drug to the average standardized charge per case (based on the case distribution from the applicant's 2009 AOR analysis) results in a case-weighted average standardized charge per case of $55,317 ($50,037 plus $5,280). Using the FY 2010 thresholds published in Table 10 (73 FR 58008), the case-weighted threshold for MS-DRGs 246, 247, 248, 249, 250, and 251 was $53,847 (all calculations above were performed using unrounded numbers). Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that LipiScan TM would meet the cost criterion. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited public comment on whether or not LipiScan TM meets the cost criterion.

Comment: One commenter, the applicant, submitted comments regarding whether LipiScan TM meets the cost criterion. The commenter noted that LipiScan TM is now used in 11 hospitals, 10 of which are non-Department of Veterans Affairs (VA) hospitals. This represented an increase from the two hospitals it noted in its application when the applicant submitted it in November 2008. Based on a sampling of all 10 non-VA hospitals that are actively using the device, the applicant determined that the average charge for the device was $7,497. Using the same methodology from the proposed rule and the AOR file from the FY 2010 proposed rule (posted on the CMS Web site) instead of the FY 2009 final rule AOR file, the applicant determined a case-weighted average standardized charge of $47,059 for MS-DRGs 246-251. Based on charge data from these 10 hospitals, the applicant determined a mean charge of $7,497 for the LipiScan TM device. The applicant added the average charge of the device to the charge per case and determined an average case-weighted charge per case of $54,556 ($47,059 plus $7,497). Based on the Table 10 thresholds published in the proposed rule (74 FR 24570), the case-weighted threshold for MS-DRGs 246-251 was $52,881. Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that based on this analysis the LipiScan TM would meet the cost criterion.

In addition, the applicant stated that it analyzed Hospital Cost Report Information System (“HCRIS”) data from 2007. Specifically, the applicant searched for the 100 cardiac catheterization labs that had the highest volume of cases in the United States. Based on the HCRIS data from these 100 labs, the applicant determined the mean cost-to-charge ratio was 0.204 with a mark-up of 490 percent yielding a charge of $11,760 for LipiScan TM. Assuming that the LipiScan TM device was marked-up 490 percent, the case-weighted average standardized charge per case for cases involving the use of LipiScan TM would be $58,819 ($47,059 plus $11,760) across MS-DRGs 246-251. Similar to the above computation, based on the Table 10 thresholds published in the proposed rule (74 FR 24570), the case-weighted threshold for MS-DRGs 246-251 was $52,881. Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that based on this analysis the LipiScan TM would also meet the cost criterion.

Response: We thank the commenter for the updated analyses. As noted above in its comment, the applicant determined the case-weighted threshold using Table 10 thresholds from the proposed rule. The thresholds in Table 10 published in the proposed rule are for applicants for new technology add-on payments for FY 2011. The correct case-weighted threshold to be used to evaluate FY 2010 proposals is the same threshold ($53,847) that the applicant used in its analysis from the proposed rule, which is based on Table 10 thresholds for FY 2010 applicants (as noted in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule). Nevertheless, under the applicant's updated analysis using the Table 10 threshold for FY 2010 applicants, the case-weighted average standardized charge per case in either of the two analyses above (in the applicant's comment) would exceed the case-weighted Table 10 threshold of $53,847.

We reviewed all three analyses that the applicant submitted (one in the proposed rule and two in its comment) and, based on all three analyses, we agree that the applicant meets the cost criterion.

With regard to substantial clinical improvement, the applicant maintains that the device meets this criterion for the following reasons. The applicant noted that the September 1, 2001 final rule states that one facet of the criterion for substantial clinical improvement is “the device offers the ability to diagnose a medical condition in a patient population where the medical condition is currently undetectable or offers the ability to diagnose a medical condition earlier in a patient population than allowed by currently available methods. There must also be evidence that use of the device to make a diagnosis affects the management of the patient” (66 FR 46914). The applicant believes that LipiScan TM meets all facets of this criterion. The applicant asserted that the device is able to detect a condition that is not currently detectable. The applicant explained that LipiScan TM is the first device of its kind to be able to detect lipid-core-containing plaques and to assess coronary artery lipid core burden. The applicant further noted that FDA, in its approval documentation, has indicated that “This is the first device that can help assess the chemical makeup of coronary artery plaques and help doctors identify those of particular concern.”

In addition, the applicant stated that the LipiScan TM chemogram permits a clinician to detect lipid-core-containing plaques in the coronary arteries compared to other currently available devices that do not have this ability. The applicant explained that the angiogram, the conventional test for coronary atherosclerosis, shows only minimal coronary narrowing. However, the applicant indicated that the LipiScan TM chemogram has the ability to reveal when an artery contains extensive lipid-core-containing plaque at an earlier stage.

The applicant also noted that the device has the ability to allow providers to make a diagnosis that better affects the management of the patient. Specifically, the applicant explained that the chemogram results are available to the interventional cardiologist during the PCI procedure, and have been found to be useful in decision-making. In their application, the applicant stated that physicians have reported changes in therapy based on LipiScan TM findings in 20 to 50 percent of patients. The applicant further stated in their application that the most common use of LipiScan TM results has been for selection of the length of artery to be stented. In some cases a longer stent has been used when there is a lipid-core-containing plaque adjacent to the area that is being stented because a flow-limiting stenosis is present. Therefore, the applicant contends that the use of LipiScan TM by clinicians to select the length of artery to be stented and as an aid in selection of intensity of lipid-altering therapy, demonstrates that LipiScan TM affects the management of patients.

The applicant also submitted commentary from Interventional Cardiologists (a group of clinicians who currently utilize the LipiScan TM device) explaining the clinical benefits of the device. The applicant further noted that the device may have other potential uses that would be of clinical benefit, and studies are currently being conducted to investigate these other potential uses. The applicant explained that LipiScan TM offers promise as a means to enhance progress against the two leading problems in coronary disease management: (1) The unacceptably high rate of second events that occur even after catheterization, revascularization, and the institution of optimal medical therapy; and (2) the failure to diagnose coronary disease early, which results in sudden death or myocardial infarction being the first sign of the disease in most patients. The applicant further stated that the identification of coronary lipid-core-containing plaques, which can most readily be done in those already undergoing catheterization, is likely to be of benefit in the prevention of second events. In the longer term, the applicant stated that the identification of lipid-core-containing plaques by LipiScan TM may contribute to the important goal of primary prevention of coronary events, which, in the absence of adequate diagnostic methods, continue to cause extensive morbidity, mortality and health care expenditures in Medicare beneficiaries and the general population.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that while we recognize that the identification of lipid-rich plaques in the coronary vasculature holds promise in the management of coronary artery disease, we were concerned that statements in the FDA approval documents, as well as statements made by investigators in the literature, suggest that the clinical implications of identifying these lipid-rich plaques are not yet certain and that further studies need to be done to understand the clinical implications of this information (74 FR 24134). We also noted that we were concerned that there are no outcome data regarding the use of the LipiScan TM technology.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comment regarding whether or not the LipiScan TM technology represents a substantial clinical improvement in the Medicare population.

Comment: Two commenters submitted comments regarding whether LipiScan TM represented a substantial clinical improvement. One commenter supported approving LipiScan TM for new technology add-on payments and noted that the statute indicated that either a “diagnostic device or a therapy should be eligible for the add-on payment.” (emphasis provided) The commenter stated that the device had been studied in detail by the FDA and that the FDA concluded that the device identified lipid core plaques with “accuracy suitable for clinical use.” Additionally, the commenter stated that the device “has already started changing the therapeutic decisionmaking process and has the potential to provide additional benefits in the struggle against the leading cause of death in the United States.”

The applicant stated that it believed that LipiScan TM is a “substantial clinical improvement” over existing technologies because it enables the physician to choose the length of artery to be stented as well as the intensity of lipid lowering medical therapy that should be used. The applicant asserted that the detection of lipid core plaque could ultimately be helpful to physicians in managing patient care and improving clinical outcomes because such plaques are prone to sudden rupture. Additionally, the applicant asserted that there were three ways in which it met CMS' regulatory standard for a substantial clinical improvement including:

1. It detects “a condition that is not currently detectable” because it is the only device approved to identify the lipid core content in coronary arteries.

2. It “enables the patient to be diagnosed earlier” because other available diagnostic tests (including exercise testing and coronary angiography) do not identify lipid core plaque; whereas without this technology, the first sign that a lipid-rich plaque is present may be an acute myocardial infarction.

3. It affects the management of the patient by:

  • Affecting the selection of the length of the artery to be stented;
  • Affecting the selection of the appropriate target levels for lipid altering pharmacologic therapy;
  • The chance that it may eventually be linked to the prevention of peri-stenting myocardial infarction.

As an attachment to its comment, the applicant submitted a legal analysis that stated that neither the statute nor the regulations require that a diagnostic device be linked to improved clinical outcomes; rather, an improvement in diagnosis alone is the only requirement. The legal memorandum also noted that the statute “references technology that improves either diagnosis or treatment” and that a new technology “need not improve both, nor does the statute specify that the diagnostic must be linked to a treatment that improves outcomes.” Additionally, the legal analysis stated that LipiScan TM has submitted evidence in accord with both the statute and the regulations that it “provides an improvement in diagnosis of coronary artery disease by identifying the presence of the lipid core plaque” and asserts that this point is further evidenced by the FDA which stated that the device “is the first device that can help assess the chemical make-up of coronary artery plaques and help physicians identify those plaques with lipid cores, which may be of particular concern.” The legal analysis also stated that CMS should not require new diagnostics to be judged by the same criteria that have been applied to judge new therapeutics because “such an approach would not be in accord with the plain language of the regulation and that statue, both of which envision distinct clinical benefits associated with either a diagnostic or a therapy.”

Finally, the applicant summarized an article that considered the “effect of diagnostic imaging on decisionmaking.” Specifically, the applicant summarized the hierarchy of six levels of diagnostic efficacy presented in the article:

Level 1: Technical efficacy, the physics are appropriate for the target of the diagnostic;

Level 2: Diagnostic accuracy, the sensitivity and specificity for the diagnostic target are appropriate;

Level 3: Diagnostic thing efficacy, the physician accepts the diagnostic as capable of identifying the target;

Level 4: Therapeutic efficacy, the physician selects or does not select a given therapy on the basis of the diagnostic outcome;

Level 5: Therapeutic outcome efficacy, the therapy selected on the basis of the results of the diagnostic outcome provides an improvement in the health outcome of the patient;

Level 6: Cost-effectiveness, the benefits to society have a favorable relationship to the costs of the diagnostic.”

The applicant claimed that, applying the analysis from the article, the FDA approval established that Levels 1 and 2 were met which it believed to be consistent with the requirement under 42 CFR 412.87(b)(1). Further, the applicant asserted that the testimony provided by physicians who are using LipiScan demonstrates that physicians are accepting the results to identify lipid core plaque (Level 3) and are utilizing the device to guide therapy (Level 4).

Response: We disagree with the commenters who stated that the statute and regulations require that a diagnostic technology need only “improve” diagnosis and that the FDA approval of a diagnostic technology in and of itself meets the regulatory criteria under § 412.87(b)(1). The commenter correctly notes that section 1886(d)(5)(K)(viii) of the Act requires us to provide for public input on whether a new technology “substantially improves the diagnosis or treatment” of Medicare beneficiaries. Section 1886(d)(5)(K)(vi) of the Act also authorizes the Secretary to establish through notice-and-comment rulemaking the criteria that a new medical service or technology must meet in order to be eligible for the new technology add-on patient. Under this authority, we established three criteria through notice and comment rulemaking—the newness criterion, the cost criterion, and the substantial clinical improvement criterion (66 FR 46924). Specifically, § 412.87(b)(1) of the regulations provides that a new medical service or technology must “represent an advance that substantially improves, relating to technologies previously available, the diagnosis or treatment of Medicare beneficiaries.”

As we explained in that rule, we will consider a diagnostic technology to meet the substantial clinical improvement criterion if the technology not only “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,” but also if “use of the device to make a diagnosis affects the management of the patient” (66 FR 46914). Under the commenter's analysis, a diagnostic technology effectively would only need to receive FDA approval and be the only technology approved for a particular diagnostic capability in order to be deemed a “substantial improvement” for purposes of new technology add-on payments, regardless of its ability to positively affect patient management. This approach would deem a device leading to the identification of new information (in this case, whether plaques contain a lipid core) as a substantial improvement in diagnosis even if such detection has not been “demonstrated to represent a substantial improvement in caring for Medicare beneficiaries” and is not linked to evidence-based, significant, and positive changes in the management of patients or, ultimately, to changes in clinical outcomes. We do not believe this rationale is consistent with our prior statements regarding the substantial clinical improvement criterion of the new technology add-on payment provision. Nor do we believe it would be appropriate to provide additional payments for new diagnostic tools that fail to significantly change the management of patients, thereby improving clinical outcomes.

As to whether LipiScan [TM] represents a substantial improvement in diagnosis, we considered first, whether LipiScan [TM] “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,” and second whether “use of the device to make a diagnosis affects the management of the patient” (66 FR 46914). In the case of LipiScan [TM] , the applicant has stated that it believes that LipiScan [TM] offers the ability to diagnose a condition that is previously undetectable because it allows the detection of lipid-rich plaques in patients with coronary artery disease (CAD). We agree with the applicant that existing technologies may not be able to adequately identify lipid-rich plaques. However, we disagree that use of LipiScan [TM] affects the management of the patient at this time.

To qualify for the new technology add-on payment, a diagnostic capability must also be linked to “evidence that use of the device to make a diagnosis affects the management of the patient.” We believe that this evidence is necessary to determine whether the new technology affords a “clear improvement over the use of previously available technologies.” We do not consider any particular type of evidence to be dispositive; instead, we will consider all information presented for each application to determine whether there is evidence to support a conclusion that “use of the device to make a diagnosis affects the management of the patient” (in the case of a diagnostic technology). Consequently, we do not consider merely anecdotal claims that a device affects the management of the patient as sufficient evidence to demonstrate that a new diagnostic device affects the management of the patient, particularly where the device could be used for a relatively large patient population. Rather, we will consider whether the peer-reviewed medical literature supports or clinical studies indicate that the diagnostic device should generally be used by providers in guiding the management of their patients. In addition, we will consider evidence demonstrating clinically accepted use of the device in a manner that actually affects the management of patients.

In the case of LipiScan [TM] , we note that other methods exist for diagnosing CAD, including intravascular ultrasound (IVUS) and optical coherence tomography (OCT). In addition, the evidence available to CMS at the time of making a final rule determination consisted of anecdotal claims made by the applicant and one other commenter, that the identification of such plaques affects the management of the patient. A review of the literature yielded no additional evidence to support the applicant's claim. Furthermore, we believe that the prognostic implications of detecting lipid-rich plaque are not yet sufficiently well enough understood and documented in the peer-reviewed evidence to conclude that such identification will lead to significant and evidence-based changes in the management of CAD. In addition, we note that there are relatively few cases in which LipiScan [TM] has been used relative to the patient population in which it could potentially be used. Specifically, the applicant claims that the device could potentially be used in every patient who undergoes coronary angiography. To date, the device is only in use in 11 hospitals total, and there have been no data published to indicate that management of patients has changed, even in the hospitals where the device has been used. Given the size of the patient population that the manufacturer claims stands to benefit from use of LipiScan [TM] , the fact that so few hospitals are using the technology raises significant concerns regarding whether use of LipiScan [TM] actually affects the management of patients in a meaningful manner.

Therefore, while we recognize that LipiScan [TM] provides the ability to detect lipid-rich plaque which is currently undetectable by any other means, we are nonetheless still concerned that there is significant uncertainty within the clinical community regarding the prognostic implications of obtaining this information. We note that we did not receive any public comment during the public comment period from physicians who may be using the device. We believe the evidence supplied by the applicant that the device is affecting the management of the patient is not able to be validated broadly and is still anecdotal. Further, the discussions of the technology in the scientific studies submitted by the applicant acknowledge the possible potential of the technology to affect treatment in the future, but all stated that additional studies are necessary to determine its actual clinical utility. Specifically, in an editorial published in 2008, the author wrote, “In conclusion, further studies are warranted to determine if detection of [lipid core plaque of interest] by [near infrared spectroscopy] imaging will contribute to enhanced prediction of outcomes in patients with known CAD.” (Young, 2008) Also, in a letter to the editor in the Journal of the College of Cardiology, another author wrote about his experience with three patients over a period of three weeks to share his “initial observations.” The author wrote that “* * * preliminary results suggest that intravascular investigation of chemical composition of a coronary plaque has become a clinical reality [but] it remains to be seen whether chemograms would perform better than the ultrasound of whether they will be able to predict adverse events and faciltate development of clinically effective strategies for management of vulnerable plaques before it is too late.” (Maini, 2008) (emphasis added).

We believe that these conclusions, and others, as stated in the literature further support our previously stated view that the prognostic implications of detecting lipid-rich plaque are not well enough understood and therefore the detection of such plaque cannot be reasonably assumed to lead to evidence-based, significant, and positive medical management of patients with CAD that is generally accepted by clinicians, much less lead to improved clinical outcomes. We agree with the commenter and applicant that the identification of lipid-rich plaques may hold promise and ultimately lead to changes in the management of CAD and that LipiScan [TM] “has the potential to provide additional benefits in the struggle against the leading cause of death in the United States.” However, we do not believe the evidence and information available at this time allows us to determine that it meets the substantial clinical improvement criterion.

For these reasons, we are not approving LipiScan [TM] for new technology add-on payments for FY 2010.

d. Spiration® IBV® Valve System

Spiration, Inc. submitted an application for new technology add-on payments for FY 2010 for the Spiration® IBV® Valve System (Spiration® IBV®). The Spiration® IBV® is a device that is used to place, via bronchoscopy, small, one-way valves into selected small airways in the lung in order to limit airflow into selected portions of lung tissue that have prolonged air leaks following surgery while still allowing mucus, fluids, and air to exit, thereby reducing the amount of air that enters the pleural space. The device is intended to control prolonged air leaks following three specific surgical procedures: lobectomy; segmentectomy; or lung volume reduction surgery. According to the applicant, an air leak that is present on postoperative day 7 is considered “prolonged” unless present only during forced exhalation or cough. In order to help prevent valve migration, there are five anchors with tips that secure the valve to the airway. The implanted valves are intended to be removed no later than 6 weeks after implantation.

With regard to the newness criterion, the Spiration® IBV® received a Humanitarian Device Exemption (HDE) approval from the FDA on October 24, 2008. We are unaware of any previously FDA-approved predicate devices, or otherwise similar devices, that could be considered substantially similar to the Spiration® IBV®. However, the applicant asserted that the FDA has precluded the device from being used in the treatment of any patients until Institutional Review Board (IRB) approvals regarding its study sites. Therefore, it would appear that the Spiration® IBV® would meet the newness criterion once it has obtained at least one IRB approval because the device would then be available on the market to treat Medicare beneficiaries. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comments about the date on which the newness period should begin for this technology should it meet the other criteria to be approved for new technology add-on payments (74 FR 24135).

We also noted that the Spiration® IBV® is currently described by ICD-9-CM procedure code 33.71 (Endoscopic insertion or replacement of bronchial valve(s)). At the September 2008 ICD-9-CM Coordination and Maintenance Committee meeting, we discussed a proposal to revise the existing code and create a new code for endoscopic bronchial valve insertion in single and multiple lobes. In the proposed rule, we included the revised title of procedure code 33.71 to “Endoscopic insertion or replacement of bronchial valve(s), single lobes” and also the new procedure code 33.73 (Endoscopic insertion or replacement of bronchial valve(s), multiple lobes) in order to distinguish between single and multiple lobes (Table 6F and 6B in the Addendum to the proposed rule (74 FR 24501 and 24494, respectively)).

Comment: The applicant commented that nine hospitals have confirmed receipt of the Spiration® IBV® and the first IRB approval for the Spiration® IBV® was March 12, 2009. The applicant believes that this would confirm that the technology meets the newness criteria.

Another commenter commented that the IRB at the commenter's hospital has made pending approval of the Spiration® IBV® and expects to be able to use the Spiration® IBV® within the next month.

Response: We thank the commenters for providing this information on when the newness period should begin for the Spiration® IBV®. Based on the information above from the applicant, the Spiration® IBV® meets the newness criterion and the newness period for the Spiration® IBV® begins on March 12, 2009.

In an effort to demonstrate that the technology meets the cost criterion, the applicant searched the FY 2007 MedPAR file for cases potentially eligible for use of the Spiration® IBV®. Specifically, the applicant searched for cases with one of the following procedure codes: 32.4 (Lobectomy of lung); 32.3 (Segmental resection of lung); or 32.22 (Long volume reduction surgery). The applicant found 4,225 cases (or 21.6 percent of all cases) in MS-DRG 163 (Major Chest Procedure with MCC), 8,960 cases (or 45.8 percent of all cases) in MS-DRG 164 (Major Chest Procedure with CC), and 6,358 cases (or 32.5 percent of all cases) in MS-DRG 165 (Major Chest Procedure without CC/MCC). The average standardized charge per case was $88,326 for MS-DRG 163, $48,494 for MS-DRG 164, and $38,463 for MS-DRG 165, equating to a case-weighted average standardized charge per case of $53,842.

The average standardized charge per case does not include charges related to the Spiration® IBV®; therefore, it is necessary to add the charges related to the device to the average standardized charge per case in evaluating the cost threshold criterion. Although the applicant submitted data related to the estimated cost of the Spiration® IBV® per case, the applicant noted that the cost of the device was proprietary information. The applicant estimates $21,450 in charges related to the Spiration® IBV® (based on a 100-percent charge markup of the cost of the device). The applicant based this amount on seven actual cases that received the device. Because the applicant lacked a significant sample of cases to determine the charges associated with the device, we expressed our concerns in the proposed rule as to whether or not the $21,450 in charges related to the device is a valid estimate. In addition, based on the seven cases, the applicant determined an estimate of the number of valves used per case (the applicant noted that the number of valves used per case is proprietary). We also expressed concerns that the applicant lacked a significant sample of cases to determine a valid estimate of the number of valves per case. Adding the estimated charges related to the device to the average standardized charge per case (based on the case distribution from the applicant's FY 2007 MedPAR claims data analysis) resulted in a case-weighted average standardized charge per case of $75,292 ($53,842 plus $21,450). Using the FY 2010 thresholds published in Table 10 (73 FR 58008), the case-weighted threshold for MS-DRGs 163, 164, and 165 was $54,715 (all calculations above were performed using unrounded numbers). Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that the Spiration® IBV® would meet the cost criterion.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited public comment on whether or not the Spiration® IBV® meets the cost criterion.

Comment: In response to our concerns in the proposed rule, the applicant commented and cited a recent study in Chest, [4] prepublished on line on April 6, 2009 (Travaline 2009). The study reports on use of bronchial valves (not necessarily made by the applicant) for air leaks from a number of etiologies. From December 2002 through January 2007, 40 patients were treated with bronchial valves in 17 centers. The mean number of valves per case was 2.9 for all patients in the study. The mean number of valves was 2.28 for the subset of seven post surgical air leak cases in the study.

We note that the applicant informed us that the information in the proposed rule was incorrect and the number of actual cases where the Spiration® IBV® was used was not seven. The applicant informed CMS that the correct number of actual cases that used the Spiration® IBV® was eight cases. In the proposed rule, the applicant determined an average of 3.9 valves per case (or $21,450 in charges related to the device) for the Spiration® IBV® based on these eight actual cases. However, the applicant explained that if we were to remove one case that they considered to be outlier because it used 10 valves, the average number of valves per case would be 3.0, which is similar to the average amount of valves per case from the Travaline study. The commenter also noted that the lower number of valves used in the Travaline study for post surgical leaks compared to the Spiration® IBV® data can be attributed to the design of the Spiration® IBV® compared to the valve used in the study that limits the sub segmental treatment. The commenter believes that this newly published data supports the conclusion that it is typical to insert multiple valves per case in prolonged air leak cases.

The applicant also commented that since the proposed rule, two additional cases were performed using the Spiration® IBV® (making a total of 10 cases). The applicant included these two additional cases in its revised estimate of the average amount of valves per case. In addition to removing the outlier case above, the applicant also removed an additional case they considered to be an outlier that used four valves and determined an average of 2.5 valves per case (or $13,750 in charges related to the Spiration® IBV®).

The applicant also noted that the case-weighted threshold was $54,715 which is slightly higher than the case-weighted average standardized charge per case of $53,842 (which does not include charges related to the device). The commenter explained that even if we added a charge of $5,550 for only one Spiration® IBV® to the case-weighted average standardized charge per case (for a total case-weighted average standardized charge per case of $59,392), the Spiration® IBV® would still meet the cost criterion since the case-weighted average standardized charge per case ($59,392) exceeds the case-weighted threshold ($53,842).

The commenter also stated the following to strengthen confidence in its MedPAR analysis. The commenter explained that its MedPAR analysis profiled cases identified by the relevant surgical codes since specific ICD-9-CM procedure and diagnosis are not available to identify cases of prolonged air leaks within the FY 2007 MedPAR. The applicant cited peer reviewed clinical literature that was submitted as part of its new technology add-on payment application to demonstrate that patients with prolonged air leaks had a greater length of stay and complication rates compared to patients who did not have a prolonged air leak. Specifically, the applicant noted that one study [5] with 91 post operative patients after pulmonary resection demonstrated that patients with air leaks after 3 days had a greater length of stay (mean of 9.4 days vs. 5.4 days with a p value of p0.0001). The commenter also noted that a study of 552 post operative patients after LVRS in the National Emphysema Treatment Trial [6] demonstrated that patients with air leaks had more complications (57 percent versus 30 percent with a p value of p=0.0004) and longer length of stay (11.8 days vs. 7.6 days with a p value of p=0.0005). The commenter also cited a retrospective study [7] of 100 patients from a single center that showed the median length of stay for patients with prolonged air leak after radical upper lobectomy procedure was 11 days versus the median of 7 days for patients without prolonged air leak. Based on these clinical data, the applicant concluded that prolonged air leak cases are costlier than cases without prolonged air leak. As a result, the commenter believes that its MedPAR analysis was conservative in evaluating charges for surgical procedures as a whole, without being able to uniquely identify costlier prolonged air leak cases.

Response: We thank the applicant for submitting additional data to determine the amount of charges related to the Spiration® IBV®. In order to determine that the applicant met the cost criteria, in addition to the applicant's analysis, we searched the March update of the FY 2008 MedPAR for the same procedure codes that the applicant searched in their MedPAR analysis. We found 5,501 cases in MS-DRG 163 (or 23.9 percent of all cases), 11,151 cases in MS-DRG 164 (or 48.4 percent of all cases), and 6,380 cases in MS-DRG 165 (or 27.7 percent of all cases). The average standardized charge per case was $85,958 for MS-DRG 163, $48,731 for MS-DRG 164, and $37,586 for MS-DRG 165, equating to a case-weighted average standardized charge per case of $54,535. Adding the revised estimate of charges of $13,750 (2.5 valves × $5,550) related to the device to the average standardized charge per case (based on the case distribution from out FY 2008 MedPAR claims data analysis) resulted in a case-weighted average standardized charge per case of $68,285. Using the FY 2010 thresholds published in Table 10 (73 FR 58008), the case-weighted threshold for MS-DRGs 163, 164 and 165 was $55,952 (all calculations above were performed using unrounded numbers). Based on this analysis, the case-weighted average standardized charge per case for the applicable MS-DRGs exceeds the case-weighted threshold amount. Additionally, similar to what the applicant stated above, if we only included the amount of charges for one valve, the case-weighted average standardized charge per case of $60,035 ($54,535 plus $5,550) would still exceed the case-weighted threshold of $55,952. Therefore, we believe that the applicant meets the cost criterion.

Additionally, the applicant submitted supplemental data from multiple sources in an effort to determine the average amount of valves that would be used per case. We note that the average number of valves from actual cases involving the Spiration® IBV® (2.5 valves per case) is higher than the average amount of valves (2.28 valves per case) from the seven post surgical air leak cases from the Traveline study (not the Spiration® IBV®). However, we prefer to rely on actual case data when available and the actual case data is a more conservative estimate of the average amount of valves per case compared to those cases in the studies that did not use the Spiration® IBV®.

With respect to how the device would meet the substantial clinical improvement criterion, the applicant submitted information that was based on the Summary of Safety and Probable Benefit (SSPB) from the FDA's HDE approval order for the device. The clinical results indicate the Spiration® IBV® can be deployed in the intended airway reasonably safely with a minimally invasive bronchoscopy procedure. There have been a limited number of device complications and no occurrences of device erosion or migration. The Spiration® IBV® can be removed using a bronchoscope. Laboratory results indicate that the Spiration® IBV® significantly reduces airflow to the lung tissue beyond the treated airway, and a significant reduction in distal airflow is anticipated to augment the resolution of air leaks of the lung. Therefore, the applicant asserts, it is reasonable to conclude that the probable benefit to health associated with using the device for the target population outweighs the risk of illness or injuries, taking into account the probable risks and benefits of currently available devices or alternative forms of treatment when used as indicated in accordance with the directions for use.

We recognize that prolonged air leaks after these types of lung surgery can be a significant problem, and that Spiration® IBV® therapy may represent a new alternative in treating properly selected patients. However, we emphasized our concerns in the proposed rule that the outcome data presented are from a sample set of only seven patients, and the FDA HDE did not require demonstration of either safety or effectiveness. Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comment as to whether or not the Spiration® IBV® represents a substantial clinical improvement for Medicare beneficiaries.

We did not receive any written public comments regarding this application for new technology add-on payments concerning the new technology town hall meeting.

Comment: A number of commenters agreed with the applicant that the Spiration® IBV® meets the substantial clinical improvement criteria. The commenters also recommended the approval of the Spiration® IBV® for new technology add-on payments in FY 2010. One commenter, an association of thoracic surgeons, expressed support for approving the Spiration® IBV® for new technology add-on payments. The commenter explained that the Spiration® IBV® offers a less invasive treatment of the prolonged air leak, whereas the alternative treatment would be a major re-operation which costs more money and poses a greater risk to the patient.

The remaining commenters were physicians who had experience using bronchial valves or had actual experience using the Spiration® IBV®. These commenters noted that excluding the Spiration® IBV®, current treatments for prolonged air leaks include chest tube drainage, occlusion of airways with fibrin “glue”, and/or re-operation. One of the commenters explained that endobronchial valves offer a unique method for treating prolonged air leaks by temporarily preventing air from flowing into the segment of the lung with the air leak. The commenter noted that the efficacy of the valve can be predicted effectively by occluding the lobe or segment involved with a balloon catheter to determine if the air leak can be stopped. If a balloon is effective in stopping the leak, then a valve can also be effective in stopping the leak. The commenter explained that the advantage of this treatment is that after the leak has completely healed, the valves can be removed with a minimally invasive fiber-optic bronchoscopy. The commenter concluded that the Spiration® IBV® represents a substantial improvement since it offers a valuable, new, unique treatment option for prolonged post thoracotomy air leak and is the only bronchial valve with FDA approval (HDE).

Another commenter stated that using a bronchial valve to treat an air leak, resulted in the air leak ceasing at the end of the procedure. The commenter noted that for safety reasons, chest tubes are left in for 48 hours and patients in its care have been discharged 72 hours after the procedure. The bronchial valve was typically removed within 4-6 weeks after the procedure. The commenter further stated that it was not aware of any randomized clinical trials that prove that bronchial valves make air leaks stop. However, the commenter maintained that based on their experience, air leaks that lasted 14 days or longer which suddenly ceased upon use of a bronchial valve would be strong circumstantial evidence that the therapy works and can shorten hospitalization in appropriately selected patients. The commenter also believes that using a bronchial valve for air leaks still present after five days following surgery would likely result in an overall cost savings since the duration of hospitalization is usually dependent on air leak cessation. The commenter concluded that the Spiration® IBV® represents a substantial clinical improvement and CMS should approve Spiration® IBV® for new technology add-on payments in FY 2010.

One of the commenters noted that in its experience using endobronchial valves, patients with prolonged air leaks who were in the hospital for many weeks with chest tubes in place were discharged and had the chest tubes removed within days upon use of an endobronchial valve. The commenter cited an example of a patient currently treated by the commenter who has undergone numerous procedures with anesthesia in the operating room and requires another two procedures. The commenter believed that this patient would have been able to be managed in a bronchoscopy suite under moderate sedation with use of an endobronchial valve. As the only bronchial valve with FDA approval (HDE), the commenter believed the Spiration® IBV® represents a substantial clinical improvement and recommended that CMS make new technology add-on payments for the Spiration® IBV® in FY 2010.

Another commenter noted that conservative management of air leaks results in prolonged hospitalization and limited mobilization of patients with a much higher risk of additional complications such as pneumonia, empyema, deep venous thrombosis and pulmonary embolism, and progressive deconditioning. These complications take a toll on patients with prolonged air leaks and result in a significantly worse overall outcomes, prolonged hospital stay, and substantial increase in costs.

The commenter also noted its extensive experience using the Spiration® IBV® valve in clinical trials as a potential therapy for palliation of severe emphysema. Specifically, the commenter stated that the valves are easy to place in desired segments and effectively block distal airflow with a high safety profile in published studies. The commenter further stated that the valves are stable with no incidence of valve migration in over 600 valves placed in emphysema patients with follow-up that included endoscopic and radiologic surveillance. The commenter also noted their extensive experience in valve removal, which is part of the intended therapy for patients that have valve treatment for air leaks (since once the air leaks are resolved the valves will no longer be necessary). The commenter disclosed that it did not have any personal experience in using the Spiration® IBV® for patients with air leaks, but are familiar with the existing literature on similar treatments as well as the case series using the Spiration® IBV® for this indication. With this background, the commenter believed that the Spiration® IBV® has a high likelihood of helping to resolve prolonged postsurgical air leaks and therefore minimizes the duration of chest tube drainage and hospitalization for patients (with an attendant decrease in the risk of complications that accompany prolonged hospitalization). The commenter also believed that the high safety profile and effectiveness of the Spiration® IBV® for occluding segmental airways suggests a very high likelihood of clinical benefit in this group of patients with the indication of prolonged air leak. The commenter concluded that it believed that the Spiration® IBV® represents a substantial improvement to currently available treatment options for patients who have post-surgical prolonged air leaks. The commenter recommended that CMS approve the Spiration® IBV® for new technology add payments so that hospitals are appropriately reimbursed for this new important technology.

Response: We appreciate the commenters submitting their comments in support of the Spiration® IBV®. Many of the commenters described their positive experiences using the Spiration® IBV® or other bronchial valves that resolved cases of air leaks, which improved the clinical outcome of the patient. Furthermore, the commenters suggested that most, if not all, of the cases treated using the Spiration® IBV® and other bronchial valves would have had to have undergone further invasive treatments had the Spiration® IBV® or other bronchial valves not have been available to resolve the air leak. Additionally, the Spiration® IBV® and other bronchial valve provided a quick resolution to these cases of prolonged air leaks. We considered the commenters' positive experiences using the Spiration® IBV® in our determination (below) on whether the Spiration® IBV® represents a substantial clinical improvement.

Comment: The applicant commented that providers have few treatment options for effectively controlling prolonged air leaks. The applicant noted that aside from the Spiration® IBV®, no other bronchoscopic treatments have been clinically accepted or approved by the FDA. Therefore, management of prolonged air leaks due to persistent bronchopleural fistula involves chest drainage and occasionally pleurodesis, with more difficult cases requiring pleurectomy and surgical repair. The applicant further noted that current treatment options for air leaks are associated with risks and complications such as prolonged use of chest tubes which increases the risk of pneumonia, deep venous thrombosis, pulmonary embolus, atelectasis, subcutaneous emphysema and empyema; restricted ambulation due to chest tube which increases the risks associated with inactivity; prolonged requirements for pain medication and extended post operative length of stay which increases the potential for hospital acquired infections.

In response to our concerns in the proposed rule, the applicant acknowledged that there are limited outcomes data associated with the use of the Spiration® IBV® for prolonged air leaks. However, the applicant cited that additional data has been published since the proposed rule regarding the use of a bronchial valve for prolonged air leaks. Specifically, the applicant cited the following clinical benefit data from the Traveline 2009 study for patients who received a bronchial valve for air leaks from multiple causes: following valve placement, the air leaks resolved or decreased in 37 of 40 patients (92.5 percent); 19 patients (47.5 percent) had complete resolution of the air leak acutely, 18 patients (45 percent) had reduction, two patients (5 percent) had no change in air leak status, and one patient (2.5 percent) the immediate change in air leak was not reported.

Additionally, the applicant reported that all 10 procedures performed with the Spiration® IBV® resulted in air leak decrease and/or resolution. The applicant concluded that these results demonstrated the following: Valve placement may reduce or avoid complications associated with current treatments of prolonged air leaks; patients who received bronchial valves experienced air leak resolution or decrease unlike a situation absent bronchial valves where a patient may need to remain in the hospital; patients with a bronchial valve are able to be discharged with the valve thus avoiding risks, complications and costs associated with prolonged lengths of hospitalizations. The applicant believed that these conclusions from the newly published data together with Spiration® data demonstrate that the Spiration® IBV® meets the substantial clinical improvement criteria.

Response: We thank the applicant for providing additional clinical data to demonstrate that the Spiration® IBV® meets the substantial clinical improvement criteria. With respect to substantial clinical improvement, we considered all the case specific clinical information presented by the applicant and the public to determine whether there is evidence to support a conclusion that use of the Spiration® IBV® represents a substantial clinical improvement. Specifically, we considered the peer-reviewed medical literature, clinical studies, and the clinically accepted use of the device. We remain concerned that no prospective comparative data exists to help understand the benefit of the technology versus other modalities. We also do not know what the outcome would have been for the cases presented as examples in the Traveline study (that is, if or when those air leaks might have resolved on their own). Additionally, many of the cases in that study were not for the indicated use (post-operative prolonged air leak management). However, we agree that the Spiration® IBV® can improve clinical outcomes by providing an alternative treatment that is effective and often a less invasive method of treating prolonged air leaks in a small patient population that is properly and carefully selected (as required by the FDA). Additionally, we received positive comments from a major thoracic society and from physicians who indicated that the Spiration® IBV® and other bronchial valves produced positive clinical outcomes by resolving air leaks. Also, the comments we received from the physicians demonstrated a change to the clinical therapy for cases of air leaks by using a bronchial valve such as the Spiration® IBV® instead of other alternative treatments such as an invasive surgery to resolve the air leak. Furthermore, the Spiration® IBV® is the only device currently approved for the purpose of treating prolonged air leaks following lobectomy, segmentectomy, and LVRS patients in the United States. Without the availability of this device, patients with prolonged air leaks (following lobectomy, segmentectomy, and LVRS) might otherwise remain inpatients in the hospital (and have a longer length of stay than they might otherwise have without the Spiration® IBV®) or might even require additional invasive surgeries to resolve the air leak. We also note that use of the Spiration® IBV® may lead to more rapid beneficial resolution of prolonged air leaks and reduce recovery time following the three lung surgeries mentioned above. Therefore, after reviewing the totality of the evidence, we have determined that the Spiration® IBV® represents a substantial clinical improvement over existing therapies for prolonged air leaks for carefully selected patients.

Accordingly, after consideration of the clinical evidence received, we are approving the Spiration® IBV® for new technology add-on payments in FY 2010. However, we remain interested in seeing whether the clinical evidence continues to find it to be effective. This approval is on the basis of using the Spiration® IBV® consistent with the FDA approval (HDE), and we emphasize the need for appropriate patient selection accordingly. Therefore, we intend to limit the add-on payment to cases involving prolonged air leaks following lobectomy, segmentectomy and LVRS in MS-DRGs 163, 164, and 165. Cases involving the Spiration® IBV® that are eligible for the new technology add-on payment will be identified by assignment to MS-DRGs 163, 164, and 165 with procedure code 33.71 or 33.73 in combination with one of the following procedure codes: 32.22, 32.30, 32.39, 32.41, or 32.49.

The average cost of the Spiration® IBV® is reported as $2,750. Based on the applicant's revised data, the average amount of valves per case is 2.5. Therefore, the total maximum cost for the Spiration® IBV® is expected to be $6,875 per case ($2,750 × 2.5). Under section 412.88(a)(2), new technology add-on payments are limited to the lesser of 50 percent of the average cost of the device or 50 percent of the costs in excess of the MS-DRG payment for the case. As a result, the maximum add-on payment for a case involving the Spiration® IBV® is $3,437.50.

e. TherOx Downstream® System

TherOx, Inc. submitted an application for new technology add-on payments for FY 2010 for the TherOx Downstream® System. However, the applicant withdrew its application for new technology add-on payments during the public comment period.

We did not receive any public comments on this application.

5. Technical Correction to the Regulations

In the FY 2009 IPPS final rule, when we revised the regulations at § 412.87 to incorporate changes relating to the announcement of determinations and deadline for consideration of new medical service or technology applications, we made a change to paragraph (b)(1) (73 FR 48755). In paragraph (b)(1), we inadvertently used the incorrect word “relating” in the provision that read “A new medical service or technology represents an advance that substantially improves, relating to technologies previously available, the diagnosis or treatment of Medicare beneficiaries” (emphasis added). The correct word should have been “relative.” We proposed to make a technical correction to § 412.87(b)(1), replacing the word “relating” with the word “relative” (74 FR 24137). We did not receive any public comments on this proposal. Accordingly, we are finalizing this proposed correction.

III. Changes to the Hospital Wage Index for Acute Care Hospitals 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 FY 2010 hospital wage index based on the statistical areas, including OMB's revised definitions of Metropolitan Areas, appears under section III.C. of this preamble.

Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we update the wage index annually. Furthermore, this section of the Act provides that the Secretary base the update on a survey of wages and wage-related costs of short-term, acute care hospitals. The survey must exclude the wages and wage-related costs incurred in furnishing skilled nursing services. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. The adjustment for FY 2010 is discussed in section II.B. of the Addendum to this final rule.

As discussed below in section III.I. of this preamble, we also take into account the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amounts so as to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. The budget neutrality adjustment for FY 2010 is discussed in section II.A.4.b. of the Addendum to this final rule.

Section 1886(d)(3)(E) of the Act also provides for the collection of data every 3 years on the occupational mix of employees for short-term, acute care hospitals participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index. A discussion of the occupational mix adjustment that we are applying beginning October 1, 2009 (the FY 2010 wage index) appears under section III.D. of this preamble.

B. Requirements of Section 106 of the MIEA-TRHCA

1. Wage Index Study Required Under the MIEA-TRHCA

a. Legislative Requirement

Section 106(b)(1) of the MIEA-TRHCA (Pub. L. 109-432) required MedPAC to submit to Congress, not later than June 30, 2007, a report on the Medicare wage index classification system applied under the Medicare IPPS. Section 106(b) of MIEA-TRHCA required the report to include any alternatives that MedPAC recommends to the method to compute the wage index under section 1886(d)(3)(E) of the Act.

In addition, section 106(b)(2) of the MIEA-TRHCA instructed the Secretary of Health and Human Services, taking into account MedPAC's recommendations on the Medicare wage index classification system, to include in the FY 2009 IPPS proposed rule one or more proposals to revise the wage index adjustment applied under section 1886(d)(3)(E) of the Act for purposes of the IPPS. The Secretary was also to consider each of the following:

  • Problems associated with the definition of labor markets for the wage index adjustment.
  • The modification or elimination of geographic reclassifications and other adjustments.
  • The use of Bureau of Labor of Statistics (BLS) data or other data or methodologies to calculate relative wages for each geographic area.
  • Minimizing variations in wage index adjustments between and within MSAs and statewide rural areas.
  • The feasibility of applying all components of CMS' proposal to other settings.
  • Methods to minimize the volatility of wage index adjustments while maintaining the principle of budget neutrality.
  • The effect that the implementation of the proposal would have on health care providers on each region of the country.
  • Methods for implementing the proposal(s), including methods to phase in such implementations.
  • Issues relating to occupational mix such as staffing practices and any evidence on quality of care and patient safety including any recommendation for alternative calculations to the occupational mix.

In the FY 2009 IPPS final rule (73 FR 48563 through 48567), we discussed the MedPAC's study and recommendations, the CMS contract with Acumen, L.L.C. for assistance with impact analysis and study of wage index reform, and public comments we received on the MedPAC recommendations and the CMS/Acumen study and analysis.

b. Interim and Final Reports on Results of Acumen's Study

(1) Interim Report on Impact Analysis of Using MedPAC's Recommended Wage Index

In the FY 2009 IPPS final rule (73 FR 48566 through 48567), we discussed the analysis conducted by Acumen comparing use of the MedPAC recommended wage indices to the current CMS wage index. We refer readers to section III.B.1.e. of that final rule for a full discussion of the impact analysis as well as to Acumen's interim report available on the Web site: http://www.acumenllc.com/reports/cms.

(2) Acumen's Final Report on Analysis of the Wage Index Data and Methodology

Acumen's final report addressing the issues in section 106(b)(2) of the MIEA-TRHCA is divided into two parts. The first part analyzes the strengths and weaknesses of the data sources used to construct the MedPAC and CMS indexes. The first part of Acumen's study is complete and was published on Acumen's Web site after the publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. The second part of Acumen's study, which is expected to be released on Acumen's Web site after the publication of this FY 2010 IPPS/RY 2010 LTCH PPS final rule, will focus on the methodology of wage index construction and covers issues related to the definition of wage areas and methods of adjusting for differences among neighboring wage areas, as well as reasons for differential impacts of shifting to a new index.

The following is a description of the analyses for both parts of Acumen's final report.

Part I: Wage Data Analysis

  • Differences between the BLS data and the CMS wage data—Acumen assessed the strengths and weaknesses of the data used to construct the CMS wage index and the MedPAC compensation index by examining the differences between the BLS and the CMS wage data. Acumen also evaluated the importance of accounting for self-employed workers, part-time workers, and industry wage differences.
  • Employee benefit (wage-related) cost—Acumen considered whether benefit costs need to be included in the hospital wage index and discussed the differences between Worksheet A benefits data (proposed by MedPAC to use with BLS wage data) and Worksheet S-3 benefit data. Acumen also analyzed the possibility of using BLS' Employer Costs for Employee Compensation (ECEC) series as an alternative to Worksheet A or Worksheet S-3 benefits data that would pose less of a data collection burden for providers.
  • Impact of the fixed national occupational weights—Acumen assessed MedPAC's and CMS' methods for adjusting for occupational mix differences. While the proposed MedPAC compensation index uses fixed weights for occupations representative of the hospital industry nationally, the CMS wage index incorporates an occupational mix adjustment (OMA) from a separate data collection.
  • Year-to-year volatility in the CMS and BLS wage data—Acumen calculated the extent of volatility in the CMS and BLS wage indexes using several measures of volatility. Acumen also explored potential causes of volatility, such as the number of hospitals and the annual change in the number of hospitals in a wage area. Finally, Acumen evaluated the impact on annual volatility of using a 2-year rolling average of CMS wage index values.

In the first part of its final report, Acumen suggests that MedPAC's recommended methods for revising the wage index represent an improvement over the existing methods, and that the BLS data should be used so that the MedPAC approach can be implemented.

Comment: Several commenters reiterated their concerns regarding the use of the BLS data for computing the Medicare wage index that they had expressed in public comments on the FY 2009 IPPS final rule (73 FR 48564). The commenters stated that they still have significant concerns about the shortcomings of the BLS data, and they urged CMS to move cautiously in considering MedPAC's and Acumen's findings. Other commenters expressed support for MedPAC's and Acumen's findings and recommendations, although some commenters cautioned that a few refinements may still be needed before adopting these recommendations. MedPAC commented that they look forward to the completion of the Acumen study and to working with CMS on improving the hospital wage index.

Response: As Acumen's study is incomplete at the time of preparation of this final rule, we are making no assessments or conclusions in this rule with regards to Acumen's findings in Part I of its final report. As we mention below, we will consider both of Acumen's final reports and public comments in assessing MedPAC's recommendations and making future proposals for changes in the wage index.

Part II: Wage Index Construction

• Alternative wage area definitions—Acumen will explore the conceptual basis for defining wage areas and investigate alternative wage area definitions that have been considered in prior literature to reduce differences between areas.

• Differences between and within contiguous wage areas—Acumen will estimate different methods for smoothing wage index values between geographically proximate areas and examine the justification for and sensitivity to assumptions used by MedPAC in its smoothing method.

  • Reasons for differential impacts of shifting to a new index—Acumen will analyze the impact on hospitals if CMS were to adopt MedPAC's proposed compensation index, with a focus on hospitals that would no longer qualify for exceptions such as geographic reclassification and the rural floor. Acumen will also determine if there are identifiable reasons for the different impacts.

As mentioned above, Acumen is expected to complete and publish its analysis for the second part of its final report after the publication date of this final rule.

We indicated in the FY 2009 IPPS final rule that, in developing any proposal(s) for additional wage index reform that may be included in the FY 2010 IPPS proposed rule, we would consider all of the public comments on the MedPAC recommendations that we had received in that proposed rulemaking cycle, along with the interim and final reports to be submitted to us by Acumen. As Acumen's study was not complete at the time of issuance of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we did not propose any additional changes to the hospital wage index for acute care hospitals for the FY 2010 IPPS.

2. FY 2009 Policy Changes in Response to Requirements Under Section 106(b) of the MIEA-TRHCA

To implement the requirements of section 106(b) of the MIEA-TRHCA and respond to MedPAC's recommendations in its June 2007 report to Congress, in the FY 2009 IPPS final rule (73 FR 48567 through 48574), we made the following policy changes relating to the hospital wage index. (We refer readers to the FY 2009 IPPS final rule for a full discussion of the basis for the proposals, the public comments received, and the FY 2009 final policy.)

a. Reclassification Average Hourly Wage Comparison Criteria

In the FY 2009 IPPS final rule, we adopted the policy to adjust the reclassification average hourly wage standard, comparing a reclassifying hospital's (or county hospital group's) average hourly wage relative to the average hourly wage of the area to which it seeks reclassification. We provided for a phase-in of the adjustment over 2 years. For applications for reclassification for the first transitional year, FY 2010, the average hourly wage standards were set at 86 percent for urban hospitals and group reclassifications and 84 percent for rural hospitals. For applications for reclassification for FY 2011 (for which the application deadline is September 1, 2009) and for subsequent fiscal years, the average hourly wage standards will be 88 percent for urban and group reclassifications and 86 percent for rural hospitals (§§ 412.230, 412.232, and 412.234 of the regulations). As stated above, these policies were adopted in the FY 2009 IPPS final rule.

In response to our summary of the FY 2009 policy changes in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24139), we received several public comments, which are summarized below.

Comment: Several commenters opposed raising the average hourly wage thresholds to 88 percent for urban and group reclassifications and 86 percent for rural hospitals for applications for FY 2011 and subsequent years.

Response: As we discussed in the FY 2009 IPPS proposed and final rules, section 106(b) of the MIEA-TRHCA required the Secretary to make one or more proposals to revise the wage index adjustment for FY 2009. In the FY 2009 IPPS proposed rule (73 FR 48567 through 48574), we indicated that while we had limited authority to make changes to the nine specific areas of the wage index that the law required us to study, we did carefully review the criteria established in regulations for allowing a hospital to geographically reclassify. Specifically, in the FY 2009 IPPS final rule, we updated the geographic reclassification criteria based on a review of the statistical metrics that were used to establish the original standards in 1993. The original individual standards were set using a methodology that calculated a percentile range of one standard deviation from the mean in which a typical hospital's average hourly wage would be expected to fall relative to its combined labor market average hourly wage. In short, we found that the average hospital average hourly wage as a percentage of its area's wage had increased from approximately 96 percent in FY 1993 to 98 percent in the most recent 3 fiscal years. Further, the standard deviation had been reduced from approximately 12 percent to 10 percent over the same time period. The original criteria were set equal to the average less the standard deviation (96 percent less 12 percentage points). The revised reclassification criteria based on these same statistical metrics led us to change the standard to 88 percent (98 percent less 10 percentage points). By refining our standards, we found that the number of hospitals that are able to reclassify despite not demonstrating average hourly wage levels that truly justify a higher wage index will be reduced.

We considered public comments received in response to the FY 2009 IPPS proposed rule before making this change final in the FY 2009 IPPS final rule (73 FR 48567 through 48574). The change in policy did not affect any 3-year geographic reclassifications that went into effect beginning in FY 2009. Further, in response to public comments on the FY 2009 IPPS proposed rule, we decided to adopt the revised reclassification criteria over a 2-year transitional period. Hospitals will be subject to the 88 percent criteria for urban and group reclassifications (86 percent for rural areas) for 3-year geographic reclassifications beginning for FY 2011 applications due to the MGCRB no later than 5 p.m. (EST) on September 1, 2009.

Finally, in the FY 2009 IPPS final rule and in section III.B.1.b. of the preamble of this final rule, we discuss our contract with Acumen to assist us in studying the wage index and the MedPAC recommendations, and also to assist us in developing other proposals for reforming the wage index. At this time, the study is still in progress and Acumen intends to issue its final report this year. We will consider possible additional changes to the wage index through the formal rulemaking process after our review of Acumen's final report and recommendations.

b. Within-State Budget Neutrality Adjustment for the Rural and Imputed Floors

In the FY 2009 IPPS final rule, we adopted State level budget neutrality (rather than the national budget neutrality adjustment) for the rural and imputed floors, to be effective beginning with the FY 2009 wage index. The transition from the national budget neutrality adjustment to the State level budget neutrality adjustment is being phased in over a 3-year period. In FY 2009, hospitals received a blended wage index that was 20 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 80 percent of a wage index with the national budget neutrality adjustment. In FY 2010, the blended wage index reflects 50 percent of the State level adjustment and 50 percent of the national adjustment. In FY 2011, the adjustment will be completely transitioned to the State level methodology.

In the FY 2009 IPPS final rule, we incorporated this policy in our regulation at § 412.64(e)(4). Specifically, we provided that CMS makes an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) and the imputed rural floor under § 412.64(h)(4) are made in a manner that ensures that aggregate payments to hospitals are not affected and that, beginning October 1, 2008, CMS would transition from a nationwide adjustment to a statewide adjustment, with a statewide adjustment fully in place by October 1, 2010. We note that the imputed floor expires on September 30, 2011 (as discussed in section III.H. of this preamble).

Comment: Several commenters requested that CMS repeal its decision to apply a State level budget neutrality adjustment for the rural and imputed floors. The commenters cited the disparity between the severe negative economic consequences of the policy for States with hospitals receiving a floor payment, compared to the relatively minor benefits received by nonfloor States. Multiple commenters pointed out that, because numerous other aspects of the Medicare wage index either cross State lines (CBSAs), or are modeled on national budget neutrality (geographic reclassification and outlier payments), they were concerned that a State-specific adjustment establishes a poor precedent and violates the intent of the legislation that established the rural floor.

Response: We disagree that a State level budget neutrality adjustment establishes a poor precedent. Unlike geographic reclassification or outlier payment budget neutrality adjustments, the construction of the rural and imputed floors requires that wage index comparisons be made between labor market areas within a specific State. Analysis in the FY 2009 IPPS final rule demonstrated how, at a State-by-State level, the rural and imputed floors create a benefit for a minority of States that is then funded by a majority of States, including States that are overwhelmingly rural in character. In the FY 2009 IPPS final rule, we also explained that because the imputed and rural floor comparisons occur at the State level, we believed it would be sound policy to make the budget neutrality adjustment specific to the State, redistributing payments among hospitals within the State, rather than adjusting payments to hospitals in other States. In the FY 2009 IPPS final rule, we adopted a 3-year phase-in to address the concerns that such a transition in policy may lead to sudden decreases in payments for certain providers. FY 2010 will mark the second year of this transition, with a 50-percent national, 50-percent within-State budget neutrality adjustment. We believe that this transition period will continue to mitigate any negative impacts on affected hospitals while we proceed towards the planned adoption of 100-percent within-State budget neutrality in FY 2011.

In addition, we do not believe the legislative history demonstrates an intent for a particular type of budget neutrality adjustment. The Conference Report for the rural floor states: “The Secretary would be required to make any adjustments in the wage index in a budget neutral manner.” (H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess. at 712) However, the report does not reference a national budget neutrality adjustment, as compared to a statewide budget neutrality adjustment. Both the legislative history and the plain language of the rural floor provision anticipate that the Secretary would have administrative discretion regarding the “manner” of the budget neutrality adjustment. Section 4410(b) of the BBA of 1997 (Pub. L. 105-33) requires that the Secretary adjust wage indices “in a manner which assures that the aggregate payments made under section 1886(d) of the Social Security Act * * * in a fiscal year for the operating costs of inpatient hospital services are not greater or less than those which would be made in the year if this section did not apply.” Thus, Congress provided discretion to the Secretary to determine the manner of ensuring that the rural floor did not increase costs above what they would have been in the absence of the rural floor, and the Secretary has exercised such discretion through the adoption of a statewide adjustment.

Comment: A number of commenters in an all-urban State urged CMS to make the imputed floor a permanent provision. The commenters explained that their State is geographically disadvantaged because it is bordered by two of the five largest cities in the United States, and the hospitals in the State have to compete with those larger cities for labor resources and patients. The commenters noted that, when CMS adopted the imputed floor policy in the FY 2005 IPPS final rule (69 FR 49109), CMS acknowledged a concern by some individuals that hospitals in all-urban States are financially and competitively disadvantaged in the absence of an imputed floor wage index. The commenters stated that CMS has provided no rationale for discontinuing the imputed floor after FY 2011 and has provided no documentation to support that the “anomalous” situation, as it was described by CMS in the FY 2005 IPPS final rule, has changed for all-urban States.

Response: We appreciate the commenter's concern about the imputed floor. However, we made no proposals regarding the imputed floor in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. Therefore, we are making no decisions in this final rule regarding any future extension of the imputed floor. We will address the imputed floor policy in the FY 2011 IPPS proposed rule, which will allow for opportunity for public comment.

Comment: One commenter requested clarification as to the discrepancy between rural and imputed floor budget neutrality factors referenced in the proposed rule (1.00016 referenced at 74 FR 24243 (the Addendum to the proposed rule) and 1.000017 referenced at 74 FR 24663 (Appendix A to the proposed rule)).

Response: We have included an updated budget neutrality factor in section I.A.4.c. of the Addendum to this final rule, along with an explanation in section VI.I of Appendix A to this final rule of why the adjustment amounts varied in the proposed rule.

Comment: One commenter requested CMS to explain how the rural floor budget neutrality adjustment is performed so that it can be certified and compared to prior years. The commenter also expressed concerns about how State level budget neutrality may complicate a hospital's geographic reclassification application process, may result in rural hospitals with high wage indices being significantly disadvantaged, and may cause deviations in payments between hospital reclassifications into a labor market from an adjoining State.

Response: We provided ample details of the iterative rural floor budget neutrality calculation process in the FY 2008 IPPS final rule with comment period (72 FR 47325 through 4733). In the FY 2009 IPPS final rule (73 FR 48574), we further explained how the same calculation process will be used to phase in a State level budget neutrality adjustment.

In response to the commenter's other concerns, the specific scenarios presented may occur regardless of how rural and imputed floor budget neutrality is achieved. The application of the rural floor itself, despite a national or a State level budget neutrality adjustment, may result in situations where hospitals classified or reclassified to the same labor market area may receive differing wage indices. Hospitals always must evaluate multiple scenarios when determining whether to apply for a reclassification or withdraw a geographic reclassification request. We provide the best information available in the IPPS proposed rule to facilitate these decisions and allow hospitals a 45-day period following publication of the proposed rule to evaluate their options.

C. Core-Based Statistical Areas for the Hospital Wage Index

The wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located. In accordance with the broad discretion under section 1886(d)(3)(E) of the Act, beginning with FY 2005, we define hospital labor market areas based on the Core-Based Statistical Areas (CBSAs) established by OMB and announced in December 2003 (69 FR 49027). For a discussion of OMB's revised definitions of CBSAs and our implementation of the CBSA definitions, we refer readers to the preamble of the FY 2005 IPPS final rule (69 FR 49026 through 49032).

As with the FY 2009 final rule, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24139), we proposed to provide that hospitals receive 100 percent of their wage index based upon the CBSA configurations. Specifically, for each hospital, we proposed to determine a wage index for FY 2010 employing wage index data from hospital cost reports for cost reporting periods beginning during FY 2006 and using the CBSA labor market definitions. We consider CBSAs that are MSAs to be urban, and CBSAs that are Micropolitan Statistical Areas as well as areas outside of CBSAs to be rural. In addition, it has been our longstanding policy that where an MSA has been divided into Metropolitan Divisions, we consider the Metropolitan Division to comprise the labor market areas for purposes of calculating the wage index (69 FR 49029) (regulations at § 412.64(b)(1)(ii)(A)).

On November 20, 2008, OMB announced three Micropolitan Statistical Areas that now qualify as MSAs (OMB Bulletin No. 09-01). The new urban CBSAs are as follows:

  • Cape Girardeau-Jackson, Missouri-Illinois (CBSA 16020). This CBSA is comprised of the principal cities of Cape Girardeau and Jackson, Missouri in Alexander County, Illinois; Bollinger County, Missouri, and Cape Girardeau County, Missouri.
  • Manhattan, Kansas (CBSA 31740). This CBSA is comprised of the principal city of Manhattan, Kansas in Geary County, Pottawatomie County, and Riley County.
  • Mankato-North Mankato, Minnesota (CBSA 31860). This CBSA is comprised of the principal cities of Mankato and North Mankato, Minnesota in Blue Earth County and Nicollet County.

OMB also changed the principal cities and titles of a number of CBSAs and a Metropolitan Division, as follows:

  • Broomfield, Colorado qualifies as a new principal city of the Denver-Aurora, Colorado CBSA. The new title is Denver-Aurora-Broomfield, Colorado CBSA.
  • Chapel Hill, North Carolina qualifies as a new principal city of the Durham, North Carolina CBSA. The new title is Durham-Chapel Hill, North Carolina CBSA.
  • Chowchilla, California qualifies as a new principal city of the Madera, California CBSA. The new title is Madera-Chowchilla, California CBSA.
  • Panama City Beach, Florida qualifies as a new principal city of the Panama City-Lynn Haven, Florida CBSA. The new title is Panama City-Lynn Haven-Panama City Beach, Florida CBSA.
  • East Wenatchee, Washington qualifies as a new principal city of the Wenatchee, Washington CBSA. The new title is Wenatchee-East Wenatchee, Washington CBSA.
  • Rockville, Maryland replaces Gaithersburg, Maryland as the third most populous city of the Bethesda-Frederick-Gaithersburg, Maryland Metropolitan Division. The new title is Bethesda-Frederick-Rockville, Maryland Metropolitan Division.

The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB—go to “Bulletins” or “Statistical Programs and Standards.” CMS will apply these changes to the IPPS beginning October 1, 2009.

We note that several public commenters who responded to the proposed rule expressed their concerns that CAHs in the new MSAs will lose their CAH status and be forced to convert to IPPS hospitals because the areas will be designated as urban instead of rural. The commenters recalled that the same situation occurred in FY 2005 when CMS adopted OMB's CBSA definitions. At that time, CMS allowed CAHs located in rural counties that became urban to maintain their CAH status for 2 years (69 FR 49221). If these CAHs were unable in 2 years to obtain rural status under § 412.103, they were required to convert to IPPS status. A more detailed discussion of the public comments and our response is included in section VII.C. of the preamble of this final rule.

D. Occupational Mix Adjustment to the FY 2010 Wage Index

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

1. Development of Data for the FY 2010 Occupational Mix Adjustment Based on the 2007-2008 Occupational Mix Survey

As provided for under section 1886(d)(3)(E) of the Act, we collect data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program. For the FY 2009 hospital wage index, we used data from the 2006 Medicare Wage Index Occupational Mix Survey (the 2006 survey) to calculate the occupational mix adjustment. In the 2006 survey, we included several modifications to the original occupational mix survey, the 2003 survey, including (1) allowing hospitals to report their own average hourly wage rather than using BLS data; (2) extending the prospective survey period; and (3) reducing the number of occupational categories but refining the subcategories for registered nurses.

The 2006 survey provided for the collection of hospital-specific wages and hours data, a 6-month prospective reporting period (that is, January 1, 2006, through June 30, 2006), the transfer of each general service category that comprised less than 4 percent of total hospital employees in the 2003 survey to the “all other occupations” category (the revised survey focused only on the mix of nursing occupations), additional clarification of the definitions for the occupational categories, an expansion of the registered nurse category to include functional subcategories, and the exclusion of average hourly rate data associated with advance practice nurses. The 2006 survey included only two general occupational categories: Nursing and “all other occupations.” The nursing category had four subcategories: Registered nurses, licensed practical nurses, aides, orderlies, attendants, and medical assistants. The registered nurse subcategory included two functional subcategories: Management personnel and staff nurses or clinicians. As indicated above, the 2006 survey provided for a 6-month data collection period, from January 1, 2006 through June 30, 2006. To allow flexibility for the reporting period beginning and ending dates to accommodate some hospitals' biweekly payroll and reporting systems, we modified the 6-month data collection period for the 2006 survey from January 1, 2006, through June 30, 2006, to a 6-month reporting period that began on or after December 25, 2005, and ended before July 9, 2006. OMB approved the revised 2006 occupational mix survey (Form CMS-10079 (2006)) on April 25, 2006. The original timelines for the collection, review, and correction of the 2006 occupational mix data were discussed in detail in the FY 2007 IPPS final rule (71 FR 48008).

As we proposed, for the FY 2010 hospital wage index, we used occupational mix data collected on a revised 2007-2008 Medicare Wage Index Occupational Mix Survey (the 2007-2008 survey) to compute the occupational mix adjustment for FY 2010. In the FY 2008 IPPS final rule with comment period (72 FR 47315), we discussed how we modified the 2006 occupational mix survey. The revised 2007-2008 occupational mix survey provided for the collection of hospital-specific wages and hours data for the 1-year period of July 1, 2007, through June 30, 2008, additional clarifications to the survey instructions, the elimination of the registered nurse subcategories, some refinements to the definitions of the occupational categories, and the inclusion of additional cost centers that typically provide nursing services.

On February 2, 2007, we published in the Federal Register a notice soliciting comments on the proposed revisions to the 2006 occupational mix survey (72 FR 5055). The comment period for the notice ended on April 3, 2007. After considering the comments we received, we made a few minor editorial changes and published the final 2007-2008 occupational mix survey on September 14, 2007 (72 FR 52568). OMB approved the survey without change on February 1, 2008 (OMB Control Number 0938-0907). The 2007-2008 Medicare occupational mix survey (Form CMS-10079 (2008)) is available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage, and through the fiscal intermediaries/MACs. Hospitals were required to submit their completed surveys to their fiscal intermediaries/MACs by September 2, 2008. The preliminary, unaudited 2007-2008 occupational mix survey data were released in early October 2008, along with the FY 2006 Worksheet S-3 wage data, for the FY 2010 wage index review and correction process.

2. Calculation of the Occupational Mix Adjustment for FY 2010

For FY 2010 (as we did for FY 2009), we are calculating the occupational mix adjustment factor using the following steps:

Step 1—For each hospital, determine the percentage of the total nursing category attributable to a nursing subcategory by dividing the nursing subcategory hours by the total nursing category's hours. Repeat this computation for each of the four nursing subcategories: Registered nurses; licensed practical nurses; nursing aides, orderlies, and attendants; and medical assistants.

Step 2—Determine a national average hourly rate for each nursing subcategory by dividing a subcategory's total salaries for all hospitals in the occupational mix survey database by the subcategory's total hours for all hospitals in the occupational mix survey database.

Step 3—For each hospital, determine an adjusted average hourly rate for each nursing subcategory by multiplying the percentage of the total nursing category (from Step 1) by the national average hourly rate for that nursing subcategory (from Step 2). Repeat this calculation for each of the four nursing subcategories.

Step 4—For each hospital, determine the adjusted average hourly rate for the total nursing category by summing the adjusted average hourly rate (from Step 3) for each of the nursing subcategories.

Step 5—Determine the national average hourly rate for the total nursing category by dividing total nursing category salaries for all hospitals in the occupational mix survey database by total nursing category hours for all hospitals in the occupational mix survey database.

Step 6—For each hospital, compute the occupational mix adjustment factor for the total nursing category by dividing the national average hourly rate for the total nursing category (from Step 5) by the hospital's adjusted average hourly rate for the total nursing category (from Step 4).

If the hospital's adjusted average hourly rate is less than the national average hourly rate (indicating the hospital employs a less costly mix of nursing employees), the occupational mix adjustment factor is greater than 1.0000. If the hospital's adjusted average hourly rate is greater than the national average hourly rate, the occupational mix adjustment factor is less than 1.0000.

Step 7—For each hospital, calculate the occupational mix adjusted salaries and wage-related costs for the total nursing category by multiplying the hospital's total salaries and wage-related costs (from Step 5 of the unadjusted wage index calculation in section III.G. of this preamble) by the percentage of the hospital's total workers attributable to the total nursing category (using the occupational mix survey data, this percentage is determined by dividing the hospital's total nursing category salaries by the hospital's total salaries for “nursing and all other”) and by the total nursing category's occupational mix adjustment factor (from Step 6 above).

The remaining portion of the hospital's total salaries and wage-related costs that is attributable to all other employees of the hospital is not adjusted by the occupational mix. A hospital's all other portion is determined by subtracting the hospital's nursing category percentage from 100 percent.

Step 8—For each hospital, calculate the total occupational mix adjusted salaries and wage-related costs for a hospital by summing the occupational mix adjusted salaries and wage-related costs for the total nursing category (from Step 7) and the portion of the hospital's salaries and wage-related costs for all other employees (from Step 7).

To compute a hospital's occupational mix adjusted average hourly wage, divide the hospital's total occupational mix adjusted salaries and wage-related costs by the hospital's total hours (from Step 4 of the unadjusted wage index calculation in section III.G. of this preamble).

Step 9—To compute the occupational mix adjusted average hourly wage for an urban or rural area, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the area, then sum the total hours for all hospitals in the area. Next, divide the area's occupational mix adjusted salaries and wage-related costs by the area's hours.

Step 10—To compute the national occupational mix adjusted average hourly wage, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the Nation, then sum the total hours for all hospitals in the Nation. Next, divide the national occupational mix adjusted salaries and wage-related costs by the national hours. The FY 2010 occupational mix adjusted national average hourly wage is $33.5268.

Step 11—To compute the occupational mix adjusted wage index, divide each area's occupational mix adjusted average hourly wage (Step 9) by the national occupational mix adjusted average hourly wage (Step 10).

Step 12—To compute the Puerto Rico specific occupational mix adjusted wage index, follow Steps 1 through 11 above. The FY 2010 occupational mix adjusted Puerto Rico-specific average hourly wage is $14.2555.

The table below is an illustrative example of the occupational mix adjustment.

BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

Because the occupational mix adjustment is required by statute, all hospitals that are subject to payments under the IPPS, or any hospital that would be subject to the IPPS if not granted a waiver, must complete the occupational mix survey, unless the hospital has no associated cost report wage data that are included in the proposed FY 2010 wage index. For the FY 2007-2008 survey, the response rate was 89 percent.

In computing the FY 2010 wage index, if a hospital did not respond to the occupational mix survey, or if we determined that a hospital's submitted data were too erroneous to include in the wage index, we assigned the hospital the average occupational mix adjustment for the labor market area. We believed this method had the least impact on the wage index for other hospitals in the area. For areas where no hospital submitted data for purposes of calculating the proposed occupational mix adjustment, we applied the national occupational mix factor of 1.0000 in calculating the area's FY 2010 occupational mix adjusted wage index. (We indicated in the FY 2008 and FY 2009 IPPS final rules that we reserve the right to apply a different approach in future years, including potentially penalizing nonresponsive hospitals (72 FR 47314).) In addition, if a hospital submitted a survey, but that survey data cannot be used because we determine it to be aberrant, we also assigned the hospital the average occupational mix adjustment for its labor market area. For example, if a hospital's individual nurse category average hourly wages were out of range (that is, unusually high or low), and the hospital did not provide sufficient documentation to explain the aberrancy, or the hospital did not submit any registered nurse salaries or hours data, we assigned the hospital the average occupational mix adjustment for the labor market area in which it is located.

In calculating the average occupational mix adjustment factor for a labor market area, we replicated Steps 1 through 6 of the calculation for the occupational mix adjustment. However, instead of performing these steps at the hospital level, we aggregated the data at the labor market area level. In following these steps, for example, for CBSAs that contain providers that did not submit occupational mix survey data, the occupational mix adjustment factor ranged from a low of 0.9252 (CBSA 17780, College Station-Bryan, TX), to a high of 1.0933 (CBSA 29700, Laredo, TX). Also, in computing a hospital's occupational mix adjusted salaries and wage-related costs for nursing employees (Step 7 of the calculation), in the absence of occupational mix survey data, we multiplied the hospital's total salaries and wage-related costs by the percentage of the area's total workers attributable to the area's total nursing category. For FY 2010, there are 7 CBSAs (that include 15 hospitals) for which we did not have occupational mix data for any of its hospitals. The CBSAs are:

  • CBSA 21940—Fajardo, PR (one hospital)
  • CBSA 22140—Farmington, NM (one hospital)
  • CBSA 25020—Guayama, PR (three hospitals)
  • CBSA 36140—Ocean City, NJ (one hospital)
  • CBSA 38660—Ponce, PR (six hospitals)
  • CBSA 41900—San German-Cabo Rojo, PR (two hospitals)
  • CBSA 49500—Yauco, PR (one hospital)

Since the FY 2007 IPPS final rule, we have periodically discussed applying a hospital-specific penalty to hospitals that fail to submit occupational mix survey data. (71 FR 48013 through 48014; 72 FR 47314 through 47315; and 73 FR 48580). During the FY 2008 rulemaking cycle, some commenters suggested a penalty equal to a 1- to 2-percent reduction in the hospital's wage index value or a set percentage of the standardized amount. During the FY 2009 rulemaking cycle, several commenters reiterated their view that full participation in the occupational mix survey is critical, and that CMS should develop a methodology that encourages hospitals to report occupational mix survey data but does not unfairly penalize neighboring hospitals. However, to date, we have not adopted a penalty for hospitals that fail to submit occupational mix data.

After review of the data for the proposed FY 2010 wage index, we became concerned about the increasing number of hospitals that fail to submit occupational mix data and the impact it may have on area wage indices. The survey response rate has dropped significantly from 93.8 percent for the 2003 survey to 90.7 percent for the 2006 survey and 90.3 percent for the 2007-2008 survey. In 40 CBSAs, the response rate was under 70 percent. In addition, for 50 areas, including New York-White Plains-Wayne, New York-New Jersey (35644), Oklahoma City, Oklahoma (36420), Rural Georgia (11), Rural Oklahoma (37), Dallas-Plano-Irving, TX (19124), Newark-Union, NJ-PA (35084), and Fort Worth-Arlington, TX (23104), the area response rate decreased 15 percent or more between the 2006 survey and the 2007-2008 survey. In all of Puerto Rico, only 21.6 percent of hospitals submitted 2007-2008 survey data. If we had proposed to apply a penalty for nonresponsive hospitals for the FY 2010 wage index, Puerto Rico hospitals would have been significantly adversely affected in both the proposed national and Puerto Rico-specific wage indices. We indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule that, while we were not proposing a penalty at that time, we would consider the public comments we previously received, as well as any public comments on the proposed rule, as we develop the proposed FY 2011 wage index. One approach that we will explore is to assign any nonresponsive hospital the occupational mix factor deriving from the survey that would result in the greatest negative adjustment to the hospital's wage index. We also will consider applying the same penalty to hospitals that submit unusable occupational mix data. Although we would apply this penalty factor in establishing the hospital's payment rate, we would not use this factor in computing the area's wage index. Rather, in computing the area wage index, we would apply the same methodology as described above (that is, assign the nonresponsive hospital the average occupational mix adjustment factor for the labor market area) so that other hospitals in the area are minimally impacted by the hospital's failure to submit occupational mix data. Again, we note that we reserve the right to penalize nonresponsive hospitals in the future. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comments on this matter and indicated that we would address this issue in next year's IPPS proposed rule.

Comment: Several commenters indicated that they share CMS' concerns about the increasing number of hospitals that fail to submit occupational mix data. The commenters contended that accuracy and fairness in the occupational mix adjustment will only be achieved through 100 percent hospital participation and agreed that CMS should consider a penalty for hospitals that do not participate. The commenters suggested that CMS should not simply substitute unfavorable occupational mix data for noncompliant hospitals because it could unfairly penalize other neighboring hospitals that are diligent in reporting their data. Some commenters recommended that CMS apply a percentage adjustment to the standardized rate or to the wage index that would reduce Medicare payment to nonparticipating hospitals, similar to the slight payment differential for hospitals failing to provide quality data. One commenter added that the penalty should be applied in a budget neutral manner. Another commenter suggested that the penalty should be applied to inpatient and outpatient payments. The commenters also recommended an appeal process that would allow hospitals to rectify the situation when the Medicare contractor or CMS determines that a hospital's data were not submitted, not acceptable, or unusable.

Response: We appreciate all of the comments and suggestions we received regarding a penalty for hospitals that do not participate in the occupational mix survey. We will consider these comments and other methods in developing a proposal for the FY 2011 IPPS proposed rule.

Comment: Several commenters gave suggestions for improving the next update of the occupational mix survey. (The 2007-2008 survey will expire with the FY 2012 wage index.) Suggestions included the following:

  • Use calendar year 2010 instead of the 12 months ending June 30, 2011.
  • Add unit secretaries because their duties are similar to the administrative functions of nurses and medical assistants.
  • Add an “all other nursing” category to capture all employees in the specified cost centers who are not in the specific categories (for example, emergency medical technicians and instrument technicians). This will help CMS and others to quantify the percent of nursing cost center employees that are not covered under the survey categories.
  • Revise the Medicare cost report to include the occupational mix survey data.

Response: Although we made no proposals in the FY 2010 proposed rule regarding the next update of the occupational mix survey, we appreciate receiving these comments and will consider them as we plan and develop the new survey. As with prior updates to the occupational mix survey, we will publish a notice of proposed data collection with a comment period, through the Paperwork Reduction Act process, in a future Federal Register.

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

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

1. Included Categories of Costs

The FY 2010 wage index includes the following categories of data associated with costs paid under the IPPS (as well as outpatient costs):

  • Salaries and hours from short-term, acute care hospitals (including paid lunch hours and hours associated with military leave and jury duty).
  • Home office costs and hours.
  • Certain contract labor costs and hours (which include direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services, and certain contract indirect patient care services (as discussed in the FY 2008 final rule with comment period (72 FR 47315)).
  • Wage-related costs, including pensions and other deferred compensation costs. We note that, on March 28, 2008, CMS published a technical clarification to the cost reporting instructions for pension and deferred compensation costs (sections 2140 through 2142.7 of the Provider Reimbursement Manual, Part I). These instructions are used for developing pension and deferred compensation costs for purposes of the wage index, as discussed in the instructions for Worksheet S-3, Part II, Lines 13 through 20 and in the FY 2006 IPPS final rule (70 FR 47369).

Comment: Several commenters addressed our policy for determining pension costs for the wage index. The commenters acknowledged that they have raised many of their arguments, such as arguments regarding retroactivity, before the Provider Reimbursement Review Board (PRRB).

Response: First, we did not propose to make any changes to, nor request public comments on, reporting pension costs for the wage index. Therefore, we consider the public comments received on this issue outside of the scope of this rulemaking. Further, we already discussed our policies for reporting pension costs in the FY 2006 IPPS final rule (70 FR 47369). We note that the policy for reporting pension costs for the wage index currently can be found in section 3605.2 of the Provider Reimbursement Manual (PRM), Part II, and section 2142 of PRM, Part I. We expect that purely legal arguments, such as arguments on retroactivity, will be addressed through the adjudication process.

2. Excluded Categories of Costs

Consistent with the wage index methodology for FY 2009, the wage index for FY 2010 also excludes the direct and overhead salaries and hours for services not subject to IPPS payment, such as SNF services, home health services, costs related to GME (teaching physicians and residents) and certified registered nurse anesthetists (CRNAs), and other subprovider components that are not paid under the IPPS. The FY 2010 wage index also excludes the salaries, hours, and wage-related costs of hospital-based rural health clinics (RHCs), and Federally qualified health centers (FQHCs) because Medicare pays for these costs outside of the IPPS (68 FR 45395). In addition, salaries, hours, and wage-related costs of CAHs are excluded from the wage index, for the reasons explained in the FY 2004 IPPS final rule (68 FR 45397).

3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals Under the IPPS

Data collected for the IPPS wage index are also currently used to calculate wage indices applicable to other providers, such as SNFs, home health agencies (HHAs), and hospices. In addition, they are used for prospective payments to IRFs, IPFs, and LTCHs, and for hospital outpatient services. We note that, in the IPPS rules, we do not address comments pertaining to the wage indices for non-IPPS providers, other than for LTCHs. (Beginning with this final rule, for the RY 2010, we are including in the same document updates to the LTCH PPS.) Such comments should be made in response to separate proposed rules for those providers.

F. Verification of Worksheet S-3 Wage Data

The wage data for the FY 2010 wage index were obtained from Worksheet S-3, Parts II and III of the FY 2006 Medicare cost reports. Instructions for completing Worksheet S-3, Parts II and III are in the Provider Reimbursement Manual (PRM), Part II, sections 3605.2 and 3605.3. The data file used to construct the wage index includes FY 2006 data submitted to us as of March 2, 2009. As in past years, we performed an intensive review of the wage data, mostly through the use of edits designed to identify aberrant data.

We asked our fiscal intermediaries/MACs to revise or verify data elements that resulted in specific edit failures. For the proposed FY 2010 wage index, we identified and excluded 34 providers with data that were too aberrant to include in the proposed wage index, although we stated that if data elements for some of these providers were corrected, we intended to include some of these providers in the FY 2010 final wage index. We instructed fiscal intermediaries/MACs to complete their data verification of questionable data elements and to transmit any changes to the wage data no later than April 15, 2009. The data for 2 of the hospitals identified in the proposed rule were resolved; however, the data for 8 additional hospitals were identified as too aberrant to include in the final wage index. Therefore, we determined that the data for 40 hospitals (that is, 34 − 2 + 8 = 40) should not be included in the FY 2010 final wage index.

In constructing the FY 2010 wage index, we included the wage data for facilities that were IPPS hospitals in FY 2006, inclusive of those facilities that have since terminated their participation in the program as hospitals, as long as those data did not fail any of our edits for reasonableness. We believe that including the wage data for these hospitals is, in general, appropriate to reflect the economic conditions in the various labor market areas during the relevant past period and to ensure that the current wage index represents the labor market area's current wages as compared to the national average of wages. However, we excluded the wage data for CAHs as discussed in the FY 2004 IPPS final rule (68 FR 45397). For this final rule, we removed 17 hospitals that converted to CAH status between February 18, 2008, the cut-off date for CAH exclusion from the FY 2009 wage index, and February 16, 2009, the cut-off date for CAH exclusion from the FY 2010 wage index. After removing hospitals with aberrant data and hospitals that converted to CAH status, the FY 2010 wage index is calculated based on 3,519 hospitals.

In the FY 2008 final rule with comment period (72 FR 47317) and the FY 2009 IPPS final rule (73 FR 48582), we discussed our policy for allocating a multicampus hospital's wages and hours data, by full-time equivalent (FTE) staff, among the different labor market areas where its campuses are located. During the FY 2010 wage index desk review process, we requested fiscal intermediaries/MACs to contact multicampus hospitals that had campuses in different labor market areas to collect the data for the allocation. As we proposed, the FY 2010 wage index in this final rule includes separate wage data for campuses of three multicampus hospitals.

For FY 2010, we are again allowing hospitals to use FTE or discharge data for the allocation of a multicampus hospital's wage data among the different labor market areas where its campuses are located. The Medicare cost report was updated in May 2008 to provide for the reporting of FTE data by campus for multicampus hospitals. Because the data from cost reporting periods that begin in FY 2008 will not be used in calculating the wage index until FY 2012, a multicampus hospital will still have the option, through the FY 2011 wage index, to use either FTE or discharge data for allocating wage data among its campuses by providing the information from the applicable cost reporting period to CMS through its fiscal intermediary/MAC. Two of the three multicampus hospitals chose to have their wage data allocated by their Medicare discharge data for the FY 2010 wage index. One of the hospitals provided FTE staff data for the allocation. The average hourly wage associated with each geographical location of a multicampus hospital is reflected in Table 2 of the Addendum to this final rule.

G. Method for Computing the FY 2010 Unadjusted Wage Index

The method used to compute the FY 2010 wage index without an occupational mix adjustment follows:

Step 1—As noted above, we are basing the FY 2010 wage index on wage data reported on the FY 2006 Medicare cost reports. We gathered data from each of the non-Federal, short-term, acute care hospitals for which data were reported on the Worksheet S-3, Parts II and III of the Medicare cost report for the hospital's cost reporting period beginning on or after October 1, 2005, and before October 1, 2006. In addition, we included data from some hospitals that had cost reporting periods beginning before October 2005 and reported a cost reporting period covering all of FY 2005. These data are included because no other data from these hospitals would be available for the cost reporting period described above, and because particular labor market areas might be affected due to the omission of these hospitals. However, we generally describe these wage data as FY 2005 data. We note that, if a hospital had more than one cost reporting period beginning during FY 2006 (for example, a hospital had two short cost reporting periods beginning on or after October 1, 2005, and before October 1, 2006), we included wage data from only one of the cost reporting periods, the longer, in the wage index calculation. If there was more than one cost reporting period and the periods were equal in length, we included the wage data from the later period in the wage index calculation.

Step 2—Salaries—The method used to compute a hospital's average hourly wage excludes certain costs that are not paid under the IPPS. (We note that, beginning with FY 2008 (72 FR 47315), we include Lines 22.01, 26.01, and 27.01 of Worksheet S-3, Part II for overhead services in the wage index. However, we note that the wages and hours on these lines are not incorporated into Line 101, Column 1 of Worksheet A, which, through the electronic cost reporting software, flows directly to Line 1 of Worksheet S-3, Part II. Therefore, the first step in the wage index calculation for FY 2010 is to compute a “revised” Line 1, by adding to the Line 1 on Worksheet S-3, Part II (for wages and hours respectively) the amounts on Lines 22.01, 26.01, and 27.01.) In calculating a hospital's average salaries plus wage-related costs, we subtract from Line 1 (total salaries) the GME and CRNA costs reported on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home office salaries reported on Line 7, and exclude salaries reported on Lines 8 and 8.01 (that is, direct salaries attributable to SNF services, home health services, and other subprovider components not subject to the IPPS). We also subtract from Line 1 the salaries for which no hours were reported. To determine total salaries plus wage-related costs, we add to the net hospital salaries the costs of contract labor for direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services (Lines 9 and 10), home office salaries and wage-related costs reported by the hospital on Lines 11 and 12, and nonexcluded area wage-related costs (Lines 13, 14, and 18).

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

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

Step 4—For each hospital reporting both total overhead salaries and total overhead hours greater than zero, we then allocate overhead costs to areas of the hospital excluded from the wage index calculation. First, we determine the ratio of excluded area hours (sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours (Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts of overhead salaries and hours to be allocated to excluded areas by multiplying the above ratio by the total overhead salaries and hours reported on Line 13 of Worksheet S-3, Part III. Next, we compute the amounts of overhead wage-related costs to be allocated to excluded areas using three steps: (1) We determine the ratio of overhead hours (Part III, Line 13 minus the sum of lines 22.01, 26.01, and 27.01) to revised hours excluding the sum of lines 22.01, 26.01, and 27.01 (Line 1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 22.01, 26.01, and 27.01). (We note that for the FY 2008 and subsequent wage index calculations, we are excluding the sum of lines 22.01, 26.01, and 27.01 from the determination of the ratio of overhead hours to revised hours because hospitals typically do not provide fringe benefits (wage-related costs) to contract personnel. Therefore, it is not necessary for the wage index calculation to exclude overhead wage-related costs for contract personnel. Further, if a hospital does contribute to wage-related costs for contracted personnel, the instructions for Lines 22.01, 26.01, and 27.01 require that associated wage-related costs be combined with wages on the respective contract labor lines.); (2) we compute overhead wage-related costs by multiplying the overhead hours ratio by wage-related costs reported on Part II, Lines 13, 14, and 18; and (3) we multiply the computed overhead wage-related costs by the above excluded area hours ratio. Finally, we subtract the computed overhead salaries, wage-related costs, and hours associated with excluded areas from the total salaries (plus wage-related costs) and hours derived in Steps 2 and 3.

Step 5—For each hospital, we adjust the total salaries plus wage-related costs to a common period to determine total adjusted salaries plus wage-related costs. To make the wage adjustment, we estimate the percentage change in the employment cost index (ECI) for compensation for each 30-day increment from October 14, 2003, through April 15, 2005, for private industry hospital workers from the BLS'Compensation and Working Conditions. We use the ECI because it reflects the price increase associated with total compensation (salaries plus fringes) rather than just the increase in salaries. In addition, the ECI includes managers as well as other hospital workers. This methodology to compute the monthly update factors uses actual quarterly ECI data and assures that the update factors match the actual quarterly and annual percent changes. We also note that, since April 2006 with the publication of March 2006 data, the BLS' ECI uses a different classification system, the North American Industrial Classification System (NAICS), instead of the Standard Industrial Codes (SICs), which no longer exist. We have consistently used the ECI as the data source for our wages and salaries and other price proxies in the IPPS market basket and, as we proposed, we are not making any changes to the usage for FY 2010. The factors used to adjust the hospital's data were based on the midpoint of the cost reporting period, as indicated below.

Midpoint of Cost Reporting Period Back to Top
After Before Adjustment factor
10/14/2005 11/15/2005 1.04966
11/14/2005 12/15/2005 1.04632
12/14/2005 01/15/2006 1.04296
01/14/2006 02/15/2006 1.03955
02/14/2006 03/15/2006 1.03610
03/14/2006 04/15/2006 1.03269
04/14/2006 05/15/2006 1.02936
05/14/2006 06/15/2006 1.02613
06/14/2006 07/15/2006 1.02298
07/14/2006 08/15/2006 1.01990
08/14/2006 09/15/2006 1.01688
09/14/2006 10/15/2006 1.01391
10/14/2006 11/15/2006 1.01098
11/14/2006 12/15/2006 1.00808
12/14/2006 01/15/2007 1.00526
01/14/2007 02/15/2007 1.00257
02/14/2007 03/15/2007 1.00000
03/14/2007 04/15/2007 0.99745

For example, the midpoint of a cost reporting period beginning January 1, 2006, and ending December 31, 2006, is June 30, 2006. An adjustment factor of 1.02298 would be applied to the wages of a hospital with such a cost reporting period. In addition, for the data for any cost reporting period that began in FY 2006 and covered a period of less than 360 days or more than 370 days, we annualize the data to reflect a 1-year cost report. Dividing the data by the number of days in the cost report and then multiplying the results by 365 accomplishes annualization.

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

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

Step 8—We add the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in the Nation and then divide the sum by the national sum of total hours from Step 4 to arrive at a national average hourly wage. Using the data as described above, the national average hourly wage (unadjusted for occupational mix) is $33.5491.

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

Step 10—Following the process set forth above, we develop a separate Puerto Rico-specific wage index for purposes of adjusting the Puerto Rico standardized amounts. (The national Puerto Rico standardized amount is adjusted by a wage index calculated for all Puerto Rico labor market areas based on the national average hourly wage as described above.) We add the total adjusted salaries plus wage-related costs (as calculated in Step 5) for all hospitals in Puerto Rico and divide the sum by the total hours for Puerto Rico (as calculated in Step 4) to arrive at an overall average hourly wage (unadjusted for occupational mix) of $14.2462 for Puerto Rico. For each labor market area in Puerto Rico, we calculate the Puerto Rico-specific wage index value by dividing the area average hourly wage (as calculated in Step 7) by the overall Puerto Rico average hourly wage.

Step 11—Section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State. The areas affected by this provision are identified in Table 4D-2 of the Addendum to this final rule.

In the FY 2005 IPPS final rule (69 FR 49109), we adopted the “imputed” floor as a temporary 3-year measure to address a concern by some individuals that hospitals in all-urban States were disadvantaged by the absence of rural hospitals to set a wage index floor in those States. The imputed floor was originally set to expire in FY 2007, but we extended it an additional year in the FY 2008 IPPS final rule with comment period (72 FR 47321). In the FY 2009 IPPS final rule (73 FR 48570 through 48574 and 48584), we extended the imputed floor for an additional 3 years, through FY 2011.

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

As discussed in section III.D. of this preamble, for FY 2010, we apply the occupational mix adjustment to 100 percent of the FY 2010 wage index. We calculated the occupational mix adjustment using data from the 2007-2008 occupational mix survey data, using the methodology described in section III.D.3. of this preamble.

Using the occupational mix survey data and applying the occupational mix adjustment to 100 percent of the FY 2010 wage index results in a national average hourly wage of $33.5268 and a Puerto Rico-specific average hourly wage of $14.2555. After excluding data of hospitals that either submitted aberrant data that failed critical edits, or that do not have FY 2006 Worksheet S-3 cost report data for use in calculating the FY 2010 wage index, we calculated the FY 2010 wage index using the occupational mix survey data from 3,178 hospitals. Using the Worksheet S-3 cost report data of 3,519 hospitals and occupational mix survey data from 3,178 hospitals represents a 90.3 percent survey response rate. The FY 2010 national average hourly wages for each occupational mix nursing subcategory as calculated in Step 2 of the occupational mix calculation are as follows:

Occupational mix nursing subcategory Average hourly wage
National RN $36.071788464
National LPN and Surgical Technician 20.882610908
National Nurse Aide, Orderly, and Attendant 14.619113985
National Medical Assistant 16.486068445
National Nurse Category 30.482374867

The national average hourly wage for the entire nurse category as computed in Step 5 of the occupational mix calculation is $30.482374867. Hospitals with a nurse category average hourly wage (as calculated in Step 4) of greater than the national nurse category average hourly wage receive an occupational mix adjustment factor (as calculated in Step 6) of less than 1.0. Hospitals with a nurse category average hourly wage (as calculated in Step 4) of less than the national nurse category average hourly wage receive an occupational mix adjustment factor (as calculated in Step 6) of greater than 1.0.

Based on the July 2007 through June 2008 occupational mix survey data, we determined (in Step 7 of the occupational mix calculation) that the national percentage of hospital employees in the nurse category is 44.31 percent, and the national percentage of hospital employees in the all other occupations category is 55.69 percent. At the CBSA level, the percentage of hospital employees in the nurse category ranged from a low of 29.08 percent in one CBSA, to a high of 70.76 percent in another CBSA.

We compared the FY 2010 occupational mix adjusted wage indices for each CBSA to the unadjusted wage indices for each CBSA. As a result of applying the occupational mix adjustment to the wage data, the wage index values for 205 (52.4 percent) urban areas and 32 (68.1 percent) rural areas will increase. One hundred and six (27.1 percent) urban areas will increase by 1 percent or more, and 5 (1.3 percent) urban areas will increase by 5 percent or more. Nineteen (40.4 percent) rural areas will increase by 1 percent or more, and no rural areas will increase by 5 percent or more. However, the wage index values for 186 (47.6 percent) urban areas and 14 (29.8 percent) rural areas will decrease. Eighty-eight (22.5 percent) urban areas will decrease by 1 percent or more, and no urban area will decrease by 5 percent or more. Seven (14.9 percent) rural areas will decrease by 1 percent or more, and no rural areas will decrease by 5 percent or more. The largest positive impacts are 7.83 percent for an urban area and 2.97 percent for a rural area. The largest negative impacts are 3.90 percent for an urban area and 2.32 percent for a rural area. One rural area is unaffected. These results indicate that a larger percentage of rural areas (68.1 percent) benefit from the occupational mix adjustment than do urban areas (52.4 percent). While these results are more positive overall for rural areas than under the previous occupational mix adjustment that used survey data from 2006, approximately one-third (29.8 percent) of rural CBSAs will still experience a decrease in their wage indices as a result of the occupational mix adjustment.

We also compared the FY 2010 wage data adjusted for occupational mix from the 2007-2008 survey to the FY 2010 wage data adjusted for occupational mix from the 2006 survey. This analysis illustrates the effect on area wage indices of using the 2007-2008 survey data compared to the 2006 survey data; that is, it shows whether hospitals' wage indices are increasing or decreasing under the current survey data as compared to the prior survey data. Our analysis shows that the FY 2010 wage index values for 185 (47.3 percent) urban areas and 19 (40.4 percent) rural areas will increase. Sixty-two (15.9 percent) urban areas will increase by 1 percent or more, and no urban areas will increase by 5 percent or more. One (2.1 percent) rural area will increase by 1 percent or more, and no rural areas will increase by 5 percent or more. However, the wage index values for 202 (51.7 percent) urban areas and 28 (59.6 percent) rural areas will decrease using the 2007-2008 data. Fifty-five (14.1 percent) urban areas will decrease by 1 percent or more, and one (0.26 percent) urban area will decrease by 5 percent or more. Three (6.4 percent) rural areas will decrease by 1 percent or more, and no rural areas will decrease by 5 percent or more. The largest positive impacts using the 2007-2008 data compared to the 2006 data are 4.32 percent for an urban area and 2.34 percent for a rural area. The largest negative impacts are 6.46 percent for an urban area and 4.40 percent for a rural area. Four urban areas and no rural areas will be unaffected. These results indicate that a larger percentage of urban areas (47.3 percent) will benefit from the 2007-2008 occupational mix survey as compared to the 2006 survey than will rural areas (40.4 percent). Further, the wage indices of more CBSAs overall (52.5 percent) will be decreasing due to application of the 2007-2008 occupational mix survey data as compared to the 2006 survey data to the wage index. However, as noted in the analysis above, a greater percentage of rural areas (68.1 percent) will benefit from the application of the occupational mix adjustment than will urban areas.

The wage index values for FY 2010 (except those for hospitals receiving wage index adjustments under section 1886(d)(13) of the Act) included in Tables 4A, 4B, 4C, and 4F of the Addendum to this final rule include the occupational mix adjustment.

Tables 3A and 3B in the Addendum to this final rule list the 3-year average hourly wage for each labor market area before the redesignation of hospitals based on FYs 2008, 2009, and 2010 cost reporting periods. Table 3A lists these data for urban areas and Table 3B lists these data for rural areas. In addition, Table 2 in the Addendum to this final rule includes the adjusted average hourly wage for each hospital from the FY 2004 and FY 2005 cost reporting periods, as well as the FY 2006 period used to calculate the FY 2010 wage index. The 3-year averages are calculated by dividing the sum of the dollars (adjusted to a common reporting period using the method described previously) across all 3 years, by the sum of the hours. If a hospital is missing data for any of the previous years, its average hourly wage for the 3-year period is calculated based on the data available during that period. The average hourly wages in Tables 2, 3A, and 3B in the Addendum to this final rule include the occupational mix adjustment. The wage index values in Tables 4A, 4B, 4C, and 4D-1 also include the State-specific rural floor and imputed floor budget neutrality adjustments.

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General

Under section 1886(d)(10) of the Act, the MGCRB considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. Hospitals must apply to the MGCRB to reclassify 13 months prior to the start of the fiscal year for which reclassification is sought (generally by September 1). Generally, hospitals must be proximate to the labor market area to which they are seeking reclassification and must demonstrate characteristics similar to hospitals located in that area. The MGCRB issues its decisions by the end of February for reclassifications that become effective for the following fiscal year (beginning October 1). The regulations applicable to reclassifications by the MGCRB are located in 42 CFR 412.230 through 412.280.

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

Section 304(b) of Public Law 106-554 provides that the Secretary must establish a mechanism under which a statewide entity may apply to have all of the geographic areas in the State treated as a single geographic area for purposes of computing and applying a single wage index, for reclassifications beginning in FY 2003. The implementing regulations for this provision are located at 42 CFR 412.235.

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

2. Effects of Reclassification/Redesignation

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

  • If including the wage data for the redesignated hospitals would reduce the wage index value for the area to which the hospitals are redesignated by 1 percentage point or less, the area wage index value determined exclusive of the wage data for the redesignated hospitals applies to the redesignated hospitals.
  • If including the wage data for the redesignated hospitals reduces the wage index value for the area to which the hospitals are redesignated by more than 1 percentage point, the area wage index determined inclusive of the wage data for the redesignated hospitals (the combined wage index value) applies to the redesignated hospitals.
  • If including the wage data for the redesignated hospitals increases the wage index value for the urban area to which the hospitals are redesignated, both the area and the redesignated hospitals receive the combined wage index value. Otherwise, the hospitals located in the urban area receive a wage index excluding the wage data of hospitals redesignated into the area.

Rural areas whose wage index values would be reduced by excluding the wage data for hospitals that have been redesignated to another area continue to have their wage index values calculated as if no redesignation had occurred (otherwise, redesignated rural hospitals are excluded from the calculation of the rural wage index). The wage index value for a redesignated rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located.

CMS also has adopted the following policies:

  • The wage data for a reclassified urban hospital is included in both the wage index calculation of the urban area to which the hospital is reclassified (subject to the rules described above) and the wage index calculation of the urban area where the hospital is physically located.
  • In cases where hospitals have reclassified to rural areas, such as urban hospitals reclassifying to rural areas under 42 CFR 412.103, the hospital's wage data are: (a) included in the rural wage index calculation, unless doing so would reduce the rural wage index; and (b) included in the urban area where the hospital is physically located. The effect of this policy, in combination with the statutory requirement at section 1886(d)(8)(C)(ii) of the Act, is that rural areas may receive a wage index based upon the highest of: (1) Wage data from hospitals geographically located in the rural area; (2) wage data from hospitals geographically located in the rural area, but excluding all data associated with hospitals reclassifying out of the rural area under section 1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) wage data associated with hospitals geographically located in the area plus all hospitals reclassified into the rural area.

In addition, in accordance with the statutory language referring to “hospitals” in the plural under sections 1886(d)(8)(C)(i) and 1886(d)(8)(C)(ii) of the Act, our longstanding policy is to consider reclassified hospitals as a group when deciding whether to include or exclude them from both urban and rural wage index calculations.

3. FY 2010 MGCRB Reclassifications

Under section 1886(d)(10) of the Act, the MGCRB considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. The specific procedures and rules that apply to the geographic reclassification process are outlined in 42 CFR 412.230 through 412.280.

At the time this final rule was constructed, the MGCRB had completed its review of FY 2010 reclassification requests. Based on such reviews, there were 292 hospitals approved for wage index reclassifications by the MGCRB for FY 2010. Because MGCRB wage index reclassifications are effective for 3 years, for FY 2010, hospitals reclassified during FY 2008 or FY 2009 are eligible to continue to be reclassified to a particular labor market area based on such prior reclassifications. There were 313 hospitals approved for wage index reclassifications in FY 2008 and 271 hospitals approved for wage index reclassifications in FY 2009. Of all of the hospitals approved for reclassification for FY 2008, FY 2009, and FY 2010, based upon the review at the time of this final rule, 861 hospitals are in a reclassification status for FY 2010.

Under 42 CFR 412.273, hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of a proposed rule. Generally stated, the request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2010 had to be received by the MGCRB within 45 days of the publication of the FY 2010 IPPS proposed rule. Hospitals may also cancel prior reclassification withdrawals or terminations in certain circumstances. For further information about withdrawing, terminating, or canceling a previous withdrawal or termination of a 3-year reclassification for wage index purposes, we refer the reader to 42 CFR 412.273, as well as the FY 2002 IPPS final rule (66 FR 39887) and the FY 2003 IPPS final rule (67 FR 50065).

Changes to the wage index that result from withdrawals of requests for reclassification, wage index corrections, appeals, and the Administrator's review process for FY 2010 are incorporated into the wage index values published in this FY 2010 IPPS/RY 2010 LTCH PPS final rule. These changes affect not only the wage index value for specific geographic areas, but also the wage index value redesignated hospitals receive; that is, whether they receive the wage index that includes the data for both the hospitals already in the area and the redesignated hospitals. Further, the wage index value for the area from which the hospitals are redesignated may be affected.

Applications for FY 2011 reclassifications are due to the MGCRB by September 1, 2009 (the first working day of September 2009). We note that this is also the deadline for canceling a previous wage index reclassification withdrawal or termination under 42 CFR 412.273(d). Applications and other information about MGCRB reclassifications may be obtained, beginning in mid-July 2009, via the CMS Internet Web site at: http://cms.hhs.gov/MGCRB/02_instructions_and_applications.asp, or by calling the MGCRB at (410) 786-1174. The mailing address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

Comment: Several commenters suggested that CMS lower the employment interchange measure (EIM) from 15 percent to 7.5 percent. EIM is a measure of ties between two adjacent entities, used when defining Combined Statistical Areas (CSAs). The EIM is calculated as the sum of the percentage of employed residents commuting from the smaller area to the larger area and the percentage of employment in the smaller area accounted for by workers residing in the larger area. Hospitals seeking a group reclassification from one urban area to another must be located in the same CSA (or CBSA where relevant) as the urban area to which they seek redesignation, as stated in § 412.234(a)(3)(iv) of the regulations.

Response: We are not adopting the commenters' recommendation. First, we have a longstanding policy of using OMB's statistical area definitions to set our labor market areas, and OMB does not modify the statistical area definitions to meet the requirements of any nonstatistical program. Second, such a change in the EIM could significantly reduce the wage indices of some reclassified hospitals. In analyzing the implications of the EIM change suggested by the commenters, we reviewed 31 of 127 CSAs (these are the 31 areas for which the Office of Personnel Management uses a 7.5 percent EIM in determining locality payment adjustments under the general schedule for Federal employees). The result was that the change would allow a total of at least 57 hospitals in 21 counties to reclassify, and while a national budget neutrality adjustment would affect all hospitals equally, the additional reclassifications could significantly reduce the wage index applied to reclassified hospitals in certain areas—in some cases, by as much as 10 percent as a result of the additional reclassifications. These effects could be even more significant were the EIM changed for all counties nationally.

4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act

Section 1886(d)(8)(B) of the Act requires us to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA if certain criteria are met. Effective beginning FY 2005, we use OMB's 2000 CBSA standards and the Census 2000 data to identify counties in which hospitals qualify under section 1886(d)(8)(B) of the Act to receive the wage index of the urban area. Hospitals located in these counties have been known as “Lugar” hospitals and the counties themselves are often referred to as “Lugar” counties. We provide the FY 2010 chart below with the listing of the rural counties containing the hospitals designated as urban under section 1886(d)(8)(B) of the Act. For discharges occurring on or after October 1, 2009, hospitals located in the rural county in the first column of this chart will be redesignated for purposes of using the wage index of the urban area listed in the second column.

Rural Counties Containing Hospitals Redesignated as Urban Under Section 1886(d )(8)(B) of the Act Back to Top
Rural county CBSA
[Based on CBSAs and Census 2000 data]
Cherokee, AL Rome, GA.
Macon, AL Auburn-Opelika, AL.
Talladega, AL Anniston-Oxford, AL.
Hot Springs, AR Hot Springs, AR.
Windham, CT Hartford-West Hartford-East Hartford, CT.
Bradford, FL Gainesville, FL.
Hendry, FL West Palm Beach-Boca Raton-Boynton, FL.
Levy, FL Gainesville, FL.
Walton, FL Fort Walton Beach-Crestview-Destin, FL.
Banks, GA Gainesville, GA.
Chattooga, GA Chattanooga, TN-GA.
Jackson, GA Atlanta-Sandy Springs-Marietta, GA.
Lumpkin, GA Atlanta-Sandy Springs-Marietta, GA.
Morgan, GA Atlanta-Sandy Springs-Marietta, GA.
Peach, GA Macon, GA.
Polk, GA Atlanta-Sandy Springs-Marietta, GA.
Talbot, GA Columbus, GA-AL.
Bingham, ID Idaho Falls, ID.
Christian, IL Springfield, IL.
DeWitt, IL Bloomington-Normal, IL.
Iroquois, IL Kankakee-Bradley, IL.
Logan, IL Springfield, IL.
Mason, IL Peoria, IL.
Ogle, IL Rockford, IL.
Clinton, IN Lafayette, IN.
Henry, IN Indianapolis-Carmel, IN.
Spencer, IN Evansville, IN-KY.
Starke, IN Gary, IN.
Warren, IN Lafayette, IN.
Boone, IA Ames, IA.
Buchanan, IA Waterloo-Cedar Falls, IA.
Cedar, IA Iowa City, IA.
Allen, KY Bowling Green, KY.
Assumption Parish, LA Baton Rouge, LA.
St. James Parish, LA Baton Rouge, LA.
Allegan, MI Holland-Grand Haven, MI.
Montcalm, MI Grand Rapids-Wyoming, MI.
Oceana, MI Muskegon-Norton Shores, MI.
Shiawassee, MI Lansing-East Lansing, MI.
Tuscola, MI Saginaw-Saginaw Township North, MI.
Fillmore, MN Rochester, MN.
Dade, MO Springfield, MO.
Pearl River, MS Gulfport-Biloxi, MS.
Caswell, NC Burlington, NC.
Davidson, NC Greensboro-High Point, NC.
Granville, NC Durham, NC.
Harnett, NC Raleigh-Cary, NC.
Lincoln, NC Charlotte-Gastonia-Concord, NC-SC.
Polk, NC Spartanburg, SC.
Los Alamos, NM Santa Fe, NM.
Lyon, NV Carson City, NV.
Cayuga, NY Syracuse, NY.
Columbia, NY Albany-Schenectady-Troy, NY.
Genesee, NY Rochester, NY.
Greene, NY Albany-Schenectady-Troy, NY.
Schuyler, NY Ithaca, NY.
Sullivan, NY Poughkeepsie-Newburgh-Middletown, NY.
Wyoming, NY Buffalo-Niagara Falls, NY.
Ashtabula, OH Cleveland-Elyria-Mentor, OH.
Champaign, OH Springfield, OH.
Columbiana, OH Youngstown-Warren-Boardman, OH-PA.
Cotton, OK Lawton, OK.
Linn, OR Corvallis, OR.
Adams, PA York-Hanover, PA.
Clinton, PA Williamsport, PA.
Greene, PA Pittsburgh, PA.
Monroe, PA Allentown-Bethlehem-Easton, PA-NJ.
Schuylkill, PA Reading, PA.
Susquehanna, PA Binghamton, NY.
Clarendon, SC Sumter, SC.
Lee, SC Sumter, SC.
Oconee, SC Greenville, SC.
Union, SC Spartanburg, SC.
Meigs, TN Cleveland, TN.
Bosque, TX Waco, TX.
Falls, TX Waco, TX.
Fannin, TX Dallas-Plano-Irving, TX.
Grimes, TX College Station-Bryan, TX.
Harrison, TX Longview, TX.
Henderson, TX Dallas-Plano-Irving, TX.
Milam, TX Austin-Round Rock, TX.
Van Zandt, TX Dallas-Plano-Irving, TX.
Willacy, TX Brownsville-Harlingen, TX.
Buckingham, VA Charlottesville, VA.
Floyd, VA Blacksburg-Christiansburg-Radford, VA.
Middlesex, VA Virginia Beach-Norfolk-Newport News, VA.
Page, VA Harrisonburg, VA.
Shenandoah, VA Winchester, VA-WV.
Island, WA Seattle-Bellevue-Everett, WA.
Mason, WA Olympia, WA.
Wahkiakum, WA Longview, WA.
Jackson, WV Charleston, WV.
Roane, WV Charleston, WV.
Green, WI Madison, WI.
Green Lake, WI Fond du Lac, WI.
Jefferson, WI Milwaukee-Waukesha-West Allis, WI.
Walworth, WI Milwaukee-Waukesha-West Allis, WI.

As in the past, hospitals redesignated under section 1886(d)(8)(B) of the Act are also eligible to be reclassified to a different area by the MGCRB. Affected hospitals were permitted to compare the reclassified wage index for the labor market area in Table 4C in the Addendum to the proposed rule into which they would be 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 could have withdrawn from an MGCRB reclassification within 45 days of the publication of the FY 2010 proposed rule.

Comment: Several commenters suggested that CMS allow Lugar hospitals the ability to waive their Lugar status once and have the waiver be effective until the hospital chooses to withdraw.

Response: 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 to which the greatest number of workers in the county commute. Hospitals satisfying the criteria under section 1886(d)(8)(B) of the Act are treated as urban hospitals and are also eligible for reclassification through the MGCRB or may waive their Lugar status if eligible to receive the out-migration adjustment. Once a hospital is listed as a Lugar hospital under section 1886(d)(8)(B) of the Act, it is treated as such until the hospital waives its Lugar status. Hospitals can only waive Lugar status if they are in a county that is eligible to receive an out-migration adjustment. A rural hospital that is redesignated as Lugar, or urban, that wishes to stay rural can apply to be reclassified back to rural status under § 412.103 of the regulations. Otherwise, hospitals that are redesignated as Lugar can only waive Lugar status if they are eligible for the out-migration adjustment.

The wage index is updated annually and, as such, hospitals wishing to waive their Lugar redesignation in order to receive the rural area wage index plus the out-migration adjustment must request the waiver annually. Each year, the preamble of the IPPS proposed rule is specific that hospitals redesignated under section 1886(d)(8) of the Act or reclassified under section 1886(10) of the Act will be deemed to have chosen to retain their redesignation or reclassification, and that hospitals redesignated under section 1886(d)(8) of the Act will be deemed to have waived the out-migration adjustment, unless they explicitly notify CMS within 45 days from the publication of the proposed rule that they elect to receive the out-migration adjustment instead. For example, we refer readers to the FY 2009 IPPS proposed rule (73 FR 23635). The introductory text of Table 4J in the Addendum to the rule also reminds hospitals of the annual process.

If a hospital chooses to waive its Lugar status within 45 days of the proposed rule, each year it must send a written request to CMS at the following address: Division of Acute Care, Center for Medicare Management, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244, Attn: Brian Slater; and must send a copy to the MGCRB. The mailing address for the MGCRB is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

5. Reclassifications Under Section 1886(d)(8)(B) of the Act

As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar hospitals are treated like reclassified hospitals for purposes of determining their applicable wage index and receive the reclassified wage index for the urban area to which they have been redesignated. Because Lugar hospitals are treated like reclassified hospitals, when they are seeking reclassification by the MGCRB, they are subject to the rural reclassification rules set forth at 42 CFR 412.230. The procedural rules set forth at § 412.230 list the criteria that a hospital must meet in order to reclassify as a rural hospital. Lugar hospitals are subject to the proximity criteria and payment thresholds that apply to rural hospitals. Specifically, the hospital must be no more than 35 miles from the area to which it seeks reclassification (§ 412.230(b)(1)); and the hospital must show that its average hourly wage is at least 106 percent of the average hourly wage of all other hospitals in the area in which the hospital is located (§ 412.230(d)(1)(iii)(C)). In accordance with policy adopted in the FY 2009 IPPS final rule (73 FR 48568 and 48569), beginning with reclassifications for the FY 2010 wage index, a Lugar hospital must also demonstrate that its average hourly wage is equal to at least 84 percent (for FY 2010 reclassifications) and 86 percent (for reclassifications for FY 2011 and subsequent fiscal years) of the average hourly wage of hospitals in the area to which it seeks redesignation (§ 412.230(d)(1)(iv)(C)).

Hospitals not located in a Lugar county seeking reclassification to the urban area where the Lugar hospitals have been redesignated are not permitted to measure to the Lugar county to demonstrate proximity (no more than 15 miles for an urban hospital, and no more than 35 miles for a rural hospital or the closest urban or rural area for RRCs or SCHs) in order to be reclassified to such urban area. These hospitals must measure to the urban area exclusive of the Lugar County to meet the proximity or nearest urban or rural area requirement. We treat New England deemed counties in a manner consistent with how we treat Lugar counties. (We refer readers to FY 2008 IPPS final rule with comment period (72 FR 47337) for a discussion of this policy.)

6. Reclassifications Under Section 508 of Public Law 108-173

Section 508 of Public Law 108-173 allowed certain qualifying hospitals to receive wage index reclassifications and assignments that they otherwise would not have been eligible to receive under the law. Although section 508 originally was scheduled to expire after a 3-year period, Congress extended the provision several times, as well as certain special exceptions that would have otherwise expired. For a discussion of the original section 508 provision and its various extensions, we refer readers to the FY 2009 IPPS final rule (73 FR 48588). The most recent extension of the provision was included in section 124 of Public Law 110-275 (MIPPA). Section 124 extended, through FY 2009, section 508 reclassifications as well as certain special exceptions. Because the latest extension of these provisions expires on September 30, 2009, and will not be applicable in FY 2010, we are not making any changes related to these provisions in this final rule.

J. FY 2010 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

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

Hospitals located in counties that qualify for the wage index adjustment are to receive an increase in the wage index that is equal to the average of the differences between the wage indices of the labor market area(s) with higher wage indices and the wage index of the resident county, weighted by the overall percentage of hospital workers residing in the qualifying county who are employed in any labor market area with a higher wage index. Beginning with the FY 2008 wage index, we use post-reclassified wage indices when determining the out-migration adjustment (72 FR 47339).

For the FY 2010 wage index, we calculated the out-migration adjustment using the same formula described in the FY 2005 IPPS final rule (69 FR 49064), with the addition of using the post-reclassified wage indices, to calculate the out-migration adjustment. This adjustment is calculated as follows:

Step 1—Subtract the wage index for the qualifying county from the wage index of each of the higher wage area(s) to which hospital workers commute.

Step 2—Divide the number of hospital employees residing in the qualifying county who are employed in such higher wage index area by the total number of hospital employees residing in the qualifying county who are employed in any higher wage index area. For each of the higher wage index areas, multiply this result by the result obtained in Step 1.

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

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

These adjustments will be effective for each county for a period of 3 fiscal years. For example, hospitals that received the adjustment for the first time in FY 2009 will be eligible to retain the adjustment for FY 2010. For hospitals in newly qualified counties, adjustments to the wage index are effective for 3 years, beginning with discharges occurring on or after October 1, 2009.

Hospitals receiving the wage index adjustment under section 1886(d)(13)(F) of the Act are not eligible for reclassification under sections 1886(d)(8) or (d)(10) of the Act unless they waive the out-migration adjustment. Consistent with our FY 2005, 2006, 2007, 2008, and 2009 IPPS final rules, we are specifying that hospitals redesignated under section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) of the Act will be deemed to have chosen to retain their redesignation or reclassification. Section 1886(d)(10) hospitals that wished to receive the out-migration adjustment, rather than their reclassification adjustment, had to follow the termination/withdrawal procedures specified in 42 CFR 412.273 and section III.I.3. of the preamble of the proposed rule. Otherwise, they were deemed to have waived the out-migration adjustment. Hospitals redesignated under section 1886(d)(8) of the Act were deemed to have waived the out-migration adjustment unless they explicitly notified CMS within 45 days from the publication of the proposed rule that they elected to receive the out-migration adjustment instead.

Table 4J in the Addendum to this final rule lists the out-migration wage index adjustments for FY 2010. Hospitals that are not otherwise reclassified or redesignated under section 1886(d)(8) or section 1886(d)(10) of the Act will automatically receive the listed adjustment. In accordance with the procedures discussed above, redesignated/reclassified hospitals will be deemed to have waived the out-migration adjustment unless CMS was otherwise notified within the necessary timeframe. In addition, hospitals eligible to receive the out-migration wage index adjustment and that withdrew their application for reclassification will automatically receive the wage index adjustment listed in Table 4J in the Addendum to this final rule.

Comment: One commenter requested that CMS allow hospitals to submit their own commuting data to apply for the out-migration adjustment.

Response: First, we did not propose any changes on commuting data for purposes of calculating the out-migration adjustment. Therefore, we believe this comment is outside the scope of the proposed rule. In addition, as we stated in the FY 2005 IPPS final rule (69 FR 49063), because the adjustment is based on the number of hospital workers in a county who commute to other higher wage areas, we believe it would be extremely problematic for individual hospitals to track and submit the data necessary for determining the out-migration adjustment. A hospital could not simply survey its own employees to obtain these necessary data, but would have to survey all hospital workers who live in the county where the hospital is located and commute to hospitals in other higher wage index areas.

K. Process for Requests for Wage Index Data Corrections

The preliminary, unaudited Worksheet S-3 wage data and occupational mix survey data files for the FY 2010 wage index were made available on October 6, 2008, through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.

In the interest of meeting the data needs of the public, beginning with the proposed FY 2009 wage index, we post an additional public use file on our Web site that reflects the actual data that are used in computing the proposed wage index. The release of this new file does not alter the current wage index process or schedule. We notified the hospital community of the availability of these data as we do with the current public use wage data files through our Hospital Open Door forum. We encouraged hospitals to sign up for automatic notifications of information about hospital issues and the scheduling of the Hospital Open Door forums at: http://www.cms.hhs.gov/OpenDoorForums/.

In a memorandum dated October 6, 2008, we instructed all fiscal intermediaries/MACs to inform the IPPS hospitals they service of the availability of the wage index data files and the process and timeframe for requesting revisions (including the specific deadlines listed below). We also instructed the fiscal intermediaries/MACs to advise hospitals that these data were also made available directly through their representative hospital organizations.

If a hospital wished to request a change to its data as shown in the October 6, 2008 wage and occupational mix data files, the hospital was to submit corrections along with complete, detailed supporting documentation to its fiscal intermediary/MAC by December 8, 2008. Hospitals were notified of this deadline and of all other possible deadlines and requirements, including the requirement to review and verify their data as posted on the preliminary wage index data files on the Internet, through the October 6, 2008 memorandum referenced above.

In the October 6, 2008 memorandum, we also specified that a hospital requesting revisions to its first and/or second quarter occupational mix survey data was to copy its record(s) from the CY 2007-2008 occupational mix preliminary files posted to our Web site in October, highlight the revised cells on its spreadsheet, and submit its spreadsheet(s) and complete documentation to its fiscal intermediary/MAC no later than December 8, 2008.

The fiscal intermediaries/MACs notified the hospitals by mid-February 2009 of any changes to the wage index data as a result of the desk reviews and the resolution of the hospitals' early-December revision requests. The fiscal intermediaries/MACs also submitted the revised data to CMS by mid-February 2009. CMS published the proposed wage index public use files that included hospitals' revised wage index data on February 23, 2009. In a memorandum also dated February 23, 2009, we instructed fiscal intermediaries/MACs to notify all hospitals regarding the availability of the proposed wage index public use files and the criteria and process for requesting corrections and revisions to the wage index data. Hospitals had until March 10, 2009, to submit requests to the fiscal intermediaries/MACs for reconsideration of adjustments made by the fiscal intermediaries/MACs as a result of the desk review, and to correct errors due to CMS's or the fiscal intermediary's (or, if applicable, the MAC's) mishandling of the wage index data. Hospitals also were required to submit sufficient documentation to support their requests.

After reviewing requested changes submitted by hospitals, fiscal intermediaries/MACs were required to transmit any additional revisions resulting from the hospitals' reconsideration requests by April 15, 2009. The deadline for a hospital to request CMS intervention in cases where the hospital disagrees with the fiscal intermediary's (or, if applicable, the MAC's) policy interpretations was April 22, 2009.

Hospitals were given the opportunity to examine Table 2 in the Addendum to the proposed rule. Table 2 in the Addendum to the proposed rule contained each hospital's adjusted average hourly wage used to construct the wage index values for the past 3 years, including the FY 2006 data used to construct the proposed FY 2010 wage index. We noted that the hospital average hourly wages shown in Table 2 only reflect changes made to a hospital's data and transmitted to CMS by March 2, 2009.

We released the final wage index data public use files in early May 2009 on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. The May 2009 public use files were made available solely for the limited purpose of identifying any potential errors made by CMS or the fiscal intermediary/MAC in the entry of the final wage index data that resulted from the correction process described above (revisions submitted to CMS by the fiscal intermediaries/MACs by April 15, 2009). If, after reviewing the May 2009 final files, a hospital believed that its wage or occupational mix data were incorrect due to a fiscal intermediary/MAC or CMS error in the entry or tabulation of the final data, the hospital had to send a letter to both its fiscal intermediary/MAC and CMS that outlined why the hospital believed an error existed and that provided all supporting information, including relevant dates (for example, when it first became aware of the error). CMS and the fiscal intermediaries (or, if applicable, the MACs) had to receive these requests no later than June 8, 2009.

Each request also had to be sent to the fiscal intermediary/MAC. The fiscal intermediary/MAC reviewed requests upon receipt and contacted CMS immediately to discuss any findings.

At this point in the process, that is, after the release of the May 2009 wage index data files, changes to the wage and occupational mix data were only made in those very limited situations involving an error by the fiscal intermediary/MAC or CMS that the hospital could not have known about before its review of the final wage index data files. Specifically, neither the fiscal intermediary/MAC nor CMS approved the following types of requests:

  • Requests for wage index data corrections that were submitted too late to be included in the data transmitted to CMS by fiscal intermediaries or the MACs on or before April 15, 2009.
  • Requests for correction of errors that were not, but could have been, identified during the hospital's review of the February 23, 2009 wage index public use files.
  • Requests to revisit factual determinations or policy interpretations made by the fiscal intermediary or the MAC or CMS during the wage index data correction process.

Verified corrections to the wage index data received timely by CMS and the fiscal intermediaries or the MACs (that is, by June 8, 2009) were incorporated into the final wage index in this FY 2010 IPPS/RY 2010 LTCH PPS final rule, which will be effective October 1, 2009.

We created the processes described above to resolve all substantive wage index data correction disputes before we finalize the wage and occupational mix data for the FY 2010 payment rates. Accordingly, hospitals that did not meet the procedural deadlines set forth above will not be afforded a later opportunity to submit wage index data corrections or to dispute the fiscal intermediary's (or, if applicable the MAC's) decision with respect to requested changes. Specifically, our policy is that hospitals that do not meet the procedural deadlines set forth above will not be permitted to challenge later, before the Provider Reimbursement Review Board, the failure of CMS to make a requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. Thompson, No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 2000 IPPS final rule (64 FR 41513) for a discussion of the parameters for appealing to the PRRB for wage index data corrections.

Again, we believe the wage index data correction process described above provides hospitals with sufficient opportunity to bring errors in their wage and occupational mix data to the fiscal intermediary's (or, if applicable, the MAC's) attention. Moreover, because hospitals had access to the final wage index data by early May 2009, they had the opportunity to detect any data entry or tabulation errors made by the fiscal intermediary or the MAC or CMS before the development and publication of the final FY 2010 wage index by August 2009, and the implementation of the FY 2010 wage index on October 1, 2009. If hospitals availed themselves of the opportunities afforded to provide and make corrections to the wage and occupational mix data, the wage index implemented on October 1 should be accurate. Nevertheless, in the event that errors are identified by hospitals and brought to our attention after June 8, 2009, we retain the right to make midyear changes to the wage index under very limited circumstances.

Specifically, in accordance with 42 CFR 412.64(k)(1) of our existing regulations, we make midyear corrections to the wage index for an area only if a hospital can show that: (1) the fiscal intermediary or the MAC or CMS made an error in tabulating its data; and (2) the requesting hospital could not have known about the error or did not have an opportunity to correct the error, before the beginning of the fiscal year. For purposes of this provision, “before the beginning of the fiscal year” means by the June 8 deadline for making corrections to the wage data for the following fiscal year's wage index. This provision is not available to a hospital seeking to revise another hospital's data that may be affecting the requesting hospital's wage index for the labor market area. As indicated earlier, because CMS makes the wage index data available to hospitals on the CMS Web site prior to publishing both the proposed and final IPPS rules, and the fiscal intermediaries or the MAC notify hospitals directly of any wage index data changes after completing their desk reviews, we do not expect that midyear corrections will be necessary. However, under our current policy, if the correction of a data error changes the wage index value for an area, the revised wage index value will be effective prospectively from the date the correction is made.

In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 412.64(k)(2) to specify that, effective on October 1, 2005, that is, beginning with the FY 2006 wage index, a change to the wage index can be made retroactive to the beginning of the Federal fiscal year only when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS made an error in tabulating data used for the wage index calculation; (2) the hospital knew about the error and requested that the fiscal intermediary (or if applicable the MAC) and CMS correct the error using the established process and within the established schedule for requesting corrections to the wage index data, before the beginning of the fiscal year for the applicable IPPS update (that is, by the June 8, 2009 deadline for the FY 2010 wage index); and (3) CMS agreed that the fiscal intermediary (or if applicable, the MAC) or CMS made an error in tabulating the hospital's wage index data and the wage index should be corrected.

In those circumstances where a hospital requested a correction to its wage index data before CMS calculates the final wage index (that is, by the June 8, 2009 deadline), and CMS acknowledges that the error in the hospital's wage index data was caused by CMS' or the fiscal intermediary's (or, if applicable, the MAC's) mishandling of the data, we believe that the hospital should not be penalized by our delay in publishing or implementing the correction. As with our current policy, we indicated that the provision is not available to a hospital seeking to revise another hospital's data. In addition, the provision cannot be used to correct prior years' wage index data; and it can only be used for the current Federal fiscal year. In other situations where our policies would allow midyear corrections, we continue to believe that it is appropriate to make prospective-only corrections to the wage index.

We note that, as with prospective changes to the wage index, the final retroactive correction will be made irrespective of whether the change increases or decreases a hospital's payment rate. In addition, we note that the policy of retroactive adjustment will still apply in those instances where a judicial decision reverses a CMS denial of a hospital's wage index data revision request.

IV. Rebasing and Revision of the Hospital Market Baskets for Acute Care Hospitals Back to Top

A. Background

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

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

Since the inception of the IPPS, the projected change in the hospital market basket has been the integral component of the update factor by which the prospective payment rates are updated every year. An explanation of the hospital market basket used to develop the prospective payment rates was published in the Federal Register on September 1, 1983 (48 FR 39764). We also refer readers to the FY 2006 IPPS final rule (70 FR 47387) in which we discussed the most recent previous rebasing of the hospital input price index.

The hospital market basket is a fixed-weight, Laspeyres-type price index that is constructed in three steps. A Laspeyres price index measures the change in price, over time, of the same mix of goods and services purchased in the base period. Any changes in the quantity or mix of goods and services (that is, intensity) purchased over time are not measured.

The index itself is constructed in three steps. First, a base period is selected (in this final rule, the base period is FY 2006) and total base period expenditures are estimated for a set of mutually exclusive and exhaustive spending categories based upon type of expenditure. Then the proportion of total operating costs that each category represents is determined. These proportions are called cost or expenditure weights. Second, each expenditure category is matched to an appropriate price or wage variable, referred to as a price proxy. In nearly every instance, these price proxies are price levels derived from publicly available statistical series that are published on a consistent schedule (preferably at least on a quarterly basis). Finally, the expenditure weight for each cost category is multiplied by the level of its respective price proxy. The sum of these products (that is, the expenditure weights multiplied by their price levels) for all cost categories yields the composite index level of the market basket in a given period. Repeating this step for other periods produces a series of market basket levels over time. Dividing an index level for a given period by an index level for an earlier period produces a rate of growth in the input price index over that timeframe.

The market basket is described as a fixed-weight index because it represents the change in price over time of the same mix (quantity and intensity) of goods and services purchased to provide hospital services in a base period. The effects on total expenditures resulting from changes in the mix of goods and services purchased subsequent to the base period are not measured. For example, shifting a traditionally inpatient type of care to an outpatient setting might affect the volume of inpatient goods and services purchased by the hospital, but would not be factored into the price change measured by a fixed-weight hospital market basket. In this manner, the market basket measures pure price change only. Only when the index is rebased would changes in the quantity and intensity be captured in the cost weights. Therefore, we rebase the market basket periodically so the cost weights reflect recent changes in the mix of goods and services that hospitals purchase (hospital inputs) to furnish inpatient care between base periods. We last rebased the hospital market basket cost weights effective for FY 2006 (70 FR 47387), with FY 2002 data used as the base period for the construction of the market basket cost weights.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24154), we invited public comments on our proposed methodological changes to both the IPPS operating market basket and the capital input price index (CIPI). We note that this section addresses only the rebasing and revision of the IPPS market basket and CIPI for acute care hospitals and for children's and cancer hospitals and RNHCIs, which are excluded from the IPPS. We address the market basket that will be applicable to LTCHs in section VIII.C.2. of the preamble of this final rule. Separate documents will address the market basket for other hospitals that are excluded from the IPPS.

B. Rebasing and Revising the IPPS Market Basket

The terms “rebasing” and “revising,” while often used interchangeably, actually denote different activities. “Rebasing” means moving the base year for the structure of costs of an input price index (for example, in this final rule, we are shifting the base year cost structure for the IPPS hospital index from FY 2002 to FY 2006). “Revising” means changing data sources, or price proxies, used in the input price index. As published in the FY 2006 IPPS final rule (70 FR 47387), in accordance with section 404 of Public Law 108-173, CMS determined a new frequency for rebasing the hospital market basket. We established a rebasing frequency of every 4 years and, therefore, for the FY 2010 IPPS update, as we proposed, we are rebasing and revising the IPPS market basket and the CIPI.

1. Development of Cost Categories and Weights

a. Medicare Cost Reports

The major source of expenditure data for developing the rebased and revised hospital market basket cost weights is the FY 2006 Medicare cost reports. As was done in previous rebasings, these cost reports are from IPPS hospitals only (hospitals excluded from the IPPS and CAHs are not included) and are based on IPPS Medicare-allowable operating costs. IPPS Medicare-allowable operating costs are costs that are eligible to be paid for under the IPPS. For example, the IPPS market basket excludes home health agency (HHA) costs as these costs would be paid under the HHA PPS and, therefore, these costs are not IPPS Medicare-allowable costs.

The IPPS cost reports yield seven major expenditure or cost categories—the same as in the FY 2002-based hospital market basket: Wages and salaries, employee benefits, contract labor, pharmaceuticals, professional liability insurance (malpractice), blood and blood products, and a residual “all other.” The cost weights that were obtained directly from the Medicare cost reports are reported in Chart 1. These Medicare cost report cost weights are then supplemented with information obtained from other data sources to derive the IPPS market basket cost weights.

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

b. Other Data Sources

In addition to the Medicare cost reports, the other data source we used to develop the IPPS market basket cost weights was the Benchmark Input-Output (I-O) Tables created by the Bureau of Economic Analysis (BEA), U.S. Department of Commerce. The BEA Benchmark I-O data are scheduled for publication every 5 years. The most recent data available are for 2002. BEA also produces Annual I-O estimates; however, the 2002 Benchmark I-O data represent a much more comprehensive and complete set of data that are derived from the 2002 Economic Census. The Annual I-O is simply an update of the Benchmark I-O tables. For the FY 2006 market basket rebasing, we used the 1997 Benchmark I-O data. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24155), we proposed to use the 2002 Benchmark I-O data in the FY 2006-based IPPS market basket, to be effective for FY 2010. Instead of using the less detailed, less accurate Annual I-O data, we aged the 2002 Benchmark I-O data forward to FY 2006. The methodology we used to age the data forward involves applying the annual price changes from the respective price proxies to the appropriate cost categories. We repeat this practice for each year.

The “all other” cost category obtained directly from the Medicare cost reports is divided into other hospital expenditure category shares using the 2002 Benchmark I-O data. Therefore, the “all other” cost category expenditure shares are proportional to their relationship to “all other” totals in the 2002 Benchmark I-O data. For instance, if the cost for telephone services was to represent 10 percent of the sum of the “all other” Benchmark I-O (see below) hospital expenditures, then telephone services would represent 10 percent of the IPPS market basket's “all other” cost category. Following publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, and in an effort to provide greater transparency, we posted on the CMS market basket Web page at: http://www.cms.hhs.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp#TopOfPage an illustrative spreadsheet that shows how the detailed cost weights in the proposed rule (that is, those not calculated using Medicare cost reports) were determined using the 2002 Benchmark I-O data.

2. Final Cost Category Computation

As stated previously, for this rebasing we used the Medicare cost reports to derive seven major cost categories. As we proposed, the FY 2006-based IPPS market basket includes three additional cost categories that were not broken out separately in the FY 2002-based IPPS market basket. The first is lifted directly from the Medicare cost reports: Blood and blood products. The remaining two are derived using the Benchmark I-O data: Administrative and business support services and financial services. As we proposed, we broke out the latter two categories so we can better match their respective expenses with price proxies. A thorough discussion of our rationale for each of these cost categories is provided in section IV.B.3. of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24155) and this final rule. Also, the FY 2006-based IPPS market basket excludes one cost category: Photo supplies. The 2002 Benchmark I-O weight for this category is considerably smaller than the 1997 Benchmark I-O weight, presently accounting for less than one-tenth of one percentage point of the IPPS market basket. Therefore, as we proposed, we include the photo supplies costs in the chemical cost category weight with other similar chemical products (74 FR 24155).

As we proposed, we are not changing our definition of the labor-related share. However, we rename our aggregate cost categories from “labor-intensive” and “non-labor-intensive” services to “labor-related” and “nonlabor-related” services (74 FR 24155). As discussed in more detail below and similar to the previous rebasing, we classify a cost category as labor-related and include it in the labor-related share if the cost category is defined as being labor-intensive and its cost varies with the local labor market. In previous regulations, we grouped cost categories that met both of these criteria into labor-intensive services. We believe the new labels more accurately reflect the concepts that they are intended to convey. We are not changing our definition of the labor-related share because we continue to classify a cost category as labor-related if the costs are labor-intensive and vary with the local labor market.

3. Selection of Price Proxies

After computing the FY 2006 cost weights for the rebased hospital market basket, it was necessary to select appropriate wage and price proxies to reflect the rate of price change for each expenditure category. With the exception of the proxy for professional liability, all the proxies are based on Bureau of Labor Statistics (BLS) data and are grouped into one of the following BLS categories:

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

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

Comment: Several commenters stated that although the MMA requires CMS to rebase the weights used in the hospital market basket more frequently than every 5 years to reflect the most current data available, it does not require CMS to modify or revise the price proxies used in the market basket calculation. The commenters discouraged CMS from incorporating any new price proxies, particularly the new blended price proxy associated with the Chemicals cost category, and indicated that such a change was not preferred at this time. They pointed out that the methodology and data sources used by CMS to derive the proposed 2006-based IPPS market basket yield a projected 2.1 percent increase in the hospital market basket update, while the historical methodology and data sources used to derive the FY 2002-based IPPS market basket yield a projected update of 2.3 percent. Several commenters pointed to the current status and volatility of the economy as a basis for maintaining the same price proxies going forward. Those comments included the following:

  • Maintaining the current proxies will result in a more stable market basket increase and will demonstrate forbearance, given the current economic volatility that has occurred or may be yet to come.
  • The country has recently experienced a period of very low inflation. The funds from the ARRA (Pub. L. 111-5) are beginning to work their way into the economy, possibly resulting in a period of higher inflation that could substantially affect the market basket estimate.
  • The new price proxies selected by CMS are not responsive to the inflationary effects of the President's FY 2010 Budget and the inflationary stimulus effect of the Troubled Asset Relief Program (TARP), which is demonstrated by the modest market basket increases in FY 2010 and FY 2011.
  • The traditional approach taken in developing the annual market basket forecast is inadequate, given the severe downturn in the economy and the potential for inflation to pick up at a pace quicker than we have seen for many years. Following several years of updates between 3 percent and 3.5 percent, a lower forecast may well underestimate hospital input costs, particularly nursing labor, as hospitals will not benefit from swelling labor markets due to the fact that it is unlikely that newly-unemployed workers possess the specialized skills required by hospitals.

As a result of these issues, multiple commenters urged CMS only to rebase the data and weights used in the market basket calculation, and not to revise the price proxies.

Response: We continuously monitor the technical appropriateness of all of CMS' market baskets (including the hospital market basket) whether or not the market basket is being rebased. However, whenever a market basket is rebased, it is a matter of practice for CMS to scrutinize all of its aspects, including the data sources that are used to construct it, the selection of its exhaustive and mutually exclusive cost categories, the weights associated with those categories, and the price proxies that are applied. We are revising the hospital market basket to make technical improvements that we believe results in more accurate payment updates.

We believe that revising four new price proxies for existing cost categories and including three additional price proxies for the new cost categories in the FY 2006-based hospital market basket represents a significant technical improvement to the market basket.

As many of the commenters stated, we proposed (and are adopting as final) a new blended chemical price proxy for the Chemicals cost weight in the FY 2006-based IPPS market basket. The FY 2002-based IPPS market basket used the PPI for industrial chemicals (WPI061) to proxy the chemicals cost category. In evaluating the technical merit of the continuing use of that proxy, we compared the 2002 BEA Benchmark I-O expenditure weights with the composition of the PPI for industrial chemicals. Using a commodity-to-industry crosswalk, we were able to identify the industry expenses classified by North American Industrial Classification System (NAICS) that comprise the commodity-based PPI for industrial chemicals.

We found that the relative PPI weights for each of the NAICS expense categories were not always consistent with the expense weights for the hospital industry, as indicated by the 2002 Benchmark I-O data. For example, hospital spending for NAICS 325120 (Industrial Gas Manufacturing)—the hospital industry's largest chemical expense category (accounting for 29 percent of the hospital industry's total chemical expenses)—is not found in the PPI for industrial chemicals. In addition, hospital spending attributable to NAICS 325190 (Other Basic Organic Chemical Manufacturing) accounts for just 26 percent of the hospital industry's total chemical expenses. However, NAICS 325190 accounts for 41 percent of the PPI for industrial chemicals.

Given these findings, we proposed using a blended chemical price index that reflects the relative weights of the hospital industry's chemical expenses as indicated by the 2002 Benchmark I-O data. This blended index is composed of the PPI for industrial gases (NAICS 325120), the PPI for other basic inorganic chemical manufacturing (NAICS 325180), the PPI for other basic organic chemical manufacturing (NAICS 325190), and the PPI for soap and cleaning compound manufacturing (NAICS 325610). The expenses for these NAICS industries account for approximately 90 percent of the hospital industry's chemical expenses, excluding NAICS 324110—Petroleum Refineries, which we proposed to include with other petroleum-related expenses classified in the fuel, oil, and gas cost category. We believe this new blended proxy represents a more accurate reflection of the price pressures associated with hospital chemical expenses.

With respect to the state of the economy, we are attentive to the recent downturn and the fact that this year's update is lower relative to historical market basket updates. We also recognize the commenters' uncertainty regarding future inflationary pressures, given the activities undertaken in the last several months to aid the economy. However, the most recent forecast of the rebased and revised FY 2006-based IPPS market basket FY 2010 update factor reflects the current expectations regarding the performance of the economy during FY 2010, including the inflation expectations associated with the economic stimulus plans. Moreover, this forecast also reflects our most recent expectations regarding price pressures associated with the labor market for hospital workers.

Comment: One commenter stated that CMS' proposal to rebase and revise the market basket appears to be directed at reducing the rate of increase in future market basket increases.

Response: When selecting the price proxies for the IPPS market basket, we do not evaluate the resulting market basket update as a criterion in selecting these proxies, but rather choose the most technically appropriate measures of the price pressures faced by the hospital industry. We believe the proxies that were articulated in the FY 2010 proposed rule reflect that approach.

Comment: Several commenters supported CMS' proposed use of the PPI for blood and organ banks for measuring changes in the cost of blood and blood products. The commenters expressed appreciation for CMS' responsiveness to the need for greater accuracy in the calculation of price changes attributable to blood and blood products in the IPPS market basket.

Response: We appreciate the commenters' support for our proposed price proxy for the blood and blood products cost category. We agree with the commenters that the implementation of this price proxy represents a technical improvement to the IPPS market basket.

After consideration of the public comments received, we are adopting as final the price proxies that we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24155-24159).

Chart 2 sets forth the FY 2006-based IPPS market basket, including cost categories, weights, and price proxies. For comparison purposes, the corresponding FY 2002-based IPPS market basket is listed as well. A summary outlining the choice of the various proxies follows the chart.

Chart 2—FY 2006-Based IPPS Hospital Market-Basket Cost Categories, Weights, and Price Proxies With FY 2002-Based IPPS Market Basket Included for Comparison Back to Top
Cost Categories FY 2002-based hospital market basket cost weights Rebased FY 2006-based hospital market basket cost weights Rebased FY 2006-based hospital market basket price proxies
Note: Detail may not add to total due to rounding.
1Contract labor is distributed to wages and salaries and employee benefits based on the share of total compensation that each category represents.
2To proxy the “chemicals” cost category, we used a blended PPI composed of the PPI for industrial gases, the PPI for other basic inorganic chemical manufacturing, the PPI for other basic organic chemical manufacturing, and the PPI for soap and cleaning compound manufacturing. For more detail about this proxy, see section IV.B.3.j. of the preamble of this final rule.
3The “blood and blood products” cost category was contained within “miscellaneous products” cost category in the FY 2002-based IPPS market basket.
4The “professional fees: Labor-related” and “professional fees: Nonlabor-related” cost categories were included in one cost category called “professional fees” in the FY 2002-based IPPS market basket. For more detail about how these new categories were derived, we refer readers to sections IV.B.3.s. and v. of the preamble of this final rule, on the labor-related share.
5The “administrative and business support services” cost category was contained within “all other: Labor-intensive services” cost category in the FY 2002-based IPPS market basket. The “all other: Labor-intensive services” cost category is renamed the “all other: Labor-related services” cost category for the FY 2006-based IPPS market basket.
6The “financial services” cost category was contained within the “all other: Non-labor intensive services” cost category in the FY 2002-based IPPS market basket. The “all other: Nonlabor intensive services” cost category is renamed the “all other: Nonlabor-related services” cost category for the FY 2006-based IPPS market basket.
1. Compensation 59.993 59.627  
A. Wages and Salaries1 48.171 47.213 ECI for Wages and Salaries, Civilian Hospital Workers.
B. Employee Benefits1 11.822 12.414 ECI for Benefits, Civilian Hospital Workers.
2. Utilities 1.251 2.180  
A. Fuel, Oil, and Gasoline 0.206 0.418 PPI for Petroleum Refineries.
B. Electricity 0.669 1.645 PPI for Commercial Electric Power.
C. Water and Sewage 0.376 0.117 CPI-U for Water Sewerage Maintenance.
3. Professional Liability Insurance 1.589 1.661 CMS Professional Liability Insurance Premium Index.
4. All Other 37.167 36.533  
A. All Other Products 20.336 19.473  
(1.) Pharmaceuticals 5.855 5.380 PPI for Pharmaceutical Preparations (Prescriptions).
(2.) Food: Direct Purchases 1.664 3.982 PPI for Processed Foods Feeds.
(3.) Food: Contract Services 1.180 0.575 CPI-U for Food Away From Home.
(4.) Chemicals2 2.096 1.538 Blend of Chemical PPIs.
(5.) Blood and Blood Products3 1.078 PPI for Blood and Organ Banks.
(6.) Medical Instruments 1.932 2.762 PPI for Medical, Surgical, and Personal Aid Devices.
(7.) Photographic Supplies 0.183    
(8.) Rubber and Plastics 2.004 1.659 PPI for Rubber Plastic Products.
(9.) Paper and Printing Products 1.905 1.492 PPI for Converted Paper Paperboard Products.
(10.) Apparel 0.394 0.325 PPI for Apparel.
(11.) Machinery and Equipment 0.565 0.163 PPI for Machinery Equipment.
(12.) Miscellaneous Products3 2.558 0.519 PPI for Finished Goods Less Food and Energy.
B. Labor-related Services 9.738 9.175  
(1.) Professional Fees: Labor-related4 5.510 5.356 ECI for Compensation for Professional and Related Occupations.
(2.) Administrative and Business Support Services5 n/a 0.626 ECI for Compensation for Office and Administrative Services.
(3.) All Other: Labor-Related Services5 4.228 3.193 ECI for Compensation for Private Service Occupations.
C. Nonlabor-Related Services 7.093 7.885  
(1.) Professional Fees: Nonlabor-Related4 n/a 4.074 ECI for Compensation for Professional and Related Occupations.
(2.) Financial Services6 n/a 1.281 ECI for Compensation for Financial Activities.
(3.) Telephone Services 0.458 0.627 CPI-U for Telephone Services.
(4.) Postage 1.300 0.963 CPI-U for Postage.
(5.) All Other: Nonlabor-Related Services6 5.335 0.940 CPI-U for All Items Less Food and Energy.
Total 100.000 100.000  

As we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24156 through 24159), for this final rule, we use the following choices with respect to the various proxies:

a. Wages and Salaries

We use the ECI for wages and salaries for hospital workers (all civilian) (series code #CIU1026220000000I) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

b. Employee Benefits

We use the ECI for employee benefits for hospital workers (all civilian) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

c. Fuel, Oil, and Gasoline

For the FY 2002-based market basket, this category only included expenses classified under North American Industry Classification System (NAICS) 21 (Mining). We proxied this category using the PPI for commercial natural gas (series code #WPU0552). For the FY 2006-based market basket, we add costs to this category that had previously been grouped in other categories. The added costs include petroleum-related expenses under NAICS 324110 (previously captured in the miscellaneous category), as well as petrochemical manufacturing classified under NAICS 325110 (previously captured in the chemicals category). These added costs represent 80 percent of the hospital industry's fuel, oil, and gasoline expenses (or 80 percent of this category). Because the majority of the industry's fuel, oil, and gasoline expenses originate from petroleum refineries (NAICS 324110), we use the PPI for petroleum refineries (series code #PCU324110) as the proxy for this cost category.

d. Electricity

We use the PPI for commercial electric power (series code #WPU0542) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

e. Water and Sewage

We use the CPI for water and sewerage maintenance (all urban consumers) (series code #CUUR0000SEHG01) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

f. Professional Liability Insurance

We proxy price changes in hospital professional liability insurance premiums (PLI) using percentage changes as estimated by the CMS Hospital Professional Liability Index. To generate these estimates, we collect commercial insurance premiums for a fixed level of coverage while holding nonprice factors constant (such as a change in the level of coverage). This method also is used to proxy PLI price changes in the Medicare Economic Index (68 FR 63244). This same proxy was used in the FY 2002-based IPPS market basket.

g. Pharmaceuticals

We use the PPI for pharmaceutical preparations (prescription) (series code #PCU32541DRX) to measure the price growth of this cost category. This is a special index produced by BLS and is the same proxy used in the FY 2002-based IPPS market basket.

h. Food: Direct Purchases

We use the PPI for processed foods and feeds (series code #WPU02) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

i. Food: Contract Services

We use the CPI for food away from home (all urban consumers) (series code #CUUR0000SEFV) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

j. Chemicals

We use a blended PPI composed of the PPI for industrial gases (NAICS 325120), the PPI for other basic inorganic chemical manufacturing (NAICS 325180), the PPI for other basic organic chemical manufacturing (NAICS 325190), and the PPI for soap and cleaning compound manufacturing (NAICS 325610). Using the 2002 Benchmark I-O data, we found that these NAICS industries accounted for approximately 90 percent of the hospital industry's chemical expenses. Therefore, we use this blended index because we believe its composition better reflects the composition of the purchasing patterns of hospitals than does the PPI for industrial chemicals (series code #WPU061), the proxy used in the FY 2002-based IPPS market basket. Chart 3 below shows the weights for each of the four PPIs used to create the blended PPI, which we determined using the 2002 Benchmark I-O data.

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

k. Blood and Blood Products

In the FY 2002-based IPPS market basket, we classified blood and blood products into the miscellaneous products category and used the PPI for finished goods less food and energy to proxy the price changes associated with these expenses. At the time of the rebasing of the FY 2002-based IPPS market basket, we noticed an apparent divergence between the PPI for blood and blood derivatives, the price proxy used in the FY 1997-based IPPS market basket, and blood costs faced by hospitals over the recent time period. A thorough discussion of this analysis is found in the FY 2006 IPPS final rule (70 FR 47390).

Since the last rebasing of the market basket, BLS began collecting data and publishing an industry PPI for blood and organ banks (NAICS 621991). For the FY 2006-based IPPS market basket, as we proposed, we incorporate this series (series code #PCU621991) into the market basket and use it to proxy the blood and blood products cost category.

l. Medical Instruments

We use the PPI for medical, surgical, and personal aid devices (series code #WPU156) to measure the price growth of this cost category. In the 1997 Benchmark I-O data, approximately half of the expenses classified in this category were for surgical and medical instruments. Thus, we used the PPI for surgical and medical instruments and equipment (series code #WPU1562) to proxy this category in the FY 2002-based IPPS market basket. The 2002 Benchmark I-O data show that this category now represents only 33 percent of these expenses and the largest expense category is surgical appliance and supplies manufacturing (corresponding to series code #WPU1563). Due to this reallocation of costs over time, we are changing the price proxy for this cost category to the more aggregated PPI for medical, surgical, and personal aid devices.

m. Photographic Supplies

We are eliminating the cost category specific to photographic supplies for the proposed FY 2006-based IPPS market basket. These costs will now be included in the chemicals cost category because the costs are presently reported as all other chemical products. Notably, although we are eliminating the specific cost category, these costs will still be accounted for within the IPPS market basket.

n. Rubber and Plastics

We use the PPI for rubber and plastic products (series code #WPU07) to measure price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

o. Paper and Printing Products

We use the PPI for converted paper and paperboard products (series code #WPU0915) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

p. Apparel

We use the PPI for apparel (series code #WPU0381) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

q. Machinery and Equipment

We use the PPI for machinery and equipment (series code #WPU11) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

r. Miscellaneous Products

We use the PPI for finished goods less food and energy (series code #WPUSOP3500) to measure the price growth of this cost category. Using this index removes the double-counting of food and energy prices, which are already captured elsewhere in the market basket. This same proxy was used in the FY 2002-based IPPS market basket.

s. Professional Fees: Labor-Related

We use the ECI for compensation for professional and related occupations (private industry) (series code #CIS2020000120000I) to measure the price growth of this category. It includes occupations such as legal, accounting, and engineering services. This same proxy was used in the FY 2002-based IPPS market basket.

t. Administrative and Business Support Services

We use the ECI for compensation for office and administrative support services (private industry) (series code #CIU2010000220000I) to measure the price growth of this category. Previously these costs were included in the “all other: labor-intensive cost” category (now renamed the “all other: labor-related cost” category), and were proxied by the ECI for compensation for service occupations. We believe that this compensation index better reflects the changing price of labor associated with the provision of administrative services and its incorporation represents a technical improvement to the market basket.

u. All Other: Labor-Related Services

We use the ECI for compensation for service occupations (private industry) (series code #CIU2010000300000I) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

v. Professional Fees: Nonlabor-Related

We use the ECI for compensation for professional and related occupations (private industry) (series code #CIS2020000120000I) to measure the price growth of this category. This is the same price proxy that we use for the professional fees: labor-related cost category.

w. Financial Services

We use the ECI for compensation for financial activities (private industry) (series code #CIU201520A000000I) to measure the price growth of this cost category. Previously these costs were included in the “all other: nonlabor-intensive cost” category (now renamed the “all other: nonlabor-related cost” category), and were proxied by the CPI for all items. We believe that this compensation index better reflects the changing price of labor associated with the provision of financial services and its incorporation represents a technical improvement to the market basket.

x. Telephone Services

We use the CPI for telephone services (series code #CUUR0000SEED) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

y. Postage

We use the CPI for postage (series code #CUUR0000SEEC01) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket.

z. All Other: Nonlabor-Related Services

We use the CPI for all items less food and energy (series code #CUUR0000SA0L1E) to measure the price growth of this cost category. Previously these costs were proxied by the CPI for all items in the FY 2002-based IPPS market basket. We believe that using the CPI for all items less food and energy will remove any double-counting of food and energy prices, which are already captured elsewhere in the market basket. Consequently, we believe that the incorporation of this proxy represents a technical improvement to the market basket.

Chart 4 compares both the historical and forecasted percent changes in the FY 2002-based IPPS market basket and the FY 2006-based IPPS market basket.

Chart 4—FY 2002-Based and FY 2006-Based Prospective Payment Hospital Operating Index Percent Change, FY 2004 Through FY 2012 Back to Top
Fiscal year (FY) FY 2002-based IPPS market basket operating index percent change FY 2006-based IPPS market basket operating index percent change
Source: IHS Global Insight, Inc., 2nd Quarter 2009, USMACRO/CONTROL0609@CISSIM/TL0509.SIM.
Historical data:    
FY 2004 4.0 4.0
FY 2005 4.3 3.9
FY 2006 4.3 4.0
FY 2007 3.4 3.6
FY 2008 4.3 4.0
Average FYs 2004-2008 4.1 3.9
Forecast:    
FY 2009 2.1 2.6
FY 2010 2.3 2.1
FY 2011 2.8 2.7
FY 2012 3.0 2.9
Average FYs 2009-2012 2.6 2.6

The differences between the FY 2002-based and the FY 2006-based IPPS market basket increases are mostly stemming from the revision the proxy used for the chemicals cost category. As stated earlier, we are adopting a blended chemical index that is comprised of four industry-based chemical price proxies that represent approximately 90 percent of the hospital industry's chemical expenses. The FY 2002-based IPPS market basket used the PPI for industrial chemicals. The PPI for industrial chemicals attributes more weight to direct petroleum expenses, which is not consistent with a hospital's most recent purchasing pattern according to the 2002 Benchmark I-O data. The lower weight for direct petroleum expenses in the blended chemical index results in less volatile price movements. We believe the blended index represents a technical improvement because it better reflects the purchasing patterns of hospitals.

Also contributing to the differences between the FY 2002-based and the FY 2006-based IPPS market basket increases is the larger weight associated with the professional fees category. In both market baskets, these expenditures are proxied by the ECI for compensation for professional and related services. The weight for professional fees in the FY 2002-based IPPS market basket is 5.5 percent compared to 9.4 percent in the FY 2006-based IPPS market basket.

4. Labor-Related Share

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

The labor-related share is used to determine the proportion of the national PPS base payment rate to which the area wage index is applied. We include a cost category in the labor-related share if the costs are labor intensive and vary with the local labor market. Given this, as we proposed, we are including in the labor-related share the national average proportion of operating costs that are attributable to wages and salaries, employee benefits, contract labor, the labor-related portion of professional fees, administrative and business support services, and all other: labor-related services (previously referred to in the FY 2002-based IPPS market basket as labor-intensive) (74 FR 24159). Consistent with previous rebasings, the “all other: labor-related services” cost category is mostly comprised of building maintenance and security services (including, but not limited to, commercial and industrial machinery and equipment repair, nonresidential maintenance and repair, and investigation and security services). Because these services tend to be labor-intensive and are mostly performed at the hospital facility (and, therefore, unlikely to be purchased in the national market), we believe that they meet our definition of labor-related services.

For the rebasing of the FY 2002-based IPPS market basket in the FY 2006 IPPS final rule, we included in the labor-related share the national average proportion of operating costs that are attributable to wages and salaries, employee benefits, contract labor, professional fees, and labor-intensive services (70 FR 47393). For the FY 2006-based IPPS market basket rebasing, the inclusion of the administrative and business support services cost category into the labor-related share remains consistent with the current labor-related share because this cost category was previously included in the labor-intensive cost category. As previously stated, we are establishing a separate administrative and business support service cost category so that we can use the ECI for compensation for office and administrative support services to more precisely proxy these specific expenses.

For the FY 2002-based IPPS market basket, we assumed that all nonmedical professional services (including accounting and auditing services, engineering services, legal services, and management and consulting services) were purchased in the local labor market and, therefore, all of their associated fees varied with the local labor market. As a result, we previously included 100 percent of these costs in the labor-related share. In an effort to more accurately determine the share of professional fees that should be included in the labor-related share, we surveyed hospitals regarding the proportion of those fees that go to companies that are located beyond their own local labor market (the results are discussed below).

We continue to look for ways to refine our market basket approach to more accurately account for the proportion of costs influenced by the local labor market. To that end, we conducted a survey of hospitals to empirically determine the proportion of contracted professional services purchased by the industry that are attributable to local firms and the proportion that are purchased from national firms. We notified the public of our intent to conduct this survey on December 9, 2005 (70 FR 73250) and received no comments (71 FR 8588).

With approval from the OMB, we contacted the industry and received responses to our survey from 108 hospitals. Using data on FTEs to allocate responding hospitals across strata (region of the country and urban/rural status), we calculated poststratification weights. Based on these weighted results, we determined that hospitals purchase, on average, the following portions of contracted professional services outside of their local labor market:

  • 34 percent of accounting and auditing services;
  • 30 percent of engineering services;
  • 33 percent of legal services; and
  • 42 percent of management consulting services.

We applied each of these percentages to its respective Benchmark I-O cost category underlying the professional fees cost category. This is the methodology that we used to separate the FY 2006-based IPPS market basket professional fees category into professional fees: Labor-related and professional fees: Nonlabor-related cost categories. In addition to the professional services listed above, we also classified expenses under NAICS 55, Management of Companies and Enterprises, into the professional fees cost category as was done in previous rebasings. The NAICS 55 data are mostly comprised of corporate, subsidiary, and regional managing offices, or otherwise referred to as home offices. Formerly, all of the expenses within this category were considered to vary with, or be influenced by, the local labor market and were thus included in the labor-related share. Because many hospitals are not located in the same geographic area as their home office, we analyzed data from a variety of sources in order to determine what proportion of these costs should be appropriately included in the labor-related share.

Comment: Several commenters disagreed with the proposed methodology to apportion home offices costs into the labor-related share.

Response: Our proposed methodology was primarily based on data from the Medicare cost reports, as well as a CMS database of Home Office Medicare Records (HOMER) (a database that provides city and state information (addresses) for home offices). The Medicare cost report requires hospitals to report their home office provider numbers. Using the HOMER database to determine the home office location for each home office provider number, we compared the location of the hospital with the location of the hospital's home office. We then proposed to determine the proportion of costs that should be allocated to the labor-related share based on the percent of hospitals that had home offices located in their respective local labor markets—defined as being in the same MSA. Using this proposed methodology, we had determined that 27 percent of hospitals that had home offices had those home offices located in their respective local labor markets, and therefore, we proposed to allocate 27 percent of NAICS 55 expenses to the labor-related share.

In response to the public comments submitted, we have revisited the home office cost allocation method and determined that a revision of the approach is appropriate. As an alternative to using provider counts (where each provider counts evenly) as the means by which home office costs are apportioned to the labor-related share, or deemed nonlabor-related, for this final rule, we are weighting the providers by home office compensation costs as reported in Worksheet S-3, part II, line 11 of the hospital MCR. (The Medicare cost report includes, but does not explicitly itemize, all home office costs. However, it does contain a line item for home office compensation costs.) We believe that this revised methodology of weighting the providers based on home office compensation costs provides a more technically appropriate estimate of the proportion of NAICS 55 expenses that should be allocated to the labor-related share.

As proposed, we are still continuing to use the same data sources and methodology to determine whether a hospital's home office is located in their respective MSA. Once we determined whether the hospital's home office is located in their respective MSA, we used additional data on home office compensation costs from the Medicare cost report to assign weights to the providers. Using this revised methodology, we determined that 57 percent of hospitals' home office costs are paid into their respective local labor markets—defined as being in the same MSA.

As was published in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24159 through 24161), below is a more detailed explanation on our methodology used to determine whether a hospital's home office was located in their respective MSA. In addition to the number of providers that appeared in the proposed rule, we have also included our weighted results.

The Medicare cost report requires hospitals to report their home office provider numbers. Using the HOMER database to determine the home office location for each home office provider number, we compared the location of the hospital with the location of the hospital's home office. We then placed hospitals into one of the following three groups:

  • Group 1—Hospital and home office are located in different States;
  • Group 2—Hospital and home office are located in the same State and same city; and
  • Group 3—Hospital and home office are located in the same State and different city.

We found that 59 percent of the hospitals with home offices (34 percent of total home office compensation costs for hospitals with home offices) were classified into Group 1 (that is, different State) and, thus, these hospitals were determined to not be located in the same local labor market as their home office.

We found that 12 percent of all hospitals with home offices (35 percent of total home office compensation costs for hospitals with home offices) were classified into Group 2 (that is, same State and same city and, therefore, the same MSA). Consequently, these hospitals were determined to be located in the same local labor market as their home offices.

We found that 29 percent of all hospitals with home offices (30 percent of total home office compensation costs for hospitals with home offices) were classified into Group 3 (that is, same State and different city). Using data from the Census Bureau to determine the specific MSA for both the hospital and its home office, we found that 16 percent of all hospitals with home offices (22 percent of total home office compensation costs for hospitals with home offices) were identified as being in the same State, a different city, but the same MSA.

Pooling these results, we were able to determine that approximately 28 percent of hospitals with home offices (57 percent of total home office compensation costs for hospitals with home offices) had home offices located within their local labor market (that is, 12 percent of hospitals with home offices (35 percent of total home office compensation costs for hospitals with home offices) had their home offices in the same State and city (and, thus, the same MSA), and 16 percent of hospitals with home offices (22 percent of total home office compensation costs for hospitals with home offices) had their home offices in the same State, a different city, but the same MSA). We note that due to data anomalies associated with home office compensation cost data on the Medicare cost report, we trimmed the data and, thus, the number of providers classified in each of the groups is slightly different than we had published in the proposed regulation. The aforementioned trim resulted in excluding hospitals whose home office costs as a percent of total hospital costs were in the top and bottom five percent of that ratio. In the proposed rule, we had determined that 27 percent of providers had a home office located in their respective MSA. Applying our trimming method resulted in 28 percent of providers having a home office located in their respective MSA. Therefore, using the results of our weighting methodology, we are classifying 57 percent of the NAICS 55 costs into the professional fees: labor-related cost category and the remaining 43 percent into the professional fees: nonlabor-related cost category.

Comment: Several commenters suggested that CMS maintain the labor-related share from the FY 2002-based market basket (69.7 percent) for hospitals with an area wage index greater than 1.0 until a statistically valid approach for changing the labor-related share can be implemented. In addition, some commenters stated that, although CMS is required to rebase the hospital market basket, the proposal to revise the labor-related share is not required by statute and, thus, represents a discretionary decision by CMS.

Response: As a matter of practice, CMS typically rebases and revises the market basket and the labor-related share simultaneously. We believe that doing so results in a more technically accurate market basket that has the effect of more precisely updating payments to Medicare's providers. We believe that revising the labor-related share is based on empirical research and relies on more recent data, representing a technical improvement to the construction of the market basket. The methodology relies, in part, on the results of a survey of professional fees that was nationally representative and inclusive of large, urban-based hospitals and whose results were estimated using widely accepted survey estimation techniques. It also is dependent on data from the Medicare cost reports and the HOMER database that showed 43 percent of total home office compensation costs for hospitals with home offices had home offices located in different MSAs. Therefore, we disagree with the commenter's suggestion to continue to use a labor-related share of 69.7 percent.

Comment: Several commenters disagreed with the proposal to only allocate a portion of home office costs to the labor-related share based on whether these costs were incurred in the local labor market. One commenter stated that it is generally understood that there is a significant degree of correlation between the location of a multihospital system and the geographic locations of its member hospitals. All systems except the limited number of truly national hospital chains tend to be clustered in subareas of the country. Therefore, the commenters claimed that an assumption that 73 percent of home office labor costs more closely resemble national versus regional wage patterns is not necessarily supported by the methodology CMS proposed. Second, the commenter stated that it is generally the case that home office operations of multihospital systems and chains tend to be located in urban areas, even if the hospitals in the system or chain are nonurban or rural. The commenter further stated that this implies that average wage costs in these system headquarters may be systematically higher than the national average wage cost, making a national pricing proxy suspect in this case, as well.

Response: In rebasing the labor-related share, we have identified new methodologies and newly available empirical evidence to estimate the portion of the standardized payment amount that is subject to the hospital area wage index. In determining what proportion of that amount should be apportioned to the labor-related share and what proportion should be deemed nonlabor-related, we referenced the following:

Section 1886(d)(3)(E)(i) of the Act states that “in general.—Except as provided in clause (ii), 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 computed under subparagraph (D) 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.”

Because the labor-related share determined through the market basket is linked to the hospital area wage index, for this rebasing, we have identified new methodologies and newly available empirical evidence to determine a labor-related share that more precisely reflects the wage and wage-related proportion of activities purchased where the individual hospital is located. Services purchased beyond the boundaries of the local labor market of the individual hospital are thereby excluded from the labor-related share.

In order to distribute the appropriate proportion of home office costs to the labor-related share, we constructed a methodology that is similar to that undertaken to determine the area wage index. That is, we analyzed the locations of the individual hospitals and their respective home offices (at the MSA-level) as well as the home office compensation costs of the individual hospitals. The proportion of home office costs that we do not include in the labor-related share was not based on assumption, but rather it was based on Medicare cost report data and the HOMER database. Those data showed 43 percent of home office compensation costs were purchased from a different MSA than where the individual hospital is located and, thus, that proportion of home office costs are excluded from the labor-related share. The remaining 57 percent of home office compensation costs were purchased in the same MSA as the hospital; therefore, that proportion of home office costs is included in the labor-related share.

Based on data published by the BEA, we determined that the share of total hospital costs attributable to home office costs in 2006 was 5.8 percent. Applying the aforementioned shares to the 5.8 percent figure, we determined that 2.494 percentage points of total costs represent home office costs that are not incurred in the same local labor market as the hospital itself and, thus, are removed from the labor-related share. The remaining 3.306 percentage points remain in the labor-related share.

Comment: Several commenters addressed the survey CMS conducted regarding certain professional fees purchased by hospitals, stating that CMS used this survey to impute a 2.631 percentage point reduction in the labor-related share. These commenters stated that CMS failed to share data on the characteristics of the hospitals that responded, possible selection bias, or survey methodology. They also cited that the survey only received 108 respondents, which could lead to a high margin of error. The commenters stated that CMS provides no indication that it assessed for response bias in its survey nor did it explain how (or whether) it assured that the survey respondents were representative of all hospitals or of hospitals in wage areas greater than 1.0. Another commenter stated that the CMS survey assumed that such professional services should be available in the local labor market and ignored some hospital's unavoidable need to incur those costs in order to comply with Federal and State requirements. The commenters requested CMS not remove a portion of professional fees from the labor-related share based on the results of this survey.

Response: We disagree with the commenters' suggestion that we ignore the survey results and continue to assign 100 percent of nonmedical professional fees to the labor-related share, as has been done historically. We believe a method that distributes these fees based on empirical research and data represents a technical improvement to the construction of the market basket. Our intent to survey for this purpose was announced in the Federal Register on December 9, 2005 (70 FR 73250). We received no public comment at that time.

Although several commenters indicated that the professional fees survey was used to decrease the labor-related share by 2.631 percentage points, that indication is not correct. In the FY 2006-based IPPS market basket, nonmedical professional fees that were subject to allocation based on the survey results represent 2.114 percent of total costs (and are limited to those fees related to Accounting Auditing, Legal, Engineering, and Management Consulting services). Based on our survey results, we are apportioning 1.335 percentage points of the 2.114 percentage point figure into the labor-related share and designating the remaining 0.779 percentage point as nonlabor-related.

The survey's methods unfolded in the following manner: A small sample of 12 hospitals was initially pre-tested in order to ensure the understandability of the survey questions. The survey prompted sample institutions to select from multiple choice answers the proportions of their professional fees that are purchased from firms located outside of their respective local labor market. The multiple choice answers for each type of professional service included the following options: 0 percent of fees; 1-20 percent of fees; 21-40 percent of fees; 41-60 percent of fees; 61-80 percent of fees; 81-99 percent of fees; and 100 percent of fees. All respondents were assured that the information they provided would be kept strictly confidential.

Understanding that larger, urban-based hospitals (and those located in areas with area wage indexes greater than 1.0) are most likely to be impacted by the survey's results, we used data on full-time equivalents (FTEs) to represent the sizes of hospitals and selected hospitals with probability proportional to their sizes across strata when drawing the full sample. Strata were formed by Census Region and Urban/Rural Status. The distributions of the hospital population, as well as weighted distributions for the responders, by Urban/Rural Status (including data on hospital size) and Census Region were as follows:

All hospitals percent distribution average FTE size Responding hospitals percent distribution average FTE size
Total 100%/994 100%/1,156
Total Rurals 30%/388 25%/449
Total Urbans 70%/1,255 75%/1,460
Total Northeast Region 15%/1,442 20%/1,078
Total Mid-West Region 23%/1,062 24%/1,656
Total South Region 42%/843 37%/944
Total West Region 20%/899 19%/1,081

Sample weights were calculated as the inverse of the selection probability and were subsequently adjusted for nonresponse bias by strata and post-stratified to derive final weights. This type of application represents a common survey approach and is based on valid and widely-accepted statistical techniques.

For the estimates of the nationwide proportion of nonmedical professional services fees purchased outside of the local labor market, we first examined the data on multiple levels. First, we found that fewer than 30 percent of the responding hospitals paid 100 percent of their professional fees to vendors located within their local labor market. Conversely, we found that roughly 20 percent of responding hospitals reported 81 percent or more of their professional services fees are paid to vendors located outside of their local labor market.

In determining the specific and appropriate proportions of professional fees to consider labor-related and nonlabor-related, we generated weighted averages from the data in the following manner:

  • For any multiple choice answer where the standard error associated with the weighted counts for that answer was less than 30 percent, we multiplied the weighted counts associated with that answer by the midpoint of the range within that answer. For example, for Accounting and Auditing services, if a weighted count of 500 hospitals responded that they pay “1 to 20 percent” of their professional fees for these services to firms located outside of their local labor market, we would multiply 500 times 10 percent. We repeat this for each possible multiple choice answer.
  • For any multiple choice answer where the standard error associated with the weighted counts for that answer exceeded 30 percent, we multiplied the weighted hospital counts by the low point of the range. Using a similar example as above, if a weighted count of 300 hospitals responded that they pay “1 to 20 percent” of their professional fees for these services to firms located outside of their local labor market, and the standard error on that estimate was greater than 30 percent, we would multiply 300 times 1 percent.
  • After applying one of these two techniques to each answer, dependent on its associated standard error, we took a weighted average of the results to determine the final proportion to be excluded from the labor-related share for each of the four types of professional services surveyed.

We do not assume that access to professional services such as those included in this survey should be available to all hospitals within their respective local labor market and we understand that, in some cases, hospitals may have to obtain these services from vendors beyond those boundaries. However, for purposes of estimating the labor-related share of the market basket, in accordance with the aforementioned section 1886(d)(3)(E)(i) of the Act, we have used the newly available empirical evidence to determine the wage and wage-related costs in the labor-related share that are incurred within the geographic location of the hospital itself.

Comment: Several commenters questioned why CMS chose to conduct a survey to determine which proportion of professional fees is purchased in the local labor market when they could have conducted a study of Medicare cost reports for hospitals which, on line 22.01 of Worksheet S-3, part II, contains hospitals' average annual wage for professional services. In addition, one commenter suggested that instead of a survey, CMS should have proposed a change to the cost report in order to collect accurate data for all facilities.

Response: The Medicare cost report data do provide an average hourly wage for administrative and general (AG) services (including those professional services included in the CMS survey) under contract. However, the data do not distinguish whether these services were purchased in the local labor market. In addition, a comparison of the average hourly wage for AG services performed by hospital staff (as reported in line 22 of Worksheet S-3, part II) and the average hourly wage for AG services under contract (as reported on line 22.01 of Worksheet S-3, part II) would not be sufficient to determine whether the contracted services were purchased in the local or national labor market. The reason for this is that the average AG wages reported for hospital staff could represent a different occupational mix than the average AG wages under contract. For example, a hospital could choose to employ staff to perform their bookkeeping and tax preparation services, but contract out their legal services. The higher average annual wage rate for the contracted AG services compared to the in-house AG services would not necessarily be a result of purchasing services in differing geographic areas, but rather a reflection of the different skill-mix represented in each group.

At the time this survey was initiated, it was not a viable option to alter the Medicare cost report in such a way as to collect this information due to the long periods of time between when the Medicare cost report questions are updated.

Comment: One commenter stated that it is inappropriate to restrict the wage index adjustment to labor-related costs that vary with the local labor market without recognizing that there are significant nonlabor costs that vary with the local market, of which professional liability insurance is but one obvious example. The commenter cited a regression analysis which showed that 85 percent of the variation in the estimated total unit costs of Medicare fee-for-service cases was explained by local input prices.

Response: For purposes of estimating the labor-related share of the market basket, in accordance with the aforementioned section 1886(d)(3)(E)(i) of the Act, we include only wage and wage-related costs in that proportion. The law does not call for the inclusion of nonlabor-related costs to be included in the labor-related share.

As described in the FY 2006 IPPS final rule (70 FR 47394), we previously performed regression analyses to reevaluate the assumptions used in determining the labor-related share. Using several regression specifications, we attempted to determine the proportion of costs that are influenced by the area wage index. We note that the results obtained for the relevant coefficients (roughly equivalent to the labor share) using the various specifications were less than 85 percent.

Comment: Many commenters disagreed with CMS removing any portion of professional fees from the labor-related share. The commenters stated that CMS did not appear to take into account the prevailing wages of areas from which hospitals typically purchase professional fees. They believe that it is uncommon for hospitals to purchase professional services from firms located in areas with lower prevailing wages than their own wage area. Therefore, they claimed that CMS failed to recognize the premium that hospitals must pay professionals from similar or higher prevailing wage areas.

Several commenters also believed that CMS' assertion that a portion of professional fees is nonlabor-related is invalid because professional fees do, in fact, vary across regions and localities. The commenters indicated that even if a professional services firm is not based in the local area, professional fees are modified in response to local market factors. They added that rates and fees are set in a competitive market and must reflect the conditions of that market. In addition, several commenters stated that professional services are highly labor-intensive and constitute a necessary business expense. Finally, one commenter indicated that even though these services may be purchased from another entity, they represent substitutes for hospital-employed staff and, thus, should be regarded by CMS as labor-related.

Response: We disagree with the commenters' assertion that CMS should include all professional fees in the labor-related share. We recognize that hospitals may often purchase professional services from geographic areas with higher prevailing wages than their own. We further recognize that the prices for these services vary across regions and localities and that the services themselves are labor-intensive. However, because we now have empirical evidence we can use to establish what portion of these professional fees are actually incurred in the local labor market, in accordance with section 1886(d)(3)(E)(i) of the Act, we are including only such wage and wage-related costs in the labor-related share. To the extent the evidence shows that the fees paid do not vary with, or are not influenced by, the local labor market, we are not including them in the labor-related share and are not subjecting them to the wage index adjustment.

Comment: Several commenters stated that the proposed change to the labor-related share will only affect hospitals in areas with a wage index over 1.0. However, the commenters claimed that these higher-wage hospitals are much more likely to hire professional firms that are actually located in their local labor market and, thus, are paying higher wages. The commenters stated that most urban areas have an excellent supply of professional services firms, thereby enabling urban hospitals to purchase such services from a local or regional market rather than a national market. In addition, some commenters claimed that this proposal will have an adverse effect on urban hospitals in general. One commenter stated that the proposed labor-related share reduction would most seriously affect large urban teaching hospitals.

One commenter stated that CMS' proposed change to the labor-related share is counter-intuitive to CMS's policy goal and would actually dampen the sensitivity of the IPPS payment methodology to area wage variations. The commenter cited that academic medical centers located in large urban markets are the most likely hospitals to be in markets with substantial local competition for professional services—markets in which professional services fees are most likely to be influenced by local labor market conditions. The commenter stated that the proposed methodology premised on the assumption that 73 percent of home office costs reflect national average wage patterns produces a substantial downward payment bias for teaching hospitals. Thus, the commenter urged CMS to only use more recent data and hold all other aspects constant, which would result in a labor-related share of 72.1 percent. The commenter stated that, at a minimum, the current labor-related share of 69.7 percent should be retained, pending further study and analysis.

Response: We recognize that many hospitals could be affected differently by a change in the labor-related share. However, we believe the law calls for this proportion to be based on a national average and does not distinguish between types of hospitals for purposes of estimating or applying the labor-related share.

We disagree with the suggestions that the FY 2006-based market basket's labor-related share should be set to 72.1 percent (as a result of holding all other aspects constant from the FY 2002-based market basket) or that it should be held to its current 69.7 percent level. We believe that incorporating more recent data, as well as the results of our research, represents a technical improvement to the accuracy of the market basket.

Comment: One commenter stated that in order for hospitals to become more efficient and cost effective, they often use contract employees. The commenter further stated that in order to obtain the best price and service, these employees are located outside the local labor market. The commenter claimed that disallowing these services to be included in the wage index survey would reduce their labor-related payment rate and not adequately reimburse for care of Medicare patients.

Response: We do include direct patient contract labor expenses in the labor-related share of the IPPS market basket. These costs are included in the Wages Salaries and Benefits cost weights. We only exclude from the labor-related share those contract labor costs associated with professional fees and home office costs that were purchased outside of the local labor market. As stated previously, the purpose of the labor-related share is to determine which portion of the standardized payment amount that is subject to the hospital wage index. Therefore, we define the labor-related share as those expenses that are labor-intensive and vary with, or are influenced by, the local labor market.

Comment: One commenter stated that without survey detail, they were unsure of CMS' treatment of professional fees paid for by a home office. The commenter stated that currently CMS excludes this expense for wage index purposes as the “home office cost center is not included in the current definition of contract services for the wage index.” The commenter believed that this created an inconsistency among the independent hospitals, which can include the professional fee costs/hours while health systems cannot. The commenter asked CMS to comment on its treatment of professional fees paid for by a home office and its use of such data in its survey.

Response: The CMS survey asked the responding hospitals to share what proportion of their professional services were purchased from vendors located beyond their local labor market. We expected that, irrespective of the mechanism of the purchase (that is, purchased directly by the hospital or purchased by the hospital's home office on the hospital's behalf), the approach to answering the questions remains the same. Therefore, we believe independent hospitals, as well as hospital groups, were captured appropriately.

Comment: One commenter questioned the conclusion from CMS' methodology, which implicitly assumes that the labor costs associated with “non-local” services, or those that are not adjusted at all for area wage variations, more closely reflects the national average than labor market conditions in the local area of the hospital receiving the services. The commenter described the market for professional services provided to hospitals as those that can be divided into the following categories: (1) Truly local firms whose clientele is comprised of the hospitals in a specific geographic area; (2) local offices of regional or national firms that will staff local assignments with some mix of local and non-local professionals; (3) firms that are “regional” in the sense of serving multiple geographic markets from a centralized location; and (4) truly national firms that operate nationwide from a single headquarters office and that serve local hospitals without assistance from locally based practitioners. The commenter claimed that CMS implicitly assumed that any firm that does not fall into the first category would experience labor costs indistinguishable from those that fall in the last category. However, the commenter stated that, in reality all such firms compete against each other in each local market. Therefore, the commenter added, local labor market conditions drive the prices local hospitals will pay for professional services even if those services wind up being rendered by professionals from out of town. The commenter stated that there is substantial regional variation in salaries paid to entry-level and early-career professionals who represent the lion's share of the cost that will be billed to hospitals. The commenter concluded that a payment methodology premised on the notion of a national professional services market with uniform prices fails to reflect the reality of what hospitals pay for professional services. The commenter also states that CMS did not disclose how professional services firms were identified as being “national” firms in its survey. The commenter believed that determining the location of a contract based on the mailing address of the contractor could materially understate the volume of services rendered by national or regional firms with a local presence, which would be fully subject to local labor market conditions. Thus, the commenter concluded the effect of reducing the labor-related share would be to dampen the sensitivity of the IPPS payment methodology to area wage variations.

Response: We recognize that fees paid for professional services provided by firms not located in the same local labor market as the hospital may be purchased in local labor markets and not always in a national market. However, given that we now have empirical evidence that can be used to estimate the portion of costs that varies based on the local labor market, we believe it is in keeping with section 1886(d)(3)(E)(i) of the Act to only assign that portion that does vary to the labor-related share. Section 1886(d)(3)(E)(i) of the Act states that “in general.—Except as provided in clause (ii), 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 computed under subparagraph (D) 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.”

Comment: One commenter stated that the treatment of contract labor has a direct influence on the labor-related share, which in turn affects the area wage index adjusted portion of the payments. Conversely, the commenter stated, because the labor-related share now includes accounting and auditing services, it is not clear whether the data currently used to develop the area wage index are inclusive of the costs for accounting and auditing because consideration of these costs for area wage index purposes is only a current CMS wage data policy convention. Therefore, the commenter added, there could be a mismatch between the data CMS is using for the labor-related share determination and the data CMS utilizes for developing the area wage index.

Response: We are not changing our methodology on how contract labor costs are included in the IPPS market basket. As has been done historically, the market basket includes all contract labor services purchased by the hospital. Direct patient contract labor costs are included in the Wage Salaries and Benefits cost weights, whereas other nondirect patient contract labor costs are represented in the other cost weights.

Also, we interpret the commenter's statement to imply that accounting and auditing services were previously excluded from the labor-related share. Historically, 100 percent of the accounting and auditing services expenses were included in the labor-related share. We proposed to only include 66 percent of the accounting and auditing costs in the labor-related share because the remaining 34 percent of these costs were determined to have been purchased outside of the local labor market.

With respect to a possible mismatch between the labor-related share and the area wage index, data from Worksheet S-3, part II, of the Medicare cost report are used to estimate both. Those data provide information on wage and wage-related costs incurred by the hospital but are not detailed enough to distinguish between costs incurred via purchase and costs incurred via direct hire. In estimating the labor-related share, we incorporate data from other data sources to supplement the Medicare cost report data to more accurately capture and apportion wage and wage-related costs that are purchased.

Comment: One commenter questioned whether the proposed revision of the labor-related share of the operating IPPS rates would affect the capital IPPS geographic adjustment factor (GAF), which is derived from the hospital wage index. The commenter requested that CMS review whether the formula used to determine the capital GAF should be revised based on the update of the operating IPPS labor-related share.

Response: In determining payments under the capital IPPS, the capital rate is adjusted for differences in local cost variations by a factor (the GAF) that is equal to the hospital's applicable wage index raised to the 0.6848 power (§ 412.316(a) of our regulations). The formula for the GAF was developed using a regression analysis and the exponential form of this factor is used in order to apply a single factor to the entire capital rate rather than splitting the capital rate into labor-related share and nonlabor-related share (56 FR 43375). The formula for the GAF is independent of the operating IPPS labor-related share and, therefore, requires no adjustment based on the revision of the operating IPPS labor-relate share. The GAF will continue to be computed as the hospital's applicable wage index raised to the 0.6848 power.

After consideration of the public comments received, in this final rule, we are revising our labor-related share that we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24159-24161) to incorporate a revision to our methodology for allocating NAICS 55 expenses to the labor-related share.

Below is a chart comparing the FY 2006-based labor-related share and the FY 2002-based labor-related share.

Chart 5—Comparison of the FY 2006-Based Labor-Related Share and the FY 2002-Based Labor-Related Share Back to Top
FY 2002-based market basket cost weights FY 2006-based market basket cost weights
Wages and Salaries 48.171 47.213
Employee Benefits 11.822 12.414
Professional Fees: Labor-Related 5.510 5.356
Administrative and Business Support Services 0.626
All Other: Labor-Related Services 4.228 3.193
Total Labor-Related Share 69.731 68.802

Using the cost category weights from the FY 2006-based IPPS market basket, we calculated a labor-related share of 68.802 percent, approximately 0.9 percentage points lower than the current labor-related share of 69.731.

We continue to believe, as we have stated in the past, that these operating cost categories are related to, influenced by, or vary with the local markets. Therefore, our definition of the labor-related share continues to be consistent with section 1886(d)(3) of the Act.

Using the cost category weights that we determined in section IV.B.1. of this preamble, we calculated a labor-related share of 68.802 percent, using the FY 2006-based IPPS market basket. Accordingly, we are implementing a labor-related share of 68.8 percent for discharges occurring on or after October 1, 2009. We note that section 403 of Public Law 108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this employment “would result in lower payments than would otherwise be made.”

As we proposed, we also are updating the labor-related share for Puerto Rico. Consistent with our methodology for determining the national labor-related share, we add the Puerto Rico-specific relative weights for wages and salaries, employee benefits, and contract labor. Because there are no Puerto Rico-specific relative weights for professional fees and labor intensive services, we use the national weights.

Below is a chart comparing the FY 2006-based Puerto Rico-specific labor-related share and the FY 2002-based Puerto Rico-specific labor-related share.

Chart 6—Comparison of the FY 2006-Based Puerto Rico-Specific Labor-Related Share and FY 2002-Based Puerto Rico-Specific Labor-Related Share Back to Top
FY 2002-based market basket cost weights FY 2006-based market basket cost weights
Wages and Salaries 40.201 44.221
Benefits 8.782 8.691
Professional Fees: Labor-Related 5.510 5.356
Administrative and Business Support Services 0.626
All Other: Labor-Related Services 4.228 3.193
Total Labor-Related Share 58.721 62.087

Using the FY 2006-based Puerto Rico cost category weights, we calculated a labor-related share of 62.087 percent, approximately 3.4 percentage points higher than the current Puerto-Rico specific labor-related share of 58.721. Accordingly, we are adopting an updated Puerto Rico labor-related share of 62.1 percent.

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

In the FY 2006 IPPS final rule (70 FR 47396), we adopted the use of the FY 2002-based IPPS operating market basket to update the target amounts for children's and cancer hospitals and religious nonmedical health care institutions (RNHCIs). Children's and cancer hospitals and RNHCIs are still reimbursed solely under the reasonable cost-based system, subject to the rate-of-increase limits. Under these limits, an annual target amount (expressed in terms of the inpatient operating cost per discharge) is set for each hospital based on the hospital's own historical cost experience trended forward by the applicable rate-of-increase percentages.

As we proposed (74 FR 24161), under the broad authority in sections 1886(b)(3)(A) and (B), 1886(b)(3)(E), and 1871 of the Act and section 4454 of the BBA, consistent with our use of the IPPS operating market basket percentage increase to update target amounts, we are using the FY 2006-based IPPS operating market basket percentage increase to update the target amounts for children's and cancer hospitals and RNHCIs.

Due to the small number of children's and cancer hospitals and RNHCIs that receive, in total, less than 1 percent of all Medicare payments to hospitals and because these hospitals provide limited Medicare cost report data, we are unable to create a separate market basket specifically for these hospitals. Based on the limited data available, we believe that the FY 2006-based IPPS operating market basket most closely represents the cost structure of children's and cancer hospitals and RNHCIs. Therefore, we believe that the percentage change in the FY 2006-based IPPS operating market basket is the best available measure of the average increase in the prices of the goods and services purchased by cancer and children's hospitals and RNHCIs in order to provide care.

We did not receive any public comments on the provisions of this section.

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

The CIPI was originally described in the FY 1993 IPPS final rule (57 FR 40016). There have been subsequent discussions of the CIPI presented in the IPPS proposed and final payment rules. The FY 2006 IPPS final rule (70 FR 47387) discussed the most recent rebasing and revision of the CIPI to a FY 2002 base year, which reflected the capital cost structure of the hospital industry in that year.

As we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24161), we are rebasing and revising the CIPI to a FY 2006 base year to reflect the more current structure of capital costs in hospitals. As with the FY 2002-based index, we developed two sets of weights in order to calculate the FY 2006-based CIPI. The first set of weights identifies the proportion of hospital capital expenditures attributable to each expenditure category, while the second set of weights is a set of relative vintage weights for depreciation and interest. The set of vintage weights is used to identify the proportion of capital expenditures within a cost category that is attributable to each year over the useful life of the capital assets in that category. A more thorough discussion of vintage weights is provided later in this section.

Both sets of weights are developed using the best data sources available. In reviewing source data, we determined that the Medicare cost reports provided accurate data for all capital expenditure cost categories. We used the FY 2006 Medicare cost reports for IPPS hospitals to determine weights for all three cost categories: depreciation, interest, and other capital expenses.

Lease expenses are unique in that they are not broken out as a separate cost category in the CIPI, but rather are proportionally distributed among the cost categories of depreciation, interest, and other, reflecting the assumption that the underlying cost structure of leases is similar to that of capital costs in general. As was done in previous rebasings of the CIPI, we first assumed 10 percent of lease expenses represents overhead and assigned them to the other capital expenses cost category accordingly. The remaining lease expenses were distributed across the three cost categories based on the respective weights of depreciation, interest, and other capital not including lease expenses.

Depreciation contains two subcategories: (1) Building and fixed equipment; and (2) movable equipment. The apportionment between building and fixed equipment and movable equipment was determined using the Medicare cost reports. This methodology was also used to compute the apportionment used in the FY 2002-based index.

The total interest expense cost category is split between government/nonprofit interest and for-profit interest. The FY 2002-based CIPI allocated 75 percent of the total interest cost weight to government/nonprofit interest and proxied that category by the average yield on domestic municipal bonds. The remaining 25 percent of the interest cost weight was allocated to for-profit interest and was proxied by the average yield on Moody's Aaa bonds (70 FR 47387).

For this rebasing, we derived the split using the relative FY 2006 Medicare cost report data on interest expenses for government/nonprofit and for-profit hospitals. Based on these data, we calculated an 85/15 split between government/nonprofit and for-profit interest. We believe it is important that this split reflects the latest relative cost structure of interest expenses.

Chart 7 presents a comparison of the FY 2006-based CIPI cost weights and the FY 2002-based CIPI cost weights.

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

Because capital is acquired and paid for over time, capital expenses in any given year are determined by both past and present purchases of physical and financial capital. The vintage-weighted CIPI is intended to capture the long-term consumption of capital, using vintage weights for depreciation (physical capital) and interest (financial capital). These vintage weights reflect the proportion of capital purchases attributable to each year of the expected life of building and fixed equipment, movable equipment, and interest. We used the vintage weights to compute vintage-weighted price changes associated with depreciation and interest expense. Following publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, and in order to provide greater transparency, we posted on the CMS market basket Web page at: http://www.cms.hhs.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp#TopOfPage an illustrative spreadsheet that contains an example of how the vintage-weighted price indexes are calculated.

Vintage weights are an integral part of the CIPI. Capital costs are inherently complicated and are determined by complex capital purchasing decisions, over time, based on such factors as interest rates and debt financing. In addition, capital is depreciated over time instead of being consumed in the same period it is purchased. The CIPI accurately reflects the annual price changes associated with capital costs, and is a useful simplification of the actual capital investment process. By accounting for the vintage nature of capital, we are able to provide an accurate, stable annual measure of price changes. Annual nonvintage price changes for capital are unstable due to the volatility of interest rate changes and, therefore, do not reflect the actual annual price changes for Medicare capital-related costs. The CIPI reflects the underlying stability of the capital acquisition process and provides hospitals with the ability to plan for changes in capital payments.

To calculate the vintage weights for depreciation and interest expenses, we needed a time series of capital purchases for building and fixed equipment and movable equipment. We found no single source that provides a uniquely best time series of capital purchases by hospitals for all of the above components of capital purchases. The early Medicare cost reports did not have sufficient capital data to meet this need. Data we obtained from the American Hospital Association (AHA) do not include annual capital purchases. However, AHA does provide a consistent database back to 1963. We used data from the AHA Panel Survey and the AHA Annual Survey to obtain a time series of total expenses for hospitals. We then used data from the AHA Panel Survey supplemented with the ratio of depreciation to total hospital expenses obtained from the Medicare cost reports to derive a trend of annual depreciation expenses for 1963 through 2006.

In order to estimate capital purchases using data on depreciation expenses, the expected life for each cost category (building and fixed equipment, movable equipment, and interest) is needed to calculate vintage weights. We used FY 2006 Medicare cost reports to determine the expected life of building and fixed equipment and of movable equipment. The expected life of any piece of equipment can be determined by dividing the value of the asset (excluding fully depreciated assets) by its current year depreciation amount. This calculation yields the estimated useful life of an asset if depreciation were to continue at current year levels, assuming straight-line depreciation. From the FY 2006 Medicare cost reports, the expected life of building and fixed equipment was determined to be 25 years, and the expected life of movable equipment was determined to be 12 years. The FY 2002-based CIPI was based on an expected life of building and fixed equipment of 23 years. It used 11 years as the expected life for movable equipment.

As we proposed, we used the building and fixed equipment and movable equipment weights derived from FY 2006 Medicare cost reports to separate the depreciation expenses into annual amounts of building and fixed equipment depreciation and movable equipment depreciation (74 FR 24162). Year-end asset costs for building and fixed equipment and movable equipment were determined by multiplying the annual depreciation amounts by the expected life calculations from the FY 2006 Medicare cost reports. We then calculated a time series back to 1963 of annual capital purchases by subtracting the previous year asset costs from the current year asset costs. From this capital purchase time series, we were able to calculate the vintage weights for building and fixed equipment and for movable equipment. Each of these sets of vintage weights is explained in more detail below.

For building and fixed equipment vintage weights, we used the real annual capital purchase amounts for building and fixed equipment to capture the actual amount of the physical acquisition, net of the effect of price inflation. This real annual purchase amount for building and fixed equipment was produced by deflating the nominal annual purchase amount by the building and fixed equipment price proxy, BEA's chained price index for nonresidential construction for hospitals and special care facilities. Because building and fixed equipment have an expected life of 25 years, the vintage weights for building and fixed equipment are deemed to represent the average purchase pattern of building and fixed equipment over 25-year periods. With real building and fixed equipment purchase estimates available back to 1963, we averaged nineteen 25-year periods to determine the average vintage weights for building and fixed equipment that are representative of average building and fixed equipment purchase patterns over time. Vintage weights for each 25-year period are calculated by dividing the real building and fixed capital purchase amount in any given year by the total amount of purchases in the 25-year period. This calculation is done for each year in the 25-year period, and for each of the nineteen 25-year periods. We used the average of each year across the nineteen 25-year periods to determine the average building and fixed equipment vintage weights for the FY 2006-based CIPI.

For movable equipment vintage weights, the real annual capital purchase amounts for movable equipment were used to capture the actual amount of the physical acquisition, net of price inflation. This real annual purchase amount for movable equipment was calculated by deflating the nominal annual purchase amounts by the movable equipment price proxy, the PPI for machinery and equipment. Based on our determination that movable equipment has an expected life of 12 years, the vintage weights for movable equipment represent the average expenditure for movable equipment over a 12-year period. With real movable equipment purchase estimates available back to 1963, thirty-two 12-year periods were averaged to determine the average vintage weights for movable equipment that are representative of average movable equipment purchase patterns over time. Vintage weights for each 12-year period are calculated by dividing the real movable capital purchase amount for any given year by the total amount of purchases in the 12-year period. This calculation was done for each year in the 12-year period and for each of the thirty-two 12-year periods. We used the average of each year across the thirty-two 12-year periods to determine the average movable equipment vintage weights for the FY 2006-based CIPI.

For interest vintage weights, the nominal annual capital purchase amounts for total equipment (building and fixed, and movable) were used to capture the value of the debt instrument. Because we have determined that hospital debt instruments have an expected life of 25 years, the vintage weights for interest are deemed to represent the average purchase pattern of total equipment over 25-year periods. With nominal total equipment purchase estimates available back to 1963, nineteen 25-year periods were averaged to determine the average vintage weights for interest that are representative of average capital purchase patterns over time. Vintage weights for each 25-year period are calculated by dividing the nominal total capital purchase amount for any given year by the total amount of purchases in the 25-year period. This calculation is done for each year in the 25-year period and for each of the nineteen 25-year periods. We used the average of each year across the nineteen 25-year periods to determine the average interest vintage weights for the FY 2006-based CIPI.

The vintage weights for the FY 2002-based CIPI and the FY 2006-based CIPI are presented in Chart 8.

Chart 8—FY 2002 Vintage Weights and FY 2006 Vintage Weights for Capital-Related Price Proxies Back to Top
Year Building and fixed equipment Movable equipment Interest
FY 2002 23 years FY 2006 25 years FY 2002 11 years FY 2006 12 years FY 2002 23 years FY 2006 25 years
Note: Detail may not add to total due to rounding.
1 0.021 0.021 0.065 0.063 0.010 0.010
2 0.022 0.023 0.071 0.067 0.012 0.012
3 0.025 0.025 0.077 0.071 0.014 0.014
4 0.027 0.027 0.082 0.075 0.016 0.016
5 0.029 0.029 0.086 0.079 0.019 0.018
6 0.031 0.031 0.091 0.082 0.023 0.020
7 0.033 0.032 0.095 0.085 0.026 0.023
8 0.035 0.033 0.100 0.086 0.029 0.025
9 0.038 0.036 0.106 0.090 0.033 0.028
10 0.040 0.038 0.112 0.093 0.036 0.031
11 0.042 0.040 0.117 0.102 0.039 0.034
12 0.045 0.042 0.106 0.043 0.038
13 0.047 0.044 0.048 0.041
14 0.049 0.045 0.053 0.044
15 0.051 0.046 0.056 0.047
16 0.053 0.047 0.059 0.050
17 0.056 0.048 0.062 0.053
18 0.057 0.050 0.064 0.057
19 0.058 0.050 0.066 0.059
20 0.060 0.050 0.070 0.060
21 0.060 0.048 0.071 0.060
22 0.061 0.048 0.074 0.062
23 0.061 0.047 0.076 0.063
24 0.049 0.068
25 0.048 0.069
Total 1.000 1.000 1.000 1.000 1.000 1.000

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. As we proposed, in this final rule, we used the same price proxies for the FY 2006-based CIPI that were used in the FY 2002-based CIPI, with the exception of the Boeckh Construction Index (74 FR 24164). We replaced the Boeckh Construction Index with BEA's chained price index for nonresidential construction for hospitals and special care facilities. The BEA index represents construction of facilities such as hospitals, nursing homes, hospices, and rehabilitation centers. Although these price indices move similarly over time, we believe that it is more technically appropriate to use an index that is more specific to the hospital industry. We believe these are the most appropriate proxies for hospital capital costs that meet our selection criteria of relevance, timeliness, availability, and reliability. The rationale for selecting the price proxies, excluding the building and fixed equipment price proxy, was explained more fully in the FY 1997 IPPS final rule (61 FR 46196).

The price proxies are presented in Chart 7.

Chart 9 below compares both the historical and forecasted percent changes in the FY 2002-based CIPI and the FY 2006-based CIPI.

Chart 9—Comparison of FY 2002-Based and FY 2006-Based Capital Input Price Index, Percent Change, FY 2004 Through FY 2012 Back to Top
Fiscal year CIPI, FY 2002-based CIPI, FY 2006-based
Source: IHS Global Insight, Inc, 2nd Quarter 2009; USMACRO/CONTROL0609@CISSIM/TL0509.SIM.
FY 2004 0.5 0.8
FY 2005 0.6 0.9
FY 2006 0.9 1.1
FY 2007 1.2 1.3
FY 2008 1.4 1.4
Forecast:    
FY 2009 1.7 1.5
FY 2010 1.5 1.2
FY 2011 1.4 1.3
FY 2012 1.6 1.4
Average:    
FYs 2004-2008 0.9 1.1
FYs 2009-2012 1.6 1.4

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

Chart 10—CMS Capital Input Price Index Percent Changes, Total and Depreciation and Interest Components, FYs 2004 Through 2012 Back to Top
Fiscal year Total Depreciation Interest
Source: IHS Global Insight, Inc, 2nd Quarter 2009; USMACRO/CONTROL0609@CISSIM/TL0509.SIM.
FY 2004 0.8 1.5 −2.6
FY 2005 0.9 1.7 −3.1
FY 2006 1.1 2.0 −3.2
FY 2007 1.3 2.1 −3.4
FY 2008 1.4 2.1 −2.6
Forecast:      
FY 2009 1.5 2.1 −2.0
FY 2010 1.2 1.8 −2.1
FY 2011 1.3 1.7 −1.4
FY 2012 1.4 1.7 −0.7

Rebasing the CIPI from FY 2002 to FY 2006 decreased the percent change in the FY 2010 forecast by 0.3 percentage point, from 1.5 to 1.2, as shown in Chart 9. The difference in the forecast of the FY 2010 market basket increase is primarily due to the proposed change in the price proxy for building and fixed equipment as well as the proposed change in the vintage weights applied to the price proxy for interest. As mentioned above, we are changing the price proxy used for building and fixed equipment to BEA's chained price index for nonresidential construction for hospitals and special care facilities. We believe this change represents a technical improvement as the BEA price index is an index that is more representative of the hospital industry. For the FY 2010 update, the result of this change is a forecasted price change in total depreciation of 1.8 percent in the FY 2006-based CIPI compared to 2.0 percent in the FY 2002-based CIPI. The other primary factor contributing to the difference is the change in the vintage weights used to calculate the vintage-weighted price proxy for interest. The forecasted price change in total interest is −2.1 percent in the FY 2006-based CIPI compared to −1.5 percent in the FY 2002-based CIPI. This is a result of changing the expected life of hospital debt instruments from 23 years to 25 years. We did not receive any public comments on our proposed methodological changes to the capital input price index published in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24154). Therefore, we are adopting as final, without modification, the proposed FY 2006-based CIPI for FY 2010 in this final rule.

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

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

1. Background

a. Overview

CMS is seeking to promote higher quality and more efficient health care for Medicare beneficiaries. This effort is supported by the adoption of an increasing number of widely-agreed upon quality measures. CMS has worked with relevant stakeholders to define measures of quality in almost every setting and currently measures some aspect of care for almost all Medicare beneficiaries. These measures assess structural aspects of care, clinical processes, patient experiences with care, and, increasingly, outcomes.

CMS has implemented quality measure reporting programs for multiple settings of care. The Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) program implements a quality reporting program for hospital inpatient services. In addition, CMS has implemented quality reporting programs for hospital outpatient services, the Hospital Outpatient Quality Data Reporting Program (HOP QDRP), and for physicians and other eligible professionals, the Physician Quality Reporting Initiative (PQRI). CMS has also implemented quality reporting programs for home health agencies and skilled nursing facilities that are based on conditions of participation, and an end-stage renal disease quality reporting program that is based on conditions for coverage.

b. Hospital Quality Data Reporting Under Section 501(b) of Public Law 108-173

Section 501(b) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Public Law 108-173, added section 1886(b)(3)(B)(vii) to the Act. This section established the authority for the RHQDAPU program and revised the mechanism used to update the standardized payment amount for inpatient hospital operating costs. Specifically, section 1886(b)(3)(B)(vii)(I) of the Act, before it was amended by section 5001(a) of Public Law 109-171, provided for a reduction of 0.4 percentage points to the update percentage increase (also known as the market basket update) for FY 2005 through FY 2007 for any subsection (d) hospital that did not submit data on a set of 10 quality indicators established by the Secretary as of November 1, 2003. It also provides that any reduction would apply only to the fiscal year involved, and would not be taken into account in computing the applicable percentage increase for a subsequent fiscal year. The statute thereby established an incentive for IPPS hospitals to submit data on the quality measures established by the Secretary, and also built upon the previously established Voluntary Hospital Quality Data Reporting Program that we described in the FY 2009 IPPS final rule (73 FR 48598).

We implemented section 1886(b)(3)(B)(vii) of the Act in the FY 2005 IPPS final rule (69 FR 49078) and codified the applicable percentage change in § 412.64(d) of our regulations. We adopted additional requirements under the RHQDAPU program in the FY 2006 IPPS final rule (70 FR 47420).

c. Hospital Quality Data Reporting under Section 5001(a) of Public Law 109-171

Section 5001(a) of the Deficit Reduction Act of 2005 (DRA), Public Law 109-171, further amended section 1886(b)(3)(B) of the Act to revise the mechanism used to update the standardized payment amount for hospital inpatient operating costs, in particular, by adding new section 1886(b)(3)(B)(viii) to the Act. Specifically, sections 1886(b)(3)(B)(viii)(I) and (II) of the Act provide that the payment update for FY 2007 and each subsequent fiscal year be reduced by 2.0 percentage points for any subsection (d) hospital that does not submit quality data in a form and manner, and at a time, specified by the Secretary. Section 1886(b)(3)(B)(viii)(I) of the Act also provides that any reduction in a hospital's payment update will apply only with respect to the fiscal year involved, and will not be taken into account for computing the applicable percentage increase for a subsequent fiscal year. In the FY 2007 IPPS final rule (71 FR 48045), we amended our regulations at § 412.64(d)(2) to reflect the 2.0 percentage point reduction in the payment update for FY 2007 and subsequent fiscal years for subsection (d) hospitals that do not comply with requirements for reporting quality data, as provided for under section 1886(b)(3)(B)(viii) of the Act.

(1) Quality Measures

Section 1886(b)(3)(B)(viii)(III) of the Act requires that the Secretary expand the “starter set” of 10 quality measures that was established by the Secretary as of November 1, 2003, as the Secretary determines to be appropriate for the measurement of the quality of care furnished by a hospital in inpatient settings. In expanding this set of measures, section 1886(b)(3)(B)(viii)(IV) of the Act requires that, effective for payments beginning with FY 2007, the Secretary begin to adopt the baseline set of performance measures as set forth in a report issued by the Institute of Medicine (IOM) of the National Academy of Sciences under section 238(b) of Public Law 108-173. [8]

The IOM measures include: 21 Hospital Quality Alliance (HQA) quality measures (including the “starter set” of 10 quality measures); the Hospital Consumer Assessment of Health Providers and Systems (HCAHPS) patient experience of care survey; and 3 structural measures. [9] The structural measures are: (1) Adoption of computerized provider order entry for prescriptions; (2) staffing of intensive care units with intensivists; and (3) evidence-based hospital referrals. These structural measures constitute the Leapfrog Group's original “three leaps,” and are part of the National Quality Forum's (NQF's) 30 Safe Practices for Better Healthcare. The HCAHPS survey is part of the Consumer Assessment of Healthcare Providers and Systems (CAHPS) program, which develops and supports the use of a comprehensive and evolving family of standardized surveys that ask consumers and patients to report on and evaluate their experiences with health care. These surveys cover topics that are important to consumers, such as the communication skills of providers and the accessibility of services. CAHPS originally stood for the Consumer Assessment of Health Plans Study, but as the products have evolved beyond health plans, the name has evolved as well to capture the full range of survey products and tools.

Section 1886(b)(3)(B)(viii)(V) of the Act requires that, effective for payments beginning with FY 2008, the Secretary add other quality measures that reflect consensus among affected parties, and to the extent feasible and practicable, have been set forth by one or more national consensus building entities. The NQF is a voluntary consensus standard-setting organization with a diverse representation of consumer, purchaser, provider, academic, clinical, and other health care stakeholder organizations. The NQF was established to standardize health care quality measurement and reporting through its consensus development process. We have generally adopted NQF-endorsed measures. However, we believe that consensus among affected parties also can be reflected by other means, including consensus achieved during the measure development process, consensus shown through broad acceptance and use of measures, and consensus through public comment.

Section 1886(b)(3)(B)(viii)(VI) of the Act authorizes the Secretary to replace any quality measures or indicators in appropriate cases, such as where all hospitals are effectively in compliance with a measure, or the measures or indicators have been subsequently shown to not represent the best clinical practice. Thus, the Secretary is granted broad discretion to replace measures that are no longer appropriate for the RHQDAPU program.

In the FY 2007 IPPS final rule, we began to expand the RHQDAPU program measures by adding 11 quality measures to the 10-measure starter set to establish an expanded set of 21 quality measures for the FY 2007 payment determination (71 FR 48033 through 48037, 48045).

In the CY 2007 OPPS/ASC final rule (71 FR 68201), we adopted six additional quality measures for the FY 2008 payment determination, for a total of 27 measures. Two of these measures (30-Day Risk Standardized Mortality Rates for Heart Failure and 30-Day Risk Standardized Mortality Rates for AMI) were calculated using existing administrative Medicare claims data; thus, no additional data submission by hospitals was required for these two measures. The measures used for the FY 2008 payment determination included, for the first time, the HCAHPS patient experience of care survey.

In the FY 2008 IPPS final rule (72 FR 47348 through 47358) and the CY 2008 OPPS/ASC final rule with comment period (72 FR 66875 through 66877), we added three additional process measures to the RHQDAPU program measure set. (These three measures are SCIP-Infection-4: Cardiac Surgery Patients with Controlled 6AM Postoperative Serum Glucose, SCIP-Infection-6: Surgery Patients with Appropriate Hair Removal, and Pneumonia 30-day mortality (Medicare patients).) The addition of these 3 measures brought the total number of RHQDAPU program measures to be used for the FY 2009 payment determination to 30 (72 FR 66876). The 30 measures used for the FY 2009 annual payment determination are listed in the FY 2009 IPPS final rule (73 FR 48600 through 48601).

For the FY 2010 payment determination, we added 15 new measures to the RHQDAPU program measure set and retired one. Of the new measures, 13 were adopted in the FY 2009 IPPS final rule (73 FR 48602 through 48611) and two additional measures were finalized in the CY 2009 OPPS/ASC final rule with comment period (73 FR 68780 through 68781). This resulted in an expansion of the RHQDAPU program measures from 30 measures for the FY 2009 payment determination to 44 measures for the FY 2010 payment determination. The RHQDAPU program measures for the FY 2010 payment determination consist of: 26 chart-abstracted process measures, which measure care provided for Acute Myocardial Infarction (AMI), Heart Failure (HF), Pneumonia (PN), or Surgical Care Improvement (SCIP); 6 claims-based measures, which evaluate 30-day mortality or 30-day readmission rates for AMI, HF, or PN; 9 AHRQ claims-based patient safety/inpatient quality indicator measures; 1 claims-based nursing sensitive measure; 1 structural measure that assesses participation in a systematic database for cardiac surgery; and the HCAHPS patient experience of care survey. The measures are listed below.

Topic RHQDAPU program quality measures for the FY 2010 payment determination
Acute Myocardial Infarction (AMI) • AMI-1 Aspirin at arrival.
• AMI-2 Aspirin prescribed at discharge.
• AMI-3 Angiotensin Converting Enzyme Inhibitor (ACE-I) or Angiotensin II Receptor Blocker (ARB) for left ventricular systolic dysfunction.
• AMI-4 Adult smoking cessation advice/counseling.
• AMI-5 Beta blocker prescribed at discharge.
• AMI-6 Beta blocker at arrival.
• AMI-7a Fibrinolytic (thrombolytic) agent received within 30 minutes of hospital arrival.
• AMI-8a Timing of Receipt of Primary Percutaneous Coronary Intervention (PCI).
Heart Failure (HF) • HF-1 Discharge instructions.