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Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Rates and Costs of Graduate Medical Education: Fiscal Year 2002 Rates; Provisions of the Balanced Budget Refinement Act of 1999; and Provisions of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000

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AGENCY:

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

ACTION:

Final rules.

SUMMARY:

We are revising the Medicare hospital inpatient prospective payment systems for operating and capital costs to: implement applicable statutory requirements, including a number of provisions of the Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000 (Public Law 106-554); and implement changes arising from our continuing experience with these systems. In addition, in the Addendum to this final rule, we describe changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. These changes apply to discharges occurring on or after October 1, 2001. We also set forth the rate-of-increase limits as well as policy changes for hospitals and hospital units excluded from the prospective payment systems.

We are making changes to the policies governing payments to hospitals for the direct costs of graduate medical education and critical access hospitals.

Lastly, we are responding to public comments received on the following two related interim final rules that we published in the Federal Register and finalizing those interim rules:

  • An August 1, 2000 interim final rule with comment period (65 FR 47026, HCFA-1131-IFC) that implemented, or conformed the regulations to, certain statutory provisions relating to Medicare payments to hospitals for inpatient services that were contained in the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (Public Law 106-113), and that were effective during FY 2000. These provisions related to reclassification of hospitals from urban to rural status, reclassification of certain hospitals for purposes of payment during fiscal year 2000, critical access hospitals, payments to hospitals excluded from the prospective payment system, and payments for indirect and direct graduate medical education costs.
  • A June 13, 2001 interim final rule with comment period (66 FR 32172, HCFA-1178-IFC) that implemented, or conformed the regulations to, certain statutory provisions relating to Medicare payments to hospitals for inpatient services that were contained in Public Law 106-554, and that were effective prior to passage of Public Law 106-554 on December 21, 2000; on April 1, 2001; or on July 1, 2001. Many of the provisions of Public Law 106-554 modified changes to the Social Security Act made by Public Law 106-113 or the Balanced Budget Act of 1997 (Public Law 105-33), or both.

EFFECTIVE DATE:

The provisions of this final rule are effective October 1, 2001. This rule is a major rule as defined in 5 U.S.C. 804(2). Pursuant to 5 U.S.C. 801(a)(1)(A), we are submitting a report to Congress on this rule on August 1, 2001.

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FOR FURTHER INFORMATION CONTACT:

Stephen Phillips, (410) 786-4548, Operating Prospective Payment, Diagnosis-Related Groups (DRGs), Wage Index, Hospital Geographic Reclassifications, Sole Community Hospitals, Disproportionate Share Hospitals, and Medicare-Dependent, Small Rural Hospitals Issues; Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals, Graduate Medical Education and Critical Access Hospitals Issues.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

Availability of Copies and Electronic Access

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I. Background

A. Summary

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. Under these prospective payment systems, 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). Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG.

Under section 1886(d)(1)(B) of the Act in effect without consideration of the amendments made by Public Law 105-33, Public Law 106-113, and Public Law 106-554, certain specialty hospitals are excluded from the hospital inpatient prospective payment system: psychiatric hospitals and units, rehabilitation hospitals and units, children's hospitals, long-term care hospitals, and cancer hospitals. For these hospitals and units, Medicare payment for operating costs is based on reasonable costs subject to a hospital-specific annual limit, until the payment provisions of Public Laws 105-33, 106-113, and 106-554 that are applicable to three classes of these hospitals are implemented, as discussed below.Start Printed Page 39829

Various sections of Public Laws 105-33, 106-113, and 106-554 provide for the transition of rehabilitation hospitals and units, psychiatric hospitals and units, and long-term care hospitals from being paid on an excluded hospital basis to being paid on an individual prospective payment system basis. These provisions are as follows:

  • Rehabilitation Hospitals and Units. Section 1886(j) of the Act, as added by section 4421 of Public Law 105-33 and amended by section 125 of Public Law 106-113 and section 305 of Public Law 106-554, authorizes the implementation of a prospective payment system for inpatient hospital services furnished by rehabilitation hospitals and units. Section 4421 of Public Law 105-33 amended the Act by adding section 1886(j). Section 1886(j) of the Act provides for a fully implemented prospective payment system for inpatient rehabilitation hospitals and rehabilitation units, effective for cost reporting periods beginning during or after October 2002, with payment provisions during a transitional period based on target amounts specified in section 1886(b) of the Act. Section 125 of Public Law 106-113 amended section 1886(j) of the Act to require the Secretary to use a discharge as the payment unit for inpatient rehabilitation services under the prospective payment system and to establish classes of patient discharges by functional-related groups. Section 305 of Public Law 106-554 further amended section 1886(j) of the Act to allow hospitals to elect to be paid the full Federal prospective payment rather than the transitional period payments specified in the Act. A final rule implementing the prospective payment system for inpatient rehabilitation hospitals will be published in the Federal Register shortly.
  • Psychiatric Hospitals and Units. Sections 124(a) and (c) of Public Law 106-113 provide for the development of a per diem prospective payment system for payment for inpatient hospital services of psychiatric hospitals and units under the Medicare program, effective for cost reporting periods beginning on or after October 1, 2002. This system must include an adequate patient classification system that reflects the differences in patient resource use and costs among these hospitals and must maintain budget neutrality. We are in the process of developing a proposed rule, to be followed by a final rule, to implement the prospective payment system for psychiatric hospitals and units, effective for October 1, 2002.
  • Long-Term Care Hospitals. Sections 123(a) and (c) of Public Law 106-113 provide for the development of a per discharge prospective payment system for payment for inpatient hospital services furnished by long-term care hospitals under the Medicare program, effective for cost reporting periods beginning on or after October 1, 2002. Section 307(b)(1) of Public Law 106-554 provides that payments under the long-term care prospective payment system will be made on a prospective payment basis rather than a cost basis. The long-term care hospital prospective payment system must include a patient classification system that reflects the differences in patient resource use and costs, and must maintain budget neutrality. We are planning to develop a proposed rule, to be followed by a final rule, to implement the prospective payment system for long-term care hospitals, effective for October 1, 2002. Section 307 of Public Law 106-554 provides that if the Secretary is unable to develop a prospective payment system for long-term care hospitals that can be implemented by October 1, 2002, the Secretary must implement a prospective payment system that bases payment under the system using the existing acute hospital DRGs, modified where feasible to account for resource use of long-term care hospital patients using the most recently available hospital discharge data for long-term care services.

Under sections 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 on a reasonable cost basis. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under Parts 413 and 415.

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 regulations governing the acute care hospital inpatient prospective payment system are located in 42 CFR part 412. The regulations governing excluded hospitals and hospital units are located in Parts 412 and 413. The regulations governing GME payments are located in Part 413. The regulations governing CAHs are located in Parts 413 and 485.

This final rule implements amendments enacted by Public Law 106-554 relating to updates to FY 2002 payments for hospital inpatient services, hospitals' geographic reclassifications and wage indexes, GME costs, the payment adjustment for disproportionate share hospitals (DSHs), the indirect medical education (IME) adjustment for teaching hospitals, and CAHs. It also implements other changes affecting DRG classifications and relative weights, annual updates to the data used to calculate the wage index, sole community hospitals (SCHs), payments under the inpatient capital prospective payment system, and policies related to hospitals and units excluded from the prospective payment system. These changes are addressed in sections II., III., IV., and VI. of this preamble.

Section 533 of Public Law 106-554 requires the Secretary to establish a mechanism to recognize the costs of new medical services and technologies by October 1, 2001. We proposed a mechanism in the May 4, 2001 proposed rule. We received 61 comments on our proposed criteria to qualify for this special payment and on the proposed mechanism to pay for qualifying new technologies. Due to this large number of comments, we will publish a separate final rule to respond to comments received on our proposal, and to establish a mechanism, by October 1, 2001.

Although we intend to establish the mechanism by October 1, 2001, we will not make additional payments under the mechanism for cases involving new technology during FY 2002 because it is not feasible. This is due to the timing of the enactment of Public Law 106-554 on December 21, 2000, the requirement that we establish the mechanism through notice and an opportunity for public comment, and the requirement that the payments be implemented in a budget neutral manner. That is, it was not feasible to establish the criteria by which new technologies would qualify through a proposed rule with opportunity for public comment as part of the May 4, 2001 proposed rule, finalize those criteria in response to public comments, allow technologies to qualify under those criteria, and implement payments for any qualified technologies in a budget neutral manner. This is because making the special payments in a budget neutral manner requires an adjustment to the standardized amounts (which must be published in final by August 1 each year).Start Printed Page 39830

Representatives of new technologies seeking to qualify for special payments under this provision for FY 2003 should proceed with their application by contacting us at the telephone numbers listed in the “For Further Information Contact” section of this preamble. As indicated previously, a final rule containing the specific qualifying criteria and payment mechanism will be published shortly.

This final rule also responds to public comments on, and finalizes implementation of, provisions of Public Law 106-113 that relate to Medicare payments to hospitals for FY 2001 that were addressed in a separate interim final rule with comment period (HCFA-1131-IFC), published in the Federal Register on August 1, 2000 (65 FR 47026).

Lastly, this final rule responds to public comments on, and finalizes implementation of, other provisions of Public Law 106-554 that relate to Medicare payments to hospitals effective prior to October 1, 2001 (that is, for FY 2001 or for the period between April l, 2001 and September 30, 2001) that were addressed in a separate interim final rule with comment period (HCFA-1178-IFC), published in the Federal Register on June 13, 2001 (66 FR 32172).

In summary, this final rule responds to public comments on, and finalizes, three documents published in the Federal Register: The August 1, 2000 interim final rule with comment period, the May 4, 2001 proposed rule (HCFA-1158-P), and the June 13, 2001 interim final rule with comment period, as discussed below.

The charts below specify the effective dates of the various provisions of Public Law 106-113 and Public Law 106-554.

Effective Dates of the Provisions of Public Law 106-113 Included in This Final Rule

Section No.TitleEffective date
111Indirect Medical Education Adjustment Formula10/01/1999.
121Wage Adjustment to Caps on Target Amounts for Excluded Hospitals and Units10/01/1999.
152(a)Reclassified Hospitals in Certain Designated Counties10/01/1999.
153Calculation of Wage Index for Hattiesburg, Mississippi10/01/1999.
154Calculation of Wage Index for Allentown-Bethlehem-Easton, Pennsylvania MSA10/01/1999.
312Initial Residency Period for Child Neurology Residency Programs7/01/2000, for residency programs that began before, on, or after 11/29/1999.
401(a)Reclassification of Certain Urban Hospitals to Rural01/01/2000.
401(b)(2)Application of Reclassifications under Section 401(a) to Critical Access Hospitals01/01/2000.
403(a)Length of Stay Restrictions on Inpatient Stays in Critical Access Hospitals11/29/1999.
403(b)Qualifications of For-Profit Hospitals for Critical Access Hospital Status11/29/1999.
403(c)Qualification of Closed Hospitals or Hospitals Downsized to Health Clinics for Critical Access Hospital Designation11/29/1999 for hospitals that closed after 11/29/1989; 11/29/1999 for hospitals that downsized to health clinics.
403(e)Elimination of Medicare Part B Deductible and Coinsurance for Clinical Diagnostic Laboratory Tests Furnished in Critical Access Hospitals11/29/1999.
403(f)Provisions on Swing-Beds in Critical Access Hospitals11/29/1999.
404Extension of Medicare-Dependent, Small Rural Hospital Program10/01/2002 through 9/30/2006.
407(a)Residents on Approved Leaves of Absence—GME and IME11/29/1999.
407(b)Expansion of Number of Unweighted Residents in Rural Hospitals—GME and IME04/01/2000.
407(c)Urban Hospitals with Rural Training Tracks or Integrated Rural Tracks—GME and IME04/01/2000.
407(d)Residents Training at Certain Veterans Hospitals—GME and IME10/01/1997
408(a)Swing Beds for Skilled Nursing Facility Level of Care Patients07/01/1998 through the end of the facility's third cost reporting period after this date.
408(b)Elimination of Constraints on Length of Stay in Swing Beds in Rural Hospitals07/01/1998 through the end of the facility's third cost reporting period after this date.
541Additional Payments to Hospitals for Approved Nursing and Allied Health Education to Reflect Utilization of Medicare+Choice Enrollees01/01/2000.

Effective Dates of the Provisions of Public Law 106-113 Included in This Final Rule

Section No.TitleEffective date
201Clarification of No Beneficiary Cost-Sharing for Clinical Diagnostic Laboratory Tests Furnished by Critical Access Hospitals11/29/1999.
202Assistance with Fee Schedule Payment for Professional Services under All-Inclusive Rate07/01/2001.
211Threshold for Disproportionate Share Hospitals04/01/2001.
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212Option to Base Eligibility for Medicare-Dependent, Small Rural Hospital Program on Discharges during Two of the Three Most Recently Audited Cost Reporting Periods04/01/2001.
213Extension of Option to use Rebased Target Amounts to All Sole Community Hospitals10/01/2000.
301Revision of Acute Care Hospital Payment Update for 200104/01/2001.
302Additional Modification in Transition for Indirect Medical Education Adjustment04/01/2001.
303Decrease in Reductions for Disproportionate Share Hospitals04/01/2001.
304(a)Three-Year Wage Index Reclassifications; Use of 3 Years of Wage Data for Evaluating Reclassifications10/01/2001.
304(b)Statewide Wage Index for Reclassifications10/01/2001 for reclassification beginning 10/01/2002.
304(c)Collection of Occupational Case Mix Data09/30/2003 for application 10/1/2004.
306Payment for Inpatient Services of Psychiatric Hospitals10/01/2000.
307Payment for Inpatient Services of Long-Term Care Hospitals10/01/2000.
511Increase in Floor for Payments for Direct Costs of Graduate Medical Education10/01/2001.
512Change in Distribution Formula for Medicare+Choice-Related Nursing and Allied Health Education Costs01/01/2001.
541Increase in Reimbursement for Bad Debt10/01/2000.

B. Summary of the Provisions of the May 4, 2001 Proposed Rule

On May 4, 2001, we published a proposed rule in the Federal Register (66 FR 22646) that set forth proposed changes to the Medicare hospital inpatient prospective payment system for operating and capital-related costs for FY 2002. We set forth proposed changes to the amounts and factors used in determining the rates for these costs. In addition, we proposed changes relating to payments for GME costs and payments to excluded hospitals and units, SCHs, and CAHs.

The following is a summary of the major changes that we proposed and the issues we addressed in the May 4, 2001 proposed rule:

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

As required by section 1886(d)(4)(C) of the Act, we proposed annual adjustments to the DRG classifications and relative weights. Based on analyses of Medicare claims data, we proposed to establish a number of new DRGs and make changes to the designation of diagnosis and procedure codes under other existing DRGs for FY 2002.

We also addressed the provisions of section 533 of Public Law 106-544 regarding development of a mechanism for increased payment for new medical services and technologies and the required report to Congress on expeditiously introducing new medical services and technology into the DRGs.

2. Changes to the Hospital Wage Index

We proposed to use wage data taken from hospitals' FY 1998 cost reports in the calculation of the FY 2002 wage index. We also proposed to implement the third year of the phaseout of wage costs related to GME or Part A certified registered nurse anesthetists (CRNA) from the FY 2002 wage index calculation.

We proposed several changes to the wage index methodology that would apply in calculating the FY 2003 wage index, and addressed new procedures for requesting wage data corrections and a modification of the process and timetable for updating the wage index.

  • We also discussed the collection of hospital occupational mix data as required by section 304(c) of Public Law 106-554.
  • In addition, we discussed revisions to the wage index based on hospital redesignations and reclassifications for purposes of the wage index, including changes to reflect the provisions of sections 304(a) and (b) of Public Law 106-554 relating to 3-year wage index reclassifications by the MGCRB, the use of 3 years of wage data for evaluating reclassification requests for FYs 2003 and later, and the application of a statewide wage index for reclassifications beginning in FY 2003.

3. Other Decisions and Changes to the Prospective Payment System for Inpatient Operating and Graduate Medical Education Costs

We discussed several provisions of the regulations in 42 CFR parts 412 and 413 and set forth certain proposed changes concerning SCHs; rural referral centers; changes relating to the IME adjustment as a result of section 302 of Public Law 106-554; changes relating to the DSH adjustment as a result of section 303 of Public Law 106-554; the establishment of policies relating to the 3-year application of wage index reclassifications by the MGCRB, the use of 3 years of wage data in evaluating reclassification requests to the MGCRB for FYs 2003 and later, and the use of a statewide wage index for reclassifications beginning in FY 2003, as required by sections 304(a) and (b) of Public Law 106-554.

We discussed proposed requirements for qualifying for additional payments for new medical services and technology, as required by section 533(b) of Public Law 106-554.

Lastly, we proposed changes relating to payment for the direct costs of GME, including changes as a result of section 511 of Public Law 106-554.

4. Prospective Payment System for Capital-Related Costs

We proposed payment requirements for capital-related costs, including the special exceptions payment, beginning October 1, 2001.

5. Proposed Changes for Hospitals and Hospital Units Excluded from the Prospective Payment Systems

We discussed the following proposals concerning excluded hospitals and hospital units and CAHs:

  • Limits on and adjustments to the proposed target amounts for FY 2002.
  • Revision of the methodology for wage neutralizing the hospital-specific target amounts using preclassified wage data.
  • Updated caps for new excluded hospitals and units as well as changes Start Printed Page 39832in the effective date of classifications of excluded hospitals and units.
  • The prospective payment system for inpatient rehabilitation hospitals and units.
  • Payments to CAHs, including exclusion from the payment window requirements; the availability of CRNA pass-through payments; payment for emergency room on-call physicians; treatment of ambulance services; the use of certain qualified practitioners for preanesthesia and postanesthesia evaluations; and clarification of location requirements for CAHs.

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

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2002 prospective payment rates for operating costs and capital-related costs. We also proposed threshold amounts for outlier cases. In addition, we proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2002 for hospitals and hospital units excluded from the prospective payment system.

7. Impact Analysis

In Appendix A, we set forth an analysis of the impact of the proposed changes on affected entities.

8. Capital Acquisition Model

In Appendix B of the proposed rule, we set forth the technical appendix on the proposed FY 2002 capital cost model.

9. Report to Congress on the Update Factor for Hospitals under the Prospective Payment System and Hospitals and Units Excluded From the Prospective Payment System

In Appendix C of the proposed rule, as required by section 1886(e)(3) of the Act, we set forth our report to Congress on our initial estimate of a recommended update factor for FY 2002 for payments to hospitals included in the prospective payment systems, and hospitals excluded from the prospective payment systems.

10. Recommendation of Update Factor for Hospital Inpatient Operating Costs

In Appendix D, as required by sections 1886(e)(4) and (e)(5) of the Act, we included our recommendation of the appropriate percentage change for FY 2002 for the following:

  • Large urban area and other area average standardized amounts (and hospital-specific rates applicable to SCHs and Medicare-dependent, small rural hospitals) for hospital inpatient services paid for under the prospective payment system for operating costs.
  • Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the prospective payment system.

11. Discussion of Medicare Payment Advisory Commission Recommendations

In the proposed rule, we discussed recommendations by the Medicare Payment Advisory Commission (MedPAC) concerning hospital inpatient payment policies and presented our responses to those recommendations. Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, not later than March 1 of each year, that reviews and makes recommendations on Medicare payment policies. We respond to those recommendations in section VII. of this preamble. For further information relating specifically to the MedPAC March 1 report or to obtain a copy of the report, contact MedPAC at (202) 653-7220 or visit MedPAC's website at: www.medpac.gov.

12. Public Comments Received in Response to the May 4, 2001 Proposed Rule

We received a total of 232 timely items of correspondence containing multiple comments on the proposed rule. Major issues addressed by the commenters included: additional payments for new medical services and technologies, geographic reclassifications of hospitals for purposes of the wage index, DRG reclassifications, payments for GME, and payments to CAHs.

Summaries of the public comments received and our responses to those comments are set forth below under the appropriate heading, with the exception of comments and responses pertaining to specific payments for new technologies under section 533 of Public Law 106-554. As described previously, this provision will be implemented through a separate final rule.

C. Summary of the Provisions of the August 1, 2000 Interim Final Rule with Comment Period

On August 1, 2000, we published in the Federal Register (65 FR 47026) an interim final rule with comment period that implemented, or conformed the regulations to, certain statutory provisions relating to Medicare payments to hospitals for inpatient services that were contained in Public Law 106-113, that were effective for FY 2000. The following is a summary of the policy changes we implemented as a result of Public Law 106-113:

1. Changes Relating to Payments for Operating Costs Under the Hospital Inpatient Prospective Payment System

  • Reclassification of Certain Counties. We implemented the provisions of section 152(a) of Public Law 106-113 that reclassified hospitals in certain designated counties for purposes of making payments to affected hospitals under section 1886(d) of the Act for FY 2000. The counties affected by this provision are identified under section III. of this preamble.
  • Wage Index. We implemented sections 153 and 154 of Public Law 106-113 that contain provisions affecting the wage indexes of specific Metropolitan Statistical Areas (MSA). Under section 153, the Hattiesburg, Mississippi FY 2000 wage index was calculated including wage data from Wesley Medical Center. Under section 154, the Allentown-Bethlehem-Easton, Pennsylvania MSA FY 2000 wage index was calculated including wage data for Lehigh Valley Hospital.
  • Reclassification of Certain Urban Hospitals as Rural Hospitals. We implemented section 401 of Public Law 106-113 which directed the Secretary to treat certain hospitals located in urban areas as being located in rural areas of their State if the hospital meets statutory criteria and files an application with HCFA. This provision was effective on January 1, 2000.
  • IME Adjustment. We implemented section 111 of Public Law 106-113 which provided for an additional payment to teaching hospitals equal to the additional amount the hospitals would have been paid for FY 2000 if the IME adjustment formula (which reflects the higher indirect operating costs associated with GME) for FY 2000 had remained the same as for FY 1999.
  • Extension of the MDH Provision. We implemented section 404 of Public Law 106-113 which extended the MDH program and its current payment methodology for an additional 5 years, from FY 2002 through FY 2006.

2. Additional Changes Relating to Direct GME and IME

  • Initial Residency Period for Child Neurology Residency Programs. We implemented section 312 of Public Law 106-113 which provides that in determining the number of residents for purposes of GME and IME payments, the period of board eligibility and the initial residency period for child neurology is the period of board Start Printed Page 39833eligibility for pediatrics plus 2 years. This provision is effective on or after July 1, 2000, for residency programs that began before, on, or after November 29, 1999.
  • Residents on Approved Leaves of Absence. We implemented section 407(a) of Public Law 106-113 which provides that, for purposes of determining a hospital's full-time equivalent (FTE) cap for direct GME payments and the IME adjustment, a hospital may count an individual to the extent that the individual would have been counted as a primary care resident for purposes of the FTE cap but for the fact that the individual was on maternity or disability leave or a similar approved leave of absence. The provision relating to direct GME was effective with cost reporting periods beginning on or after November 29, 1999. The provision relating to the IME adjustment applied to discharges occurring in cost reporting periods beginning on or after November 29, 1999.
  • Expansion of Number of Unweighted Residents in Rural Hospitals. We implemented section 407(b) of Public Law 106-113 which provides that a rural hospital's resident FTE count for direct GME and IME may not exceed 130 percent of the number of unweighted residents that the rural hospital counted in its most recent cost reporting period ending on or before December 31, 1996. The provision relating to direct GME applied to cost reporting periods beginning on or after April 1, 2000. The provision relating to the IME adjustment applied to discharges occurring on or after April 1, 2000.
  • Urban Hospitals with Rural Training Tracks or Integrated Rural Tracks. We implemented section 407(c) of Public Law 106-113 which allows an urban hospital that establishes separately accredited approved medical residency training programs (or rural training tracks) in a rural area or has an accredited training program with an integrated rural track to receive an FTE cap adjustment for purposes of direct GME and IME. The provision was effective with cost reporting periods beginning on or after April 1, 2000, for direct GME, and with discharges occurring on or after April 1, 2000, for IME.
  • Residents Training at Certain Veterans Affairs Hospitals. We implemented section 407(d) of Public Law 106-113 which provides that a non-Veterans Affairs (VA) hospital may receive a temporary adjustment to its FTE cap to reflect residents who were training at a VA hospital and were transferred on or after January 1, 1997, and before July 31, 1998, to the non-VA hospital because the program at the VA hospital would lose its accreditation by the Accreditation Council on Graduate Medical Education if the residents continued to train at the facility. This provision applies as if it was included in the enactment of Public Law 105-33, that is, for direct GME, with cost reporting periods beginning on or after October 1, 1997, and for IME, for discharges occurring on or after October 1, 1997. If a hospital is owed payments as a result of this provision, payments must be made immediately.

3. Payments for Nursing and Allied Health Education: Utilization of Medicare+Choice Enrollees

We implemented section 541 of Public Law 106-113 which provides an additional payment to hospitals that receive payments under section 1861(v) of the Act for approved nursing and allied health education programs associated with services to Medicare+Choice enrollees. This provision is effective for portions of cost reporting periods occurring on or after January 1, 2000.

4. Changes Relating to Hospitals and Hospital Units Excluded From the Prospective Payment System

We implemented section 121 of Public Law 106-113 which amended section 1886(b)(3)(H) of the Act to direct the Secretary to provide for an appropriate wage adjustment to the caps on the target amounts for psychiatric hospitals and units, rehabilitation hospitals and units, and long-term care hospitals for cost reporting periods beginning on or after October 1, 1999.

5. Changes Relating to CAHs

We implemented—

  • Section 401(b) of Public Law 106-113, which contained conforming changes to incorporate the reclassifications made by section 401(a) of Public Law 106-113 to the CAH statute (section 1820(c)(2)(B)(i) of the Act). This provision is effective beginning on January 1, 2000.
  • Section 403(a) of Public Law 106-113, which deleted the 96-hour length of stay restriction on inpatient care in a CAH and authorized a period of stay that does not exceed, on an annual, average basis, 96 hours per patient. This provision is effective beginning on November 29, 1999.
  • Section 403(b) of Public Law 106-113, which allows for-profit hospitals to qualify for CAH status. This provision is effective beginning on November 29, 1999.
  • Section 403(c) of Public Law 106-113, which allows hospitals that have closed within 10 years prior to November 29, 1999, or hospitals that downsized to a health clinic or health center, to be designated as CAHs if they satisfy the established criteria for designation, other than the requirement for existing hospital status.
  • Section 403(e) of Public Law 106-113, which eliminated the Medicare Part B deductible and coinsurance for clinical diagnostic laboratory tests furnished by a CAH on an outpatient basis. This provision is effective with respect to services furnished on or after November 29, 1999.
  • Section 403(f) of Public Law 106-113, entitled “Participation in Swing Bed Program,” which amended sections 1883(a)(1) and (c) of the Act.

6. Changes Relating Hospital to Swing Bed Program

We implemented section 408(a) of Public Law 106-113 which eliminated the requirement for a hospital to obtain a certification of need to use acute care beds as swing beds for skilled nursing facility (SNF) level of care patients; and section 408(b) of Public Law 106-113 which eliminates constraints on the length of stay in swing beds for rural hospitals with 50 to 100 beds. These provisions were effective on the first day after the expiration of the transition period for prospective payments for covered SNF services under the Medicare program (that is, at the end of the transition period for the SNF prospective payments system that began with the facility's first cost reporting period beginning on or after July 1, 1998 and extend through the end of the facility's third cost reporting period after this date).

We received a total of eight timely items of correspondence containing multiple comments on the August 1, 2000 interim final rule with comment period. Summaries of the public comments received and our responses to those comments are set forth below under the appropriate section headings of this final rule.

D. Summary of the Provisions of the June 13, 2001 Interim Final Rule With Comment Period

On June 13, 2001, we published an interim final rule with comment period in the Federal Register (66 FR 32172) that implemented changes to the Act affecting Medicare payments to hospitals for inpatient services that were made by Public Law 106-554. Some of these changes were effective before the December 21, 2000 date of enactment of Public Law 106-554, on April 1, 2001, Start Printed Page 39834or on July 1, 2001. The changes, on which we requested public comment, are as follows:

1. Changes Relating to Payments for Operating Costs Under the Hospital Inpatient Prospective Payment System

  • Treatment of Rural and Small Urban Disproportionate Share Hospitals (DSHs) . We implemented the provisions of section 211 of Public Law 106-554 which lowered thresholds by which certain classes of hospitals qualify for DSH payments, with respect to discharges occurring on or after April 1, 2001.
  • Decrease in Reductions for DSH Payments. We implemented section 303 of Public Law 106-554 which modified the previous reduction in the DSH payment to be 2 percent in FY 2001 and 3 percent in FY 2002.
  • Medicare-Dependent, Small Rural Hospitals (MDHs). We implemented section 212 of Public Law 106-554 which provided an option to base eligibility for MDH status on discharges during two of the three most recently audited cost reporting periods, effective with cost reporting periods beginning on or after April 1, 2001.
  • Revision of Prospective Payment System Standardized Amounts. We implemented section 301 of Public Law 106-554 which revised the update factor increase for the inpatient prospective payment rates for FY 2001.
  • Indirect Medical Education Adjustment (IME). We implemented section 302 of Public Law 106-554 which provided that for the purposes of making the IME payment for discharges occurring on or after April 1, 2001 and before October 1, 2001, the adjustment will be determined as if the adjustment equaled a 6.75 percent increase in payment for every 10 percent increase in the resident-to-bed ratio, rather than a 6.25 percent increase.
  • SCHs. We implemented section 213 of Public Law 106-554 which further extended the 1996 rebasing option, for hospital cost reporting periods beginning October 1, 2000, to all SCHs and provides that this extension is effective as if it had been included in section 405 of Public Law 106-113.

2. Payments for Nursing and Allied Health Education: Utilization of Medicare+Choice Enrollees

We implemented section 512 of Public Law 106-554 which revised the formula for determining the additional payment amounts to hospitals for Medicare+Choice nursing and allied health education costs to specifically account for each hospital's Medicare+Choice utilization.

3. Changes Relating to Payments for Capital-Related Costs Under the Hospital Inpatient Prospective Payment System

As a result of implementing section 301 of Public Law 106-554, which provided increased inpatient operating payment rates, we recalculated the unified outlier threshold for inpatient operating and inpatient capital-related costs. Therefore, we revised the capital outlier offset which also required us to revise the capital-related rates.

4. Changes Relating to Hospitals and Hospital Units Excluded From the Prospective Payment System

  • Increase in the Incentive Payment for Excluded Psychiatric Hospitals and Units. We implemented section 306 of Public Law 106-554, which provided that for cost reporting periods beginning on or after October 1, 2000, for psychiatric hospitals and units, if the allowable net inpatient operating costs do not exceed the hospital's ceiling, payment is the lower of: (1) net inpatient operating costs plus 15 percent of the difference between inpatient operating costs and the ceiling; or, (2) net inpatient costs plus 3 percent of the ceiling.
  • Increase in the Wage Adjusted 75th Percentile Cap on the Target Amounts for Long-Term Care Hospitals. We implemented section 307(a) of Public Law 106-554, which provided a 2-percent increase to the wage-adjusted 75th percentile cap on the target amount for long-term care hospitals, effective for cost reporting periods beginning during FY 2001.
  • Increase in the Target Amounts for Long-Term Care Hospitals. We implemented section 307(a) Public Law 106-554, which provided a 25 percent increase to the target amounts for long-term care hospitals for cost reporting periods beginning in FY 2001, up to the cap on target amounts.

5. Changes Relating to CAHs

  • Elimination of Coinsurance for Clinical Diagnostic Laboratory Tests Furnished by a CAH. We implemented section 201(a) of Public Law 106-554, which amended section 1834(g) of the Act to state that there will be no collection of coinsurance, deductible, copayments, or any other type of cost sharing from Medicare beneficiaries with respect to outpatient clinical diagnostic laboratory services furnished as outpatient CAH services and that those services will be paid for on a reasonable cost basis.
  • Assistance with Fee Schedule Payment for Professional Services under All-Inclusive Rate. We implemented section 202 of Public Law 106-554, which amended section 1834(g)(2)(B) of the Act to provide that when a CAH elects to be paid for Medicare outpatient services under the reasonable costs for facility services plus fee schedule amounts for professional services method, Medicare will pay 115 percent of the amount it otherwise pays for the professional services.
  • Condition of Participation with Hospital Requirements at the Time of Application for CAH Designation (§ 485.612). We implemented a conforming change to correct § 485.612 to reflect that certain entities are not required to have a provider agreement prior to CAH designation.

6. Other Inpatient Costs

  • Increase in Reimbursement for Bad Debts. We implemented section 541 of Public Law 106-554 which provided a 30 percent decrease of allowable hospital bad debt reimbursement for cost reporting periods beginning during FY 2001 and all subsequent fiscal years. This section modified section 4451 of Public Law 105-33 that reduced the total allowable bad debt reimbursement for hospitals by 45 percent.

We received a total of 13 timely pieces of correspondence containing comments on the June 13, 2001 interim final rule with comment period. A summary of these public comments and our responses to them are set forth under sections IV. and VI. of this final rule.

II. Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, 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 Start Printed Page 39835in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. Changes to the DRG classification system and the recalibration of the DRG weights for discharges occurring on or after October 1, 2001 are discussed below.

B. DRG Reclassification

1. General

Cases are classified into DRGs for payment under the prospective payment system based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay, as well as age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). Medicare fiscal intermediaries enter the information into their claims processing systems and subject it to a series of automated screens called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before classification into a DRG.

After screening through the MCE and any further development of the claims, cases are classified into the appropriate DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into a DRG on the basis of the diagnosis and procedure codes and demographic information (that is, sex, age, and discharge status). It is used both to classify past cases in order to measure relative hospital resource consumption to establish the DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights.

In version 18 of the GROUPER (used for FY 2001), cases are assigned to one of 499 DRGs (including one DRG (469) for a diagnosis that is invalid as a discharge diagnosis and one DRG (470) for ungroupable diagnoses) in 25 major diagnostic categories (MDCs). Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)).

In general, cases are assigned to an MDC, based on the principal diagnosis, before assignment to a DRG. However, there are six DRGs to which cases are directly assigned on the basis of procedure codes. These are the DRGs for heart, liver, bone marrow, and lung transplants (DRGs 103, 480, 481, and 495, respectively) and the two DRGs for tracheostomies (DRGs 482 and 483). Cases are assigned to these DRGs before classification to an MDC.

Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders individual procedures or groups of procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age. Some surgical and medical DRGs are further differentiated based on the presence or absence of complications or comorbidities (CC).

Generally, the GROUPER does not consider other procedures. That is, nonsurgical procedures or minor surgical procedures generally not performed in an operating room are not listed as operating room (OR) procedures in the GROUPER decision tables. However, there are a few non-OR procedures that do affect DRG assignment for certain principal diagnoses, such as extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones.

We proposed numerous changes to the DRG classification system for FY 2002. The proposed changes, the public comments we received concerning them, and the final DRG changes are set forth below. Unless otherwise noted, the changes we are implementing will be effective in the revised GROUPER software (Version 19.0) to be implemented for discharges on or after October 1, 2001. Unless noted otherwise, we are relying on the data analysis in the proposed rule for the changes discussed here.

Chart 1 lists the changes we are making by adding new DRGs or removing old DRGs. Chart 2 summarizes the changes we are making with respect to the reassignment of procedure codes. Chart 3 presents the changes we are making to the titles of existing DRGs.

In Chart 2 of the proposed rule, several procedure codes were erroneously included in the “Removed from DRG” column of the chart (66 FR 22650). The 11 affected codes are 37.21, 37.22, 37.23, 37.26, 88.52, 88.53, 88.54, 88.55, 88.56, 88.57, and 88.58. Inclusion of these codes in this chart made it appear as if the codes were being deleted from DRG 104. In fact, they are being additionally assigned to DRG 514. We have corrected Chart 2 in this final rule.

Chart 1.—Summary of Changes in DRG Assignments

Diagnosis related groups (DRGs)Added as newRemoved
Pre-MDC:
DRG 512 (Simultaneous Pancreas/Kidney Transplant)X
DRG 513 (Pancreas Transplants)X
MDC 5 (Diseases and Disorders of the Circulatory System):
DRG 112 (Percutaneous Cardiovascular Procedures)X
DRG 514 (Cardiac Defibrillator Implant with Cardiac Catheterization)X
DRG 515 (Cardiac Defibrillator Implant without Cardiac Catheterization)X
DRG 516 (Percutaneous Cardiovascular Procedures with Acute Myocardial Infarction (AMI))X
DRG 517 (Percutaneous Cardiovascular Procedures without AMI, with Coronary Artery Stent ImplantX
DRG 518 (Percutaneous Cardiovascular Procedures without AMI, without Coronary Artery Stent ImplantX
MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue):
DRG 519 (Cervical Spinal Fusion with CC)X
DRG 520 (Cervical Spinal Fusion without CC)X
MDC 20 (Alcohol/Drug Use and Alcohol/Drug-Induced Organic Mental Disorders):
DRG 434 (Alcohol/Drug Abuse or Dependency, Detoxification or Other Symptomatic Treatment with CC)X
DRG 435 (Alcohol/Drug Abuse or Dependency, Detoxification or Other Symptomatic Treatment without CC)X
DRG 436 (Alcohol/Drug Dependence with Rehabilitation Therapy)X
DRG 437 (Alcohol/Drug Dependence, Combined Rehabilitation and Detoxification Therapy)X
DRG 521 (Alcohol/Drug Abuse or Dependence with CC)X
Start Printed Page 39836
DRG 522 (Alcohol/Drug Abuse or Dependence without CC, with Rehabilitation Therapy)X
DRG 523 (Alcohol/Drug Abuse or Dependence without CC, without Rehabilitation Therapy)X

Chart 2.—Summary of Assignment or Reassignment of Diagnosis or Procedure Codes in Existing DRGs

Diagnosis/procedure codesRemoved from DRGReassigned to DRG
MDC 5 (Diseases and Disorders of the Circulatory System)
Principal Diagnosis Code:
410.01 Acute myocardial infarction of anterolateral wall, initial episode of care116516.
410.11 Acute myocardial infarction of other anterior wall, initial episode of care116516.
410.21 Acute myocardial infarction of inferolateral wall, initial episode of care116516.
410.31 Acute myocardial infarction of inferoposterior wall, initial episode of care116516.
410.41 Acute myocardial infarction of other inferior wall, initial episode of care116516.
410.51 Acute myocardial infarction of other lateral wall, initial episode of care116516.
410.61 True posterior wall infarction, initial episode of care116516.
410.71 Subendocardial infarction, initial episode of care116516.
410.81 Acute myocardial infarction of other specified sites, initial episode of care116516.
410.91 Acute myocardial infarction of unspecified site, initial episode of care116516
Procedure Codes:
37.94 Implantation or replacement of automatic cardioverter/defibrillation, total system (AICD)104, 105514, 515.
37.95 Implantation of automatic cardioverter/defibrillator lead(s) only104, 105514, 515.
37.96 Implantation of automatic cardioverter/defibrillator pulse generator only104, 105514, 515.
37.97 Raplacement of automatic cardioverter/defibrilator lead(s) only;104, 105514, 515.
37.98 Replacement of automatic cardioverter/defibrillator pulse generator only104, 105514, 515.
Operating Room Procedures:
35.96 Percutaneous valvuloplasty112, 116516, 517, 518.
36.01 Single vessel percutaneous transluminal coronary angioplasty (PTCA) or coronary atherectomy without mention of thrombolytic agent112, 116516, 517, 518.
36.02 Single vessel percutaneous transluminal coronary angioplasty (PTCA) or coronary atherectomy with mention of thrombolytic agent112, 116516, 517, 518.
36.05 Multiple vessel percutaneous transluminal coronary angioplasty (PTCA) or coronary atherectomy performed during the same operation, with or without mention of thrombolytic agent112, 116516, 517, 518.
36.09 Other removal of coronary artery obstruction112, 116516, 517, 518.
37.34 Catheter ablation of lesion or tissues of heart112, 116516, 517, 518.
92.27 Implantation or insertion of radioactive elementsnon-OR in MDC-5517
Nonoperating Room Procedures:
36.06 Insertion of coronary artery stent(s)116517.
37.26 Cardiac electrophysiologic stimulation and recording studies112514, 516, 517, 518.
37.27 Cardiac mapping112516, 517, 518.
MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)
Procedure Codes:
81.02 Other cervical fusion, anterior technique497, 498519, 520.
81.03 Other cervical fusion, posterior technique497, 498519, 520.
MDC 15 (Newborns and Other Neonates with Conditions Originating in the Perinatal Period)
Diagnosis Codes:
770.7 Chronic respiratory disease arising in the perinatal period387, 38992, 93.
773.0 Hemolytic disease due to RH isoimmunization387, 389390.
773.1 Hemolytic disease due to ABO isoimmunization387, 389390.
Secondary Diagnosis Codes:
478.1 Other diseases of nasal cavity and sinuses390391.
520.6 Disturbances in tooth eruption390391.
623.8 Other specified noninflammatory disorders of vagina390391.
709.00 Dyschromia, unspecified390391.
709.01 Vitiglio390391.
709.09 Dyschromia, Other390391.
744.1 Accessory Auricle390391.
754.61 Congenital pes planus390391.
757.33 Congenital pigmentary anomalies of skin390391.
757.39 Other specified anomaly of skin390391.
764.08 “Light for dates” without mention of fetal malnutrition, 2,000-2,499 grams390391.
764.98 Fetal growth retardation, unspecified, 2,000-2,499 grams390391.
772.6 Cutaneous hemorrhage390391.
779.3 Feeding problems in newborns390391
794.15 Abnormal and auditory function studies390391.
Start Printed Page 39837
796.4 Other abnormal clinical findings390391.
V20.2 Routine infant or child health check390391.
V72.1 Examination of ears and hearing390391.

Chart 3.—Summary of Retitled DRGs

MDCDRG No.Current nameNew name
MDC 5DRG 116Other Permanent Cardiac Pacemaker Implantation, or PTCA, with Coronary Artery Stent ImplantOther Cardiac Pacemaker Implantation.
MDC 8DRG 497Spinal Fusion with CCSpinal Fusion except Cervical with CC.
MDC 8DRG 498Spinal Fusion without CCSpinal Fusion except Cervical with CC.

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

a. Removal of Defibrillator Cases from DRGs 104 and 105

DRGs 104 (Cardiac Valve & Other Major Cardiothoracic Procedures with Cardiac Catheterization) and 105 (Cardiac Valve & Other Major Cardiothoracic Procedures without Cardiac Catheterization) include the replacement or open repair of one or more of the four heart valves. These valves may be diseased or damaged, resulting in either leakage or restriction of blood flow to the heart, compromising the ability of the heart to pump blood. This procedure requires the use of a heart-lung bypass machine, as the heart must be stilled and opened to repair or replace the valve.

Cardiac defibrillators are implanted to correct episodes of fibrillation (very fast heart rate) caused by malfunction of the conduction mechanism of the heart. Through implanted cardiac leads, the defibrillator mechanism senses changes in heart rhythm. When very fast heart rates occur, the defibrillator produces a burst of electric current through the leads to restore the normal heart rate. An implanted defibrillator constantly monitors heart rhythm. The implantation of this device does not require the use of a heart-lung bypass machine, and would be expected to be very different in terms of resource usage, although both procedures currently group to DRGs 104 and 105.

For the proposed rule, as part of our ongoing review of DRGs, we examined Medicare claims data on DRG 104 and DRG 105. We reviewed 100 percent of the FY 2000 MedPAR file containing hospital bills received through May 31, 2000, for discharges in FY 2000, and found that the average charges across all cases in DRG 104 were $84,060, while the average charges across all cases in DRG 105 were $66,348. Carving out code 37.94 (Implantation or replacement of automatic cardioverter/defibrillator, total system [AICD]) from DRGs 104 and 105 increased those average charges to $91,366 for DRG 104 and $67,323 for DRG 105. We identified 11,021 defibrillator cases in DRG 104 (out of 25,112 total cases), with average charges of $74,719, and 2,434 defibrillator cases in DRG 105 (out of 20,094 total cases), with average charges of $59,267.

We performed additional review on cases containing code 37.95 (Implantation of automatic cardioverter/defibrillator lead(s) only) with code 37.96 (Implantation of automatic cardioverter/defibrillator pulse generator only) and on cases containing code 37.97 (Replacement of automatic cardioverter/defibrillator lead(s) only) with code 37.98 (Replacement of automatic cardioverter/defibrillator pulse generator only). This subgrouping contained only 56 patients. The average charges for the 18 patients in DRG 104 were $58,847. The average charges for the 38 patients in DRG 105 were $54,891.

In the proposed rule, because we believed the defibrillator cases are significantly different from other cases in DRGs 104 and 105, we proposed two new DRGs: DRG 514 (Cardiac Defibrillator Implant with Cardiac Catheterization) and DRG 515 (Cardiac Defibrillator Implant without Cardiac Catheterization).

We also proposed the removal of procedure codes 37.94, 37.95 and 37.96, and 37.97 and 37.98 from DRGs 104 and 105 to form the new DRGs 514 and 515.

We received 58 comments on this proposal.

Comment: Many commenters noted that implanted cardioverter defibrillators (ICDs) or AICDs are lifesaving devices that demonstrate state-of-the-art technology for the treatment of cardiac arrhythmias by continuously monitoring, analyzing, and, if needed, restoring a patient's normal heart rhythm.

One commenter described the technology. Similar to the size of a pacemaker, the ICD is placed under the skin of the upper chest. It has the capacity to continuously monitor and analyze a patient's heart rhythm. If the ICD detects an arrhythmia, it can terminate the abnormal rhythm with either a pacemaker function or the delivery of a low-energy electrical shock to restore normal heart rhythm.

Response: We agree that ICDs and AICDs are an important addition to the treatment of cardiac disease. The creation of DRGs 514 and 515 is not meant to effect a judgement call about the efficacy or importance of this treatment, but simply to attempt to improve the accuracy of payments within MDC 5, based on the actual charge data associated with these cases.

Comment: A vast majority of the commenters expressed concern that payments associated with defibrillators will decrease for FY 2002 as a result of this change, with some commenters noting that an ICD or AICD may cost the hospital between $22,000 and $25,000 per device. The commenters stated that if this is the case, there is a limited amount for the remainder of the hospital care (for example, operating room, supplies, nursing staff salary, and typically a 7-day stay in an intensive care unit). Most commenters called for Start Printed Page 39838additional analysis prior to implementation of DRGs 514 and 515.

Response: As we described in the proposed rule and above, DRGs 104 and 105 currently include many different procedures, with a range of costs associated with these different procedures. We proposed to change the assignment of cardiac defibrillators to new DRGs 514 and 515 to more accurately pay for the more expensive procedures remaining in DRGs 104 and 105, as well as to improve the payment accuracy for cardiac defibrillators. In fact, the relative weight of DRG 104 increases from FY 2001 to FY 2002 by 9.1 percent.

Comment: Many commenters argued that using hospital charges to determine DRG relative weights can give a distorted picture of the costs of a procedure. The commenters referred to an unspecified national database indicating that the average mark-up of charges over cost for ICDs is lower than the mark-up applied to other components of care. Other commenters referred to the March 2001 Report to Congress by the MedPAC, which, in the context of evaluating available data for setting accurate relative values, stated that hospitals' billed charges “give a distorted picture of relative costliness across DRGs because they reflect systematic differences among hospitals in the average mark-up of charges over costs” (page 11).

Several commenters stated that about 66 percent of hospitals are losing $5,000 or more per case for these procedures. These commenters did not understand why payment would be reduced even further in light of those losses.

Response: Hospital charges have been the basis for recalibrating the DRG relative weights since FY 1986 (see 50 FR 24372 and 50 FR 35652). To the extent that the mark-up of charges over costs varies from one particular device or procedure to another, the relative weights will be impacted. However, due to the relativity of the DRG weights, a low mark-up associated with one device or procedure will be offset by relatively higher mark-ups associated with another device or procedure, leading to higher relative weights, and thus higher payments, for the latter device or procedure. The prospective payment system is an average-based payment methodology, where hospitals are expected to offset any losses they may incur from any individual or group of cases with payment gains incurred from other cases.

Furthermore, hospital charges are determined by each hospital on an item-by-item basis. It is not possible to account for these individual management decisions in the process of developing a national payment system based on prospectively determined average payment rates.

As demonstrated in the impact analysis in Appendix A to this final rule, hospital payments would rise (prior to the budget neutrality adjustment) by 0.3 percent as a result of all of the DRG changes we are implementing in this final rule, including this change. In addition, we note that the latest analysis by MedPAC indicates the average hospital Medicare inpatient operating margin during FY 1999 (the latest year available) was 12.0 percent (Report to the Congress: Medicare Payment Policy, page 64). Therefore, we believe that hospitals will be able to adequately adjust to these payment changes in both the short and the long term.

Comment: One commenter noted that the adjustment to DRGs 104 and 105 as reflected in Table 5, “List of Diagnosis Related Groups (DRGs), Relative Weighting Factors, Geometric and Arithmetic Mean Length of Stay,” in the Addendum of the proposed rule, does not reflect the resource consumption as discussed above. The commenter recommended that we increase the relative weights to reflect the resource consumption of DRGs 104 and 105.

Response: In this final rule, the relative weight for DRG 104 is 7.8411 for FY 2002, an increase of 9.1 percent from FY 2001. The relative weight for DRG 105 in this final rule is 5.6796 for FY 2002, a 0.4 percent increase from FY 2001. These percentage changes are very similar to the percent change in average charges in DRGs 104 and 105 after removing ICD and AICD charges, as described above. We note that the final relative weight values are based on 100 percent of FY 2000 discharges in the MedPAR database as of March 2001. The analysis using average charges described above was based on an earlier sample of cases; therefore, the percentage changes do not match exactly.

Comment: Other commenters noted that this change, and the resulting increase in payments for procedures remaining in DRGs 104 and 105, is a positive step to improving the payment for heart assist devices. However, the commenters were disappointed that we did not take the opportunity to make a similar revision for cases involving mechanical heart assist devices.

Response: As described above, removing the ICDs/AICDs from DRGs 104 and 105 will have the net effect of increasing the relative weights for both DRGs, so payment for the remaining cases will increase. We will continue to evaluate our options for improving the accuracy of our payments for heart assist technologies.

After carefully reviewing all of the comments submitted, we have decided to proceed with the creation of two new DRGs to capture cases involving the implantation of cardiac defibrillators. The new DRGs 514 and 515 include principal diagnosis codes and procedure codes as reflected in Chart 4 below:

Chart 4.—Composition of New DRGs 514 and 515 in MDC 5

Diagnosis and procedure codesIncluded in DRG 514Included in DRG 515
Principal Diagnosis Codes:
All of the principal diagnosis codes assigned to MDC-5XX
Principal or Secondary Procedure Code:
37.94 Implantation or replacement of automatic cardioverter/defibrillator, total system (AICD)XX
Combination Operating Procedure Codes:
37.95 Implantation of automatic cardioverter/defibrillator lead(s) only;
Plus
37.96 Implantation of automatic cardioverter/defibrillator pulse generator only;XX
Or
37.97 Replacement of automatic cardioverter/defibrillator lead(s) only;
Plus
37.98 Replacement of automatic cardioverter/defibrillator pulse generator onlyXX
Plus: One of the Following Nonoperating Room Procedure Codes:
37.21 Right heart cardiac catheterizationX
37.22 Left heart cardiac catheterizationX
Start Printed Page 39839
37.23 Combined right and left heart cardiac catheterizationX
37.26 Cardiac electrophysiologic stimulation and recording studiesX
88.52 Angiocardiography of right heart structuresX
88.53 Angiocardiography of left heart structuresX
88.54 Combined right and left heart angiocardiographyX
88.55 Coronary arteriography using a single catheterX
88.56 Coronary arteriography using two cathetersX
88.57 Other and unspecified coronary arteriographyX
88.58 Negative-contrast cardiac roentgenographyX

b. Percutaneous Cardiovascular Procedures

In the May 4 proposed rule, we indicated that we had reviewed other DRGs within MDC 5 in order to determine if there were also logic changes that could be made to these DRGs. The data were arrayed in a variety of ways displaying myriad permutations, resulting in the following proposed changes.

A percutaneous transluminal coronary angioplasty (PTCA) is an acute intervention intended to minimize cardiac damage by restarting circulation to the heart. Some patients with an acute myocardial infarction (AMI) are now treated by performing a PTCA during the hospitalization for the AMI. Currently, PTCAs with a coronary stent implant are assigned to DRG 116 (Other Permanent Cardiac Pacemaker Implantation, or PTCA with Coronary Artery Stent Implant), along with pacemaker implants. The remaining percutaneous cardiovascular procedures are assigned to DRG 112 (Percutaneous Cardiovascular Procedures).

The volume of percutaneous cardiovascular procedures has grown dramatically, with 186,669 cases identified in the FY 2000 MedPAR file containing hospital bills submitted through May 31, 2000. Because of the high volume, we decided to review the DRG for percutaneous cardiovascular procedures. As a first step in the evaluation, we combined the percutaneous cardiovascular procedures from DRGs 112 and 116. We then subdivided the combined percutaneous cardiovascular procedure group into two groups based on the principal diagnosis (Pdx) of AMI.

GroupCountAverage charge
With Pdx of AMI50,442$31,722
Without Pdx of AMI136,22723,989

Each of these groups was further evaluated by subdividing them based on whether a coronary stent was implanted. The vast majority of patients with an AMI had a coronary stent implanted. Patients without an AMI were subdivided into two groups based on whether a coronary stent was implemented.

GroupCountAverage charge
Without Pdx of AMI with stent111,441$24,745
Without Pdx of AMI without stent24,78620,589

In the proposed rule, based on this analysis, we proposed the removal of PTCAs with coronary artery stent from DRG 116, thus limiting DRG 116 to permanent cardiac pacemaker implantation. This removal would leave approximately 68,000 non-PTCA cases in DRG 116.

In conjunction with this evaluation, we considered a new technology, intravascular brachytherapy, that is being used to treat coronary in-stent stenosis. A gamma-radiation-impregnated tape is threaded through the affected vessel for a specified amount of dwell time, and then the tape is removed. Intravascular brachytherapy was approved by the Food and Drug Administration in November 2000.

Intravascular brachytherapy is assigned to procedure code 92.27 (Implantation or insert of radioactive elements). With the use of angioplasty, these cases are currently assigned to DRG 112 (Percutaneous Cardiovascular Procedures). Therefore, cases involving this new technology will be implicated by these changes.

Also in the proposed rule, we proposed to retitle DRG 116 “Other Cardiac Pacemaker Implantation,” remove DRG 112, and create three new DRGs: DRG 516 (Percutaneous Cardiovascular Procedures with Acute Myocardial Infarction (AMI)); DRG 517 (Percutaneous Cardiovascular Procedures without AMI, with Coronary Artery Stent Implant); and DRG 518 (Percutaneous Cardiovascular Procedures without AMI, without Coronary Artery Stent Implant). In order to be assigned to new DRG 516, cases must contain one of the principal diagnoses plus the operating room procedures listed in Chart 5. Because DRG 516 contains acute myocardial infarction, which is hierarchically ordered before DRGs 517 and 518, any AMI cases also containing codes 92.27 or 36.06 (Insertion of coronary artery stents(s)) would automatically be assigned to DRG 516. We also proposed the assignment of patients with a percutaneous cardiovascular procedure and intravascular radiation treatment to new DRG 517. As more data become available, we will reassess the assignment of intravascular radiation treatment to DRG 517. New DRG 518 would contain the same operating room and nonoperating room procedures as new DRG 517, with the exception of codes 92.27 and 36.06. We received 10 comments on this proposal.

Comment: Several commenters supported the reclassification of percutaneous vascular procedures to DRGs within this MDC. Other commenters, however, stated the proposed changes would be inappropriate because they would reduce payment overall for percutaneous cardiovascular procedures. These commenters noted that new technologies associated with these procedures are, in fact, more costly rather than less costly. In addition, commenters expressed concern that payment for pacemakers under DRG 116 would be reduced from FY 2001 levels.

Response: Based on 100 percent of FY 2000 discharges on file through March 2001, we estimate the case-weighted average relative weight for DRGs 116, 516, 517 and 518 to be 2.2236, a 4.5 percent decline from the case-weighted average relative weight for DRGs 112 and 116 for FY 2001 (2.3280). As discussed above in relation to the new DRGs 514 and 515, the calculation of Start Printed Page 39840the relative weights reflects the charges submitted by hospitals for these cases.

Comment: Five commenters addressed only the inclusion of code 92.27 (Implantation or insertion of radioactive elements, also known as brachytherapy) in new DRG 517 in cases without presence of AMI (these cases would go to DRG 516 if AMI were present). Four of the five expressed appreciation for this change, citing its clinical appropriateness and increased payment, which is close to the additional facility costs for performing the procedure.

One commenter, while commending the decision to assign these cases to DRG 517, requested clarification about our decisionmaking process in assigning this technology to the same DRG as coronary stents. The commenter requested that we outline the specific criteria we applied or the process we followed to evaluate the adequacy of the external data submitted.

Response: Although we received external data from a manufacturer of this technology, they were not the basis for our decision, as we were unable to verify the data because the data were submitted too late in the process of preparing the FY 2002 proposed rule. When we proposed to restructure DRGs 112 and 116, our decision was based on the clinical coherence of the DRGs. Intravascular radiation treatment is an invasive procedure that requires an additional 35 to 45 minutes, and requires the services of both a radiation (nuclear) physicist and a radiation safety officer in the operating room, as well as specifically trained operating room personnel, such as an ultrasound specialist.

Comment: One commenter wrote that these changes fail to account for the use of GP IIB-IIIA inhibitors for cases with acute coronary syndromes. The commenter was concerned whether the DRG assignment for these cases under the proposed DRGs would be appropriate.

Response: The administration of GP IIB-IIIA inhibitors is through intravenous infusion, and is assigned to code 99.20 (Injection or infusion of platelet inhibitor). The GROUPER does not recognize code 99.20 as a procedure and, therefore, its presence does not affect DRG assignment. As described above, the DRG assignment for these cases under the newly configured DRGs 116, 516, 517, and 518 would be determined by the presence of AMI and the presence of other procedures that would cause the case to group to one of the other DRGs besides 518. Our analysis of FY 2000 MedPAR data indicates that, among cases with code 99.20 currently assigned to either DRGs 112 or 116 for FY 2000, the majority of these cases are currently assigned to DRG 116 (317,108 discharges compared to 52,945). Therefore, the majority of these cases involve procedures that do affect DRG assignment. We will continue to evaluate these cases, however, to determine whether further revisions would be appropriate.

Comment: One commenter indicated that codes 37.27 (Cardiac mapping) and 37.34 (Catheter ablation of lesion or tissues of heart) would now be grouped to new DRGs 516, 517, and 518. Because these procedures are not usually used on patients with AMI or patients who receive a stent, the commenter indicated the cases would most likely be grouped to DRG 518. The commenter believed that we were unaware that certain procedures, such as the two previously mentioned, have greater resource utilization than other percutaneous cardiovascular procedures that do not involve AMI or stents. The commenter asserted that this is an inadvertently inappropriate classification. The commenter recommended that CMS either create a separate DRG for cardiac mapping and ablation procedures, or else assign codes 37.27 and 37.34 to DRG 516 after retitling the DRG appropriately.

Response: These cases previously were assigned to either DRG 112 or 116, depending upon whether they involved the insertion of a stent or the implantation of a pacemaker. This GROUPER assignment logic did not change, although the presence or absence of AMI is now a factor as well. We believe this is an appropriate clinical categorization. However, we will consider this issue as we continue to evaluate these DRGs.

The principal diagnosis codes and operating room and nonoperating room procedure codes that are included in the new DRGs 516, 517, and 518 are reflected in Chart 5.

Chart 5.—Composition of New DRGs 516, 517, and 518 in MDC 5

Diagnosis and procedure codesIncluded in DRG 516Included in DRG 517Included in DRG 518
Principal Diagnosis Codes:
410.01 Acute myocardial infarction of anterolateral wall, initial episode of careX
410.11 Acute myocardial infarction of other anterior wall, initial episode of careX
410.21 Acute myocardial infarction of inferolateral wall, initial episode of careX
410.31 Acute myocardial infarction of inferoposterior wall, initial episode of careX
410.41 Acute myocardial infarction of other inferior wall, initial episode of careX
410.51 Acute myocardial infarction of other lateral wall, initial episode of careX
410.61 True posterior wall infarction, initial episode of careX
410.71 Subendocardial infarction, initial episode of careX
410.81 Acute myocardial infarction of other specified sites, initial episode of careX
410.91 Acute myocardial infarction of unspecified site, initial episode of careX
Plus:
Operating Room Procedures:
35.96 Percutaneous valvuloplastyXXX
And
36.01 Single vessel percutaneous transluminal coronary angioplasty (PTCA) or coronary atherectomy without mention of thrombolytic agentXXX
Or
36.02 Single vessel percutaneous transluminal coronary angioplasty (PTCA) or coronary atherectomy with mention of thrombolytic agentXXX
Or
36.05 Multiple vessel percutaneous transluminal coronary angioplasty (PTCA) or coronary atherectomy performed during the same operation, with or without mention of thrombolytic agentXXX
Start Printed Page 39841
And
36.09 Other removal of coronary artery obstructionXXX
And
37.34 Catheter ablation of lesion or tissues of heartXXX
92.27 Implantation or insertion of radioactive elementsX
Or:
Nonoperating Room Procedures:
36.06 Insertion of coronary artery stent(s)X
37.26 Cardiac electrophysiologic stimulation and recording studiesXXX
37.27 Cardiac mappingXXX

DRG 121 (Circulatory Disorders with AMI and Major Complication, Discharged Alive), DRG 122 (Circulatory Disorders with AMI without Major Complication, Discharged Alive), and DRG 123 (Circulatory Disorders with AMI, Expired) are not affected by these changes.

c. Removal of Heart Assist Systems

The ICD-9-CM Coordination and Maintenance Committee considered the nonoperative removal of heart assist systems at its November 17, 2000 meeting. A device called the intra-aortic balloon pump (IABP) is one of the most common types of ventricular assist systems. A balloon catheter is placed into the patient's descending thoracic aorta, and inflates and deflates with each heartbeat. This device is timed with the patient's own heart rhythm, and inflates and circulates blood to the heart and other organs. This allows the heart to rest and recover. The IABP may be used preoperatively, intraoperatively, or postoperatively. It supports the patient from a few hours to several days.

Code 37.64 (Removal of heart assist system) already exists, and it is considered by the GROUPER to be an operative procedure. However, the nonoperative removal of a heart assist system can be done at the patient's bedside, is noninvasive, and requires no anesthesia. Therefore, the Committee created code 97.44 (Nonoperative removal of heart assist system) for use with discharges beginning on or after October 1, 2001.

In the past, we have assigned new ICD-9-CM codes to the same DRG to which the predecessor code was assigned. In the proposed rule, we explained that if this practice were to be followed, we would have proposed that code 97.44 be assigned to MDC 5, DRGs 478 (Other Vascular Procedures with CC) and 479 (Other Vascular Procedures without CC). After hospital charge data became available, we would have considered moving it to other DRGs. However, in accordance with section 533(a) of Public Law 106-554, which requires a more expeditious technique of recognizing new medical services or technology for the hospital inpatient prospective payment system, we will reconsider this longstanding practice when possible. Therefore, as code 97.44 was designed to capture heart assist system removal that is clearly nonoperative, we did not propose to designate 97.44 as a code which the GROUPER recognizes as a procedure. The GROUPER will assign these cases to a medical DRG based on the principal diagnosis, or to a surgical DRG if a surgical procedure recognized by the GROUPER is performed. This assignment can be found in Table 6B, New Procedure Codes, in the Addendum to this rule.

We received no comments on this proposal. However, we did receive comments on another issue in MDC 5, relating to DRGs 110 and 111 (Major Cardiovascular Procedures with and without CC).

Comment: One commenter submitted a case study on stent technology, noting that Medicare payments in their facility were 31.4 percent lower than total costs. This commenter made no recommendations, but stated that often surgeons must use additional stent segments to repair aneurysms, increasing total costs by thousands of dollars.

Response: We do not have a clear understanding of the commenter's statement that often surgeons must use additional stent segments to repair aneurysms, thereby increasing total costs. We are unclear because the device presented to us for new ICD-9-CM code consideration was proposed as a single device, custom-fitted to the patient's needs. We will continue to monitor this technology and the new code (used for discharges on or after October 1, 2001).

Comment: One commenter noted that aortic endografts are assigned to DRGs 110 and 111, and the cost of the device alone is greater than the entire payment for DRG 111. The commenter noted that this is a straightforward issue, and recommended that these cases be assigned specifically to DRG 110.

Response: DRGs 110 and 111 are what we refer to as paired DRGs. Paired DRGs are exactly the same as each other with regard to the principal diagnosis and procedure codes in most cases. However, other aspects of the patient's case have a bearing on DRG assignment, such as the patient's age or the secondary diagnoses (which determine comorbidities or complications in appropriate DRGs). In this case, DRGs 110 and 111 are divided based on the presence or absence of secondary diagnosis codes. If there are no secondary diagnosis codes present, the case will be assigned to DRG 111. It has been our experience that patients not having secondary diagnoses are less expensive for the hospital to treat, thereby resulting in a lower weighted DRG assignment.

Hospitals should code their records completely, recording and submitting all relevant diagnosis and procedure codes having a bearing on the current admission. As noted previously, payment for each DRG is based on the average charges for cases assigned to that DRG as submitted to us by hospitals.

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

a. Refusions

We have received questions from correspondents regarding the appropriateness of the spinal fusion DRGs: DRG 496 (Combined Anterior/Posterior Spinal Fusion); DRG 497 (Spinal Fusion with CC); and DRG 498 (Spinal Fusion without CC). Several correspondents expressed concern about the inclusion of all refusions of the spine into one procedure code, 81.09 (Refusion of spine, any level or technique). The correspondents pointed out that because all refusions using any technique or level are in this one code, Start Printed Page 39842all of these cases are assigned to DRG 497 and DRG 498. They also pointed out that fusion cases involving both an anterior and posterior technique are assigned to DRG 496. Although cases with the refusion code that involve anterior and posterior techniques would appear to be more appropriately assigned to DRG 496, this is not the case.

We recognized this limitation in the refusion codes and further acknowledged that this limitation in the ICD-9-CM coding system creates DRG problems by preventing the assignment to DRG 496 even when both anterior and posterior techniques are used for refusion cases. Therefore, we referred the issue to the ICD-9-CM Coordination and Maintenance Committee and requested the Committee to consider code revisions for the refusions of the spine during its year 2000 public meetings.

After its deliberations, the Committee approved a series of new procedure codes for refusion of the spine that could lead to improvements within DRGs 497 and 498. These new codes, listed below, go into effect on October 1, 2001.

81.30 Refusion of spine, not otherwise specified

81.31 Refusion of atlas-axis spine

81.32 Refusion of other cervical spine, anterior technique

81.33 Refusion of other cervical spine, posterior technique

81.34 Refusion of dorsal and dorsolumbar spine, anterior technique

81.35 Refusion of dorsal and dorsolumbar spine, posterior technique

81.36 Refusion of lumbar and lumbosacral spine, anterior technique

81.37 Refusion of lumbar and lumbosacral spine, lateral transverse process technique

81.38 Refusion of lumbar and lumbosacral spine, posterior technique

81.39 Refusion of spine, not elsewhere classified

As previously stated, all refusions of the spine and corrections of the pseudarthrosis of the spine are assigned to code 81.09. Code 81.09, which is always assigned to DRG 497 or DRG 498, includes refusions at any level of the spine using any technique. With the creation of the new procedure codes listed above, it will be possible to determine the level of the spine at which the refusion is performed, as well as the technique used, and assign the case to a more appropriate DRG.

These new procedure codes should greatly improve our ability to determine the level and technique used in the refusion.

In the past, we have assigned new ICD-9-CM codes to the same DRG to which the predecessor code was assigned. In the proposed rule, we explained that if this practice were followed, these new codes would have been assigned to DRG 497 and 498 as they are currently. After data became available, we would have considered moving them to other DRGs. However, in accordance with section 533(a) of Public Law 106-554, which requires more expeditious methods of recognizing new medical services or technology under the inpatient hospital prospective payment system, we will reconsider this longstanding practice when possible. Since the new codes clearly allow us to identify cases where the technique was either anterior or posterior and these cases are clinically similar and, therefore, should be handled in the same fashion, we proposed to immediately assign these cases on the same basis as the fusion codes (81.00 through 81.09). We would not wait for actual claims data before making this change. These assignments are reflected in Chart 6 and also can be found in Table 6B, in section V. of the Addendum to this final rule.

Comment: One commenter supported the creation of the ICD-9-CM codes for refusions as well as their proposed DRG assignments.

Response: We appreciate the support of the commenter and are adopting the proposed DRG assignments for refusions of spine as final.

b. Fusion of Cervical Spine

In the proposed rule we discussed an inquiry concerning the spinal DRGs that focused on fusions of the cervical spine. The inquirer stated that there was a significant difference between inpatients who undergo anterior cervical spinal fusion and other types of spinal fusion in regard to treatment, recovery time, costs, and risk of complications. Anterior cervical spinal fusions are assigned to procedure code 81.02 (Other cervical fusion, anterior technique). The inquirer pointed out that anterior cervical fusions differ significantly from anterior techniques at other levels since the anatomic approach is far less invasive. Thoracic anterior techniques require working around the cardiac and respiratory systems in the chest cavity, while lumbar anterior techniques require working around bowel and digestive system and the abdominal muscles. The inquirer recommended that code 81.02 be removed from DRGs 497 and 498 and grouped separately.

We analyzed claims data from the FY 2000 MedPAR file containing hospital bills received through May 31, 2000, and confirmed that charges are lower for fusions of the cervical spine than fusions of the thoracic and lumbar spine. This was true for both anterior and posterior cervical fusions of the spine. Our medical consultants agree that the data and their clinical analysis support the creation of new DRGs for cervical fusions of the spine. We proposed to remove procedure codes 81.02 and 81.03 from the spinal fusion DRGs (currently, DRGs 497 and 498) and assign them to new DRGs for cervical spinal fusion with and without CC. We also proposed four groupings for fusion DRGs. The net effect of this change is an increase in the weights for DRGs 497 and 498, since the lower charges for the cervical fusions would be removed. The average standardized charge for all spinal fusions with CCs was $26,957. For all spinal fusions without CCs, the average charge was $16,492. The table below also shows average standardized charges for these types of cases before and after the revisions.

Revised spinal fusion DRGsAverage charge before revisionsAverage charge after revisions
DRG 497 Spinal Fusion Except Cervical with CC$26,957$36,821
DRG 498 Spinal Fusion Except Cervical without CC17,49226,297
DRG 519 Cervical Spinal Fusion with CC26,957
DRG 520 Cervical Spinal Fusion without CC16,492
Start Printed Page 39843

Based on the groupings, we proposed the creation of two new DRGs: DRG 519 (Cervical Spinal Fusion with CC); and DRG 520 (Cervical Spinal Fusion without CC). The procedure codes that would be included in the DRGs 519 and 520 are reflected in Chart 6 below.

We also proposed to add the new ICD-9-CM procedure codes for refusion of the cervical spine (81.32 and 81.33) to the new cervical spine fusion DRGs because they are clinically similar.

In addition, we proposed to retitle DRG 497 “Spinal Fusion Except Cervical with CC” and DRG 498 “Spinal Fusion Except Cervical without CC.” The retitled DRGs 497 and 498 would retain fusion codes 81.00, 81.01, and 81.04 through 81.08 and include the new refusion codes 81.30, 81.31, and 81.34 through 81.39, as reflected in Chart 6 below.

Comment: One commenter commended the creation of the new ICD-9-CM codes for spinal refusions and the development of the new DRGs for cervical fusions. This commenter, a manufacturer of devices used for spinal fusions, agreed that cervical fusions on average cost less than lumbar and thoracic fusions. Another commenter who supported the creation of the new DRGs mentioned that this classification would more appropriately reflect the resources used in the varying cases.

Two commenters asserted that DRGs 497 and 498 fail to take into account the cost variations when multi-level spinal fusions are performed. The commenters stated that the cost and complexity of a discharge varies substantially depending on the number of levels performed as part of a fusion procedure. Commenters recommended that new ICD-9-CM procedure codes be created for multi-level spine procedures to track and measure costs. The current ICD-9-CM codes do not differentiate between the number of levels that are fused. The commenter defined multi-level as three or more vertebral segments, either anterior or posterior, or both. In addition, the commenter recommended that these new multi-level fusion codes be assigned to the higher weighted DRG 496. The commenter recommended that DRG 496 be renamed “Multi-Level Spine Procedure Anterior and/or Posterior for Stabilization and/or Correction and/or Refusion.”

Response: We agree that the current ICD-9-CM procedure codes do not differentiate between the number of levels fused. This proposal will be addressed by the ICD-9-CM Coordination and Maintenance Committee at its November 1, 2001 meeting. A potential problem with this recommendation will be the need to avoid overlapping codes. The current fusion codes are based on an axis of the level of the fusion (cervical or lumbar) and an additional axis of the approach (anterior, posterior, or lateral transverse). Devising a modified or additional scheme that utilizes an additional axis of the number of disks fused may be quite challenging. If this scheme requires the use of a set of codes from the new Chapter 17, we could quickly use up these currently empty codes. As far as the recommendation to include these new multi-level fusion codes in DRG 496, this issue will be deferred until after the coding issue is addressed. If new codes are created, they will be included in an upcoming proposed rule along with their proposed DRG assignment.

Since there was support for the proposed changes to the spinal DRGs, these will be implemented as final changes effective October 1, 2001.

c. Posterior Spinal Fusion

We received other correspondence regarding the current DRG assignment for code 81.07, Lumbar and lumbosacral fusion, lateral transverse process technique. The correspondent stated that physicians consider code 81.07 to be a posterior procedure. The patient is placed prone on the operating table and the spine is exposed through a vertical midline incision. The correspondent pointed out that code 81.07 is not classified as a posterior procedure within DRG 496 (Combined Anterior/Posterior Spinal Fusion). Therefore, when 81.07 is reported with one of the anterior techniques fusion codes, it is not assigned to DRG 496. The correspondent recommended that code 81.07 be added to the list of posterior spinal fusion codes for use in determining assignment to DRG 496.

In the proposed rule, we indicated that we consulted with our clinical advisors and they agreed that this addition should be made. Since we proposed to handle the new refusion codes in the same manner as the fusion codes, we also proposed to assign DRG 496 when 81.37 is used with one of the anterior technique fusion or refusion codes. This would be similar to the manner in which code 81.07 is classified. For assignment to DRG 496, we would consider codes 81.02, 81.04, 81.06, 81.32, 81.34, and 81.36 to be anterior techniques and codes 81.03, 81.05, 81.07, 81.08, 81.33, 81.35, and 81.38 to be posterior techniques.

Chart 6.—Revised Composition of DRGS 496, 497, and 498 and Composition of DRG 519 and 520 in MDC 8

Diagnosis and procedure codesExisting DRG 496Retained in or Added to existing DRG 497Retained in or Added to existing DRG 498Included in DRG 519 included in DRG 520
Assigned as anterior techniquesAssigned as posterior techniques
Principal or Secondary Procedure Codes:
81.00 Spinal fusion, not otherwise specifiedXX
81.01 Atlas-axis fusionXX
81.02 Other cervical fusion, anterior techniqueXXX
81.03 Other cervical fusion, posterior techniqueXXX
81.04 Lumbar and lumbosacral fusion, anterior techniqueXXX
81.05 Lumbar and lumbosacral fusion, posterior techniqueXXX
81.06 Lumbar and lumbosacral fusion, anterior techniqueXXX
81.07 Lumbar and lumbosacral fusion, lateral transverse process techniqueXXX
81.08 Lumbar and lumbosacral fusion, posterior techniqueXXX
Start Printed Page 39844
81.30 Refusion of spine, not otherwise specifiedXX
81.31 Refusion of atlas-axis spineXX
81.32 Refusion of other cervical spine, anterior techniqueXXX
81.33 Refusion of other cervical spine, posterior techniqueXXX
81.34 Refusion of dorsal and dorsolumbar spine, anterior techniqueXXX
81.35 Refusion of dorsal and dorsolumbar spine, posterior techniqueXXX
81.36 Refusion of lumbar and lumbosacral spine, anterior techniqueXXX
81.37 Refusion of lumbar and lumbosacral spine, posterior techniqueXXX
81.38 Refusion of lumbar and lumbosacral spine, posterior techniqueXXX
81.39 Refusion of spine, not elsewhere classifiedXX

There was no opposition expressed to the changes proposed for posterior spinal fusions; therefore, we are adopting the proposed changes as final.

d. Spinal Surgery

The California Division of Workers' Compensation notified us of a possible problem with the following spinal DRGs:

DRG 496 (Combined Anterior/Posterior Spinal Fusion)

DRG 497 (Spinal Fusion with CC)

DRG 498 (Spinal Fusion without CC)

DRG 499 (Back & Neck Procedures except Spinal Fusion with CC)

DRG 500 (Back & Neck Procedures except Spinal Fusion without CC)

The Division of Workers' Compensation uses the DRG categories developed by CMS to classify types of hospital care. However, instead of using CMS' weights for determining reimbursement for inpatient services, the Division sets a global fee for all inpatient medical services not otherwise exempted. This fee is established by multiplying the product of the DRG weight (or revised DRG weight for a small number of categories) and the health facility's composite factor by 1.20 to get the maximum amount for worker compensation admissions.

The Division of Workers' Compensation has received reports that the formula it uses for reimbursing cases may be providing inadequate reimbursement. California hospitals and orthopedists have reported that certain spinal surgery DRGs (DRGs 496 through 500) may involve different types of care and/or technologies than those in use at the time these groups were formulated. Health care providers in California report “recent increased use of the new implantation devices, hardware, and instrumentation, coupled with requirements for intensive hospital services accompanying use of new procedures, has led to inadequate reimbursement in these DRGs.” As a short-term response to these concerns, the California Division of Workers' Compensation is exempting the costs of hardware and instrumentation from the global fee of the fee schedule for DRGs 496 through 500. The Division also requested that CMS examine these DRGs for any potential problem under the Medicare reimbursement system.

The ICD-9-CM coding system does not capture specific types of implantation devices, hardware, and instrumentation. Therefore, we were not able to verify the claim that these new devices have led to increased costs in specific cases. We believe that the adoption of a more detailed coding system, such as ICD-10-PCS, would supply greater amounts of detail on these items. However, in the short term, it is not possible to identify a specific problem that involves implantation devices, hardware, and instrumentation.

Comment: As previously stated, we received support for the proposed changes to the spinal fusion DRGs. As was also stated, one commenter pointed out that the current ICD-9-CM codes do not specify the number of levels fused, nor do they specify the types of devices used.

One commenter, who manufactures spinal fusion devices, commended the new ICD-9-CM codes for refusions and the new DRGs for cervical fusions. This commenter also requested new codes specifying the number of levels fused. The commenter stated that typically two devices are used per level and therefore, with increased levels, there would be an increase in the number of infusion devices. The commenter recommended new codes for multi-level spinal fusions, but did not recommend new codes that would specify particular types of devices.

Responses: This coding issue will be addressed at future meetings of the ICD-9-CM Coordination and Maintenance Committee. If new codes are created, their DRG assignment would be addressed in a subsequent proposed rule.

4. MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract)

We have received correspondence from a manufacturer of an implantable vascular device requesting that code 86.07 (Insertion of totally implantable vascular access device [VAD]) be assigned as an operative procedure in MDC 11, to DRG 315 (Other Kidney & Urinary Tract O.R. Procedures). This request was inadvertently omitted from the May 4, 2001 proposed rule. Therefore, we are taking this opportunity to discuss possible designation of this procedure code as a code affecting DRG assignment in MDC 11.Start Printed Page 39845

Procedure code 86.07 describes the implantation of a VAD into the chest wall and blood vessels of a patient's upper body. Patients requiring this particular device have been diagnosed with renal (kidney) failure. Insertion of a VAD allows access to the patient's blood for dialysis purposes when other sites for hemodialysis have been exhausted. According to representatives from the manufacturer of one particular VAD used for hemodialysis, this device costs the hospitals $1,750, and is usually inserted in the outpatient setting as opposed to admission for insertion of the device.

The GROUPER program does not recognize code 86.07 as a procedure in other than MDC 9 (Disease and Disorders of the Skin, Subcutaneous Tissue and Breast), in DRGs 269 and 270 (Other Skin, Subcutaneous Tissue & Breast Procedure, with and without CC). Therefore, its presence in any other MDC does not affect DRG assignment. Patients who are admitted with renal failure and who have a VAD inserted will be assigned to DRG 316 (Renal Failure), absent any other surgical procedures. DRG 316 is a medical DRG with a lower relative weight than cases in the surgical DRGs within the same MDC.

We extensively reviewed the MedPAR data. We found that code 86.07 appeared in 358 different DRGs. Of these 358 DRGs, 173 include additional procedures recognized by GROUPER and are therefore considered surgical, while 185 are medical. Because of the space limitations of the ICD-9-CM, code 86.07 is used to describe VAD devices used for other purposes than hemodialysis.

We looked specifically at the cases within DRGs 315 and 316 as shown in the two tables below:

DRG 315 (Surgical)

With code 86.07Without code 86.07
Number of Cases42119,815.
Average Length of Stay12.5 days6.8 days.
Average Charges$39,946$23,061.

DRG 316 (Medical)

With code 86.07Without code 86.07
Number of Cases1,02019,815.
Average Length of Stay10.2 days6.6 days.
Average Charges$27,730$15,045.

Cases containing code 86.07 have higher average lengths of stay as well as higher average charges than cases not containing this code. We further examined the total number of reported procedures, as well as the range of average charges across both DRGs, for cases containing code 86.07. Both DRGs contain a significant number of additional procedures. The nature of these procedures varies widely, including such divergent procedures as X-rays and scans, injections, dental extraction, cardiac catheterization, aneurysm repair, and laparoscopic cholecystectomy. We also identified 24 cases in DRG 315 and 28 cases in DRG 316 with multiple insertions of the VAD. We believe those instances where the VAD is inserted as an inpatient procedure involve cases where other complications exist, leading to the higher average charges noted above. We are not assigning code 86.07 to DRG 315 as a surgical procedure, but will continue to consider possible alternative specifications of these DRGs.

Additionally, we take this opportunity to clarify correct coding practice. It has come to our attention that a brochure is being distributed with the product that advocates coding insertion of the Lifesite® Hemodialysis Access System using ICD-9-CM procedure code 86.07 in addition to code 39.93 (Insertion of vessel-to-vessel cannula). Inclusion of code 39.93 will force these cases into DRG 315, the higher weighted surgical DRG. Our data review showed 33 such cases of double coding. We would caution hospitals that the use of code 39.93, in the absence of the actual procedure, is erroneous. According to our vascular surgeon consultant, the LifeSite® Hemodialysis Access System as presented to us is not a vessel-to-vessel cannula. It is a device inserted into a vessel. Therefore, providers submitting code 39.93 without the actual procedure having been performed are at risk for review of fraudulent coding practice and DRG upcoding.

This same product brochure contains the name and telephone number of a nationally recognized coding specialist. The addition of this specialist's name and number was included without her knowledge or consent. We take this opportunity to reiterate that LifeSite® Hemodialysis Access System is correctly coded using 86.07 alone.

5. MDC 12 (Diseases and Disorders of the Male Reproductive System)

At its May 11, 2000 public meeting, the ICD-9-CM Coordination and Maintenance Committee considered a request from a manufacturer to create a unique code for the procedure Penile plethysmography with nerve stimulation in DRG 334 (Major Male Pelvic Procedures with CC). The penile plethysmography is a test that can be performed during a radical prostatectomy procedure. During the course of the procedure, the physician places a probe within an area where the prostatic nerves are thought to be located and is able to detect minor changes in penile tumescence or detumescence. This reaction tells the physician that the nerve bundles have been located, which may aid the physician in performing a nerve-sparing radical prostatectomy procedure with precision. The nerve bundles can also be restimulated at the conclusion of the procedure, providing immediate feedback as to whether erectile function will be restored after surgery.

After a presentation on the nerve identifying procedure and review of existing ICD-9-CM codes, the ICD-9-CM Coordination and Maintenance Committee determined that the existing Start Printed Page 39846code 89.58 (Plethysmogram) adequately describes this test.

Radical prostatectomies for patients with cancer of the prostate are grouped in either DRG 334 (Major Male Pelvic Procedures with CC) or DRG 335 (Major Male Pelvic Procedures without CC). We have received a request from a manufacturer of a nerve-identifying device to assign cases containing code 89.58 into DRG 334 only, not into DRG 335. DRG 334 results in higher payments to hospitals. For FY 2002, DRG 334 has a relative weight of 1.5177, and DRG 335 has a relative weight of 1.1047. The manufacturer requested that we designate code 89.58 as an operating room procedure code that would be recognized by the GROUPER software, and make that code applicable only to DRG 334. The manufacturer believed that this would serve to take any cases of nerve sparing out of the lower paying DRG 335, and would make the technology more attractive to hospitals. As paired DRGs 334 and 335 are currently structured, they differ only in whether or not a secondary diagnosis identified as a CC is recorded.

We examined those cases in DRG 334 to which the procedure code for prostatectomy was assigned. Of the total 7,241 cases in DRG 334 identified, 5,611 of these cases contained procedure code 60.5 (Radical prostatectomy). Only three of the prostatectomy cases included code 89.58. There are not a sufficient number of cases on which to base an assessment of the payment for this procedure. Therefore, we did not propose to modify the assignment of code 89.58.

We received one comment on this proposal.

Comment: The commenter argued that the analysis conducted on the procedure code assignment of 89.58 was incomplete, as it did not include evaluation of DRG 335 in the calculations. The commenter added that DRG also includes radical prostatectomies for patients with cancer of the prostate.

Response: We apologize for the omission. Our review of data on DRG 335 showed that the DRG contained 8,125 total cases. There were 8,117 cases that did not contain procedure code 89.58; these cases had average total charges of $12,808. There were 8 cases in this group containing code 89.58. These 8 cases had average total charges of $16,366. We found a subset of 7,050 cases containing procedure code 60.5; these cases had average total charges of $12,772. Within this subset, only 7 cases were reported containing codes 60.5 and 89.58. These 7 cases had average total charges of $16,593.

Even including these additional cases, we identified very few cases in our analysis. Therefore, we are adopting as final our original proposed decision not to modify the assignment of code 89.58 by assigning it exclusively to DRG 334 within MDC 12. However, we will continue to monitor this procedure to determine whether a change in DRG assignment is warranted in the future.

6. MDC 15 (Newborns and Other Neonates With Conditions Originating in the Perinatal Period)

DRG 390 (Neonate with Other Significant Problems) contains newborn or neonate cases with other significant problems not assigned to DRGs 385 through 389, DRG 391, or DRG 469. To be assigned to DRG 389 (Full Term Neonate with Major Problems), the neonate must have one of the principal or secondary diagnosis listed under this DRG. A neonate is assigned to DRG 390 when the neonate has a principal or secondary diagnosis of newborn or neonate with other significant problems that are not assigned to DRG 385 through 389, 391, or 469.

We have received correspondence suggesting a number of changes to be made to DRGs 398 and 391. These changes involve removing two codes from DRG 389 and adding 17 codes to DRG 391, as described below.

a. DRG 389 (Full Term Neonate with Major Problems)

The correspondent suggested removing the following codes from DRG 389 and assigning them to DRG 390:

773.0 Hemolytic disease due to RH isoimmunization

773.1 Hemolytic disease due to ABO isoimmunization

The correspondent stated that hemolytic disease due to RH isoimmunization or due to ABO isoimmunization should not be considered a major problem. The correspondent recommended that these two conditions be classified as significant problems instead and thus assigned to DRG 390.

Our medical consultants sought additional advice from the National Association of Children's Hospitals and Related Institutions (NACHRI). (CMS contracts with the 3M Health Information Systems to maintain the DRG system. The medical experts at 3M evaluate proposed DRG changes from a clinical perspective. These medical consultants assist CMS in evaluating alternative proposals.) NACHRI and our medical consultants agree that it is appropriate to remove codes 773.0 and 773.1 from DRG 389. Therefore, we proposed to remove 773.0 and 773.1 from DRG 389 so that neonates with these conditions are assigned to DRG 390.

Comment: Several commenters supported the proposed revisions for newborns within MDC 15. One commenter stated that the code assignments mentioned in the proposed rule are more appropriately classified based on their clinical attributes. Another commenter agreed with the proposed changes, but requested that an additional code be added to those being moved to DRG 391 (Normal Newborn). Specifically, the commenter requested that code 779.3, Feeding problems in newborns, be listed under DRG 391. Currently, when this code is listed as a secondary code, it results in the assignment of the neonate to DRG 390. The commenter stated that this condition and its resource consumption should not cause the neonate to be classified under DRG 390.

Response: We discussed this additional issue with our medical consultants and they agreed that code 779.3 should also be listed under DRG 391. They concurred that the addition of this code as a secondary diagnosis should not lead to the newborn being classified as having a significant problem. Therefore, code 779.3 will be included among the codes being moved to DRG 391 as of October 1, 2001.

Comment: One commenter suggested that codes 773.0 and 773.1 be removed from DRG 387 (Prematurity with major problems) in addition to DRG 389. The list of major problems in DRGs 389 and 387 mirror each other. The only difference is that DRG 387 includes premature newborns. The commenter asked us to consider codes 773.0 and 773.1 as significant problems for newborns and classify them into DRG 390, which would make them applicable for premature and full-term newborns.

Response: We agree with the commenter. We are removing codes 773.0 and 773.1 from DRG 389 as well as DRG 387. This removal will result in these cases being assigned to DRG 390 (Neonate with Other Significant Problems).

b. DRG 391 (Normal Newborn)

We also have received correspondence with recommendations for changes to DRG 391. The correspondent pointed out that the following secondary codes currently lead to the assignment of the neonate to DRG 390 (Neonate with Other Significant Problems). The correspondent believed that the conditions described by these codes Start Printed Page 39847should not cause the neonate to be classified under DRG 390 when reported as a secondary diagnosis. The correspondent recommended that these conditions be listed under DRG 391 (Normal Newborn).

478.1 Other diseases of nasal cavity and sinuses

520.6 Disturbances in tooth eruption

623.8 Other specified noninflammatory disorders of vagina

709.00 Dyschromia, unspecified

709.01 Vitiglio

709.09 Dyschromia, Other

744.1 Accessory auricle

754.61 Congenital pes planus

757.33 Congenital pigmentary anomalies of skin

757.39 Other specified anomaly of skin

764.08 “Light for dates” without mention of fetal malnutrition, 2,000-2,499 grams

764.98 Fetal growth retardation, unspecified, 2,000-2,499 grams

772.6 Cutaneous hemorrhage

794.15 Abnormal and auditory function studies

796.4 Other abnormal clinical findings

V20.2 Routine infant or child health check

V72.1 Examination of ears and hearing

Our medical consultants also sought the advice of NACHRI on this recommendation. NACHRI reviewed the list of codes and agreed that none of these conditions should be considered to be a significant problem for a neonate. NACHRI concurred that neonates with these secondary diagnoses should be classified as normal newborns. Therefore, we proposed to add the codes listed above to DRG 391 and not classify them to DRG 390 when reported as a secondary diagnosis.

Comment: One commenter expressed concern that the weights assigned to five newborn DRGs (DRGs 385, 368, 387, 388, and 389) are undervalued. The commenter pointed out that legislation mandating Early Hearing Detection and Intervention (EHDI) has been passed in 35 States plus the District of Columbia. In these States, hearing screening must be performed prior to the newborn's discharge from the hospital unless prevented by medical complications. The cost per screening ranges from $15 to $30, which includes personnel, supplies, and equipment costs which are amortized over 3 years. The screening also includes costs for babies that require diagnostic evaluation.

The commenter requested that data from States that have not implemented EHDI programs be deleted from the Medicare supplemental database for, at a minimum, DRG 391 (Normal Newborn). The commenter stated that non-Medicare data used for developing the weights for the five newborn DRGs do not represent average costs if some of the 19 States that supply supplemental non-Medicare data are States that perform hearing screenings on less than 90 percent of newborns. The commenter further requested that we use data only from States that have EHDI programs that are operational at the 90 percent level. The commenter provided a list of States that meet these criteria.

Response: While we appreciate the commenter's furnishing us with information on the costs of providing services such as hearing screenings, it would be inappropriate for us to use this one service to determine whether or not to include a State's data because the State does not provide the service at a 90-percent level. The DRG weights are based on averages. As hospitals elect to include or exclude services, the weights will change over time. Therefore, we are not developing a criterion to exclude hospital data from States that do not have a 90-percent compliance level with EHDI.

Comment: One commenter noted that new procedure code 75.38, Fetal pulse osimetry, was classified as a nonoperative procedure code in Table 6B of the Addendum of the proposed rule. As a nonoperative procedure, it was not assigned to an MDC or to specific DRGs. The commenter requested that we assign code 75.38 to MDC 14 (Pregnancy, Childbirth and Puerperium), and the following DRGs:

DRG 370—(Caesarean Section with CC)

DRG 371—(Caesarean Section without CC)

DRG 372—(Vaginal Delivery with Complicating Diagnosis)

DRG 373—(Vaginal Delivery without CC)

The commenter believed it was critical that the clinical benefits and use of fetal pulse oximetry be closely tracked in order to monitor clinical outcomes and to recognize potential economic advantages. The commenter acknowledged that most labor and delivery patients are not Medicare beneficiaries. However, other third party payers benchmark hospital inpatient payment rates from Medicare DRGs. The commenter stated that if code 75.38 does not contribute or link to a DRG, it is often simply not coded. The commenter further stated that fetal oximetry is an exciting and significant emerging technology and that much knowledge can be gained by understanding its usage in the context of labor and delivery services.

Response: The commenter requested that 75.38 be assigned to the DRGs for deliveries (DRG 370 through 373). However, these DRGs are currently assigned based on the procedure codes for the specific type of delivery (caesarian or vaginal). Adding the procedure code 75.38 to these delivery DRGs would not affect the DRG assignment. The cases would still be assigned to the appropriate DRG based on the type of delivery, not whether the baby received fetal pulse oximetry. If the commenter is suggesting that the fetal pulse oximetry code, on its own, should lead to the DRG assignment, this option is not workable. Without knowing that the mother actually delivered, and the type of delivery, one would not be able to assign the case to one of the delivery DRGs. Once one knew through the procedure codes that the mother delivered, and the type of delivery, the addition of 75.38 would not add to the DRG assignment.

The commenter did not make an argument as to why 75.38 was incorrectly classified as a nonoperating room procedure. While we appreciate the commenter's desire that this new procedure code be used, assigning the code to existing DRGs is not consistent with the structure of DRGs. Procedure codes are only assigned to DRGs when they effect the DRG assignment logic. Therefore, we are not changing the operating room status of code 75.38, nor are we adding it to the delivery DRGs. Code 75.38 will be considered a nonoperative procedure.

c. Medicare Code Editor Changes

The Medicare Code Editor (MCE) is a front-end software program that detects and reports errors in the coding of claims data. The age conflict edit detects inconsistencies between a patient's age and any diagnosis on the patient's record. A subset of diagnoses is considered valid only for patients over the age of 14 years. These diagnoses are identified as “adult” diagnoses and range in age from 15 through 124 years. Therefore, any codes included on the Newborn Diagnoses edit are valid only for patients under age 14.

It has come to our attention that cases including the ICD-9-CM code 770.7, Chronic respiratory disease arising in the perinatal period, are being rejected. However, a condition such as bronchopulmonary dysplasia always originates in the perinatal period, so regardless of the patient's age, this condition is always coded as 770.7. The age at which the diagnosis was established or the age at continuing treatment does not affect the assignment of code 770.7.Start Printed Page 39848

Because correct coding is causing these claims to be rejected, in the May 4 proposed rule we proposed to remove code 770.7 from the Newborn Diagnoses edit in the MCE, as well as remove it from DRG 387 (Prematurity with Major Problems) and DRG 389 (Full Term Neonate with Major Problems). Clinical conditions in code 770.7, such as pulmonary fibrosis, would group to DRG 92 (Interstitial Lung Disease with CC) and DRG 93 (Interstitial Lung Disease without CC). Therefore, we proposed the addition of code 770.7 to DRGs 92 and 93, as they are most similar clinically. We indicated that we would monitor these cases in upcoming MedPAR data to ascertain that the cases consume similar resources.

We received no comments on these proposals, and are, therefore, adopting the change as final.

7. MDC 20 (Alcohol/Drug Use and Alcohol/Drug-Induced Organic Mental Disorders)

DRG 434 (Alcohol/Drug Abuse or Dependency, Detoxification or Other Symptomatic Treatment with CC) is assigned when the patient has a principal diagnosis of alcohol or drug abuse or dependence along with a secondary diagnosis classified as a CC. If these patients do not have a CC, they are assigned to DRG 435 (Alcohol/Drug Abuse or Dependency, detoxification or Other Symptomatic Treatment without CC). When the patients receive rehabilitation and detoxification therapy during the stay, they are assigned to DRG 437 (Alcohol/Drug Dependence, Combined Rehabilitation and Detoxification Therapy). If the patients receive only rehabilitation therapy, they are assigned to DRG 436 (Alcohol/Drug Dependence with Rehabilitation Therapy).

We have received inquiries as to why the relative weight for DRG 437, which includes both rehabilitation and detoxification (for FY 2001, the relative weight is .6606, with a geometric mean length of stay of 7.5) is lower than the FY 2001 relative weight for DRG 434, which includes only detoxification (.7256, with a geometric mean length of stay of 3.9). Likewise, the FY 2001 relative weight for DRG 436, which includes only rehabilitation (.7433), is higher than the FY 2001 relative weight for DRG 437, which includes combined rehabilitation and detoxification therapy (.6606). The inquirers indicated that those patients receiving the combination therapy would be expected to have a longer length of stay, require more services, and, therefore, be more costly to treat.

We analyzed data from the FY 2000 MedPAR file and did not find support for the inquirers' assertion that combination therapy is more costly to treat. The relative weights indicate that the presence of a CC in DRG 434 leads to a significantly higher weight than is found in DRG 435, which does not have a CC. Therefore, we analyzed the alcohol/drug DRGs and focused on eliminating the distinction between rehabilitation and rehabilitation with detoxification and assessing the impact of CCs. We combined data on DRGs 436 and 437 and then subdivided the data based on the presence or absence of a CC. The following table contains the results of the analysis.

Average Charges for Cases—With and Without CCs

DRGSWith CCWithout CC
CountChargeLength of stayCountChargeLength of stay
Detoxification Cases—DRG 434 and DRG 4353,298$8,5485.09,689$5,1114.1
All Rehabilitation Cases—DRG 436 and DRG 4373,2988,11710.14,4737,4079.6

We found that, for both the detoxification and rehabilitation DRGs, the with-CC group has higher charges than the without-CC group. However, the with-CC groups still contain the anomaly that the detoxification DRG 434 has a slightly higher average charge than the combined rehabilitation DRGs 436 and 437. It appears that any significant medical problems as indicated by the presence of a CC dominate the cost incurred by hospitals for treating alcohol and drug abuse patients. For the without-CC groups, the detoxification DRG 435 has substantially lower average charges than the combined rehabilitation DRGs 436 and 437. Because the average charges of the with-CC for both the detoxification DRG 434 and combined rehabilitation DRGs 436 and 437 have similar average charges, we proposed to combine these two groups.

Based on the results of our analysis, we proposed to restructure MDC 20 as follows. We first identified those cases with a principal diagnosis within MDC 20 where the patient left against medical advice. These cases are found in DRG 433 (Alcohol/Drug Abuse or Dependence, Left Against Medical Advice (AMA)). We next identified all remaining cases with a principal diagnosis within MDC 20 where there was a CC. We assigned these cases to a new DRG, (Alcohol/Drug Abuse or Dependence with CC). The remaining cases (without CC and did not leave against medical advice) were then divided into two new DRGs based on whether or not the patient received rehabilitation (Alcohol/Drug Abuse or Dependence without CC, with Rehabilitation Therapy; and Alcohol/Drug Abuse or Dependence without CC, without Rehabilitation Therapy).

The following table illustrates the number of patients and average charges for each of the four proposed DRGs.

Frequencies and Average Charges for New DRGs

DRGGroup titleNumber of casesAverage charges
433Alcohol/Drug Abuse or Dependence, Left Against Medical Advice3,509$3,855
521Alcohol/Drug Abuse or Dependence with CC18,2358,470
522Alcohol/Drug Abuse or Dependence without CC, with Rehabilitation Therapy4,4737,407
523Alcohol/Drug Abuse or Dependence without CC, without Rehabilitation Therapy9,6895,111
Start Printed Page 39849

This table illustrates that groups based first on the presence of CC and then on whether or not the patient receives rehabilitation therapy provide a much better explanation of differences in charges. Therefore, we proposed to retain DRG 433, make DRGs 434 through 437 invalid, and create new DRGs 521, 522, and 523 to include the diagnosis and procedure codes reflected in Chart 7 below.

Chart 7.—Restructure of MDC 20 (Alcohol/Drug Use and Alcohol/Drug-Induced Organic Mental Disorders)

Diagnosis and procedure codeIncluded in Existing DRG 433Included in DRG 521Included in DRG 522Included in DRG 523
Principal diagnosis:
All principal diagnosis within existing MDC 20 involving cases in which patients left against medical advice (AMA)X
All principal diagnoses within existing MDC 20 where there is a CC and where patient did not leave against medical advice (AMA)X
All principal diagnoses within existing MDC 20 without CC and where patient did not leave against medical advice (AMA)
All principal diagnoses in existing MDC 20 without CC involving cases where patients did not leave against medical advice (AMA)X
Procedure Codes:
94.61 Alcohol rehabilitationX
94.63 Alcohol rehabilitation and detoxificationX
94.64 Drug rehabilitationX
94.66 Drug rehabilitation and detoxificationX
94.67 Combined alcohol and drug rehabilitationX
94.69 Combined alcohol and drug rehabilitation and detoxificationX

Comment: One commenter was uncertain as to the intent of the reclassification of the DRGs to identify alcohol/drug use and alcohol/drug-induced organic mental disorders. The commenter expressed concern that the cases associated with alcohol/drug use would have a lower overall weight relative to the overall average weight of these cases in FY 2001. The commenter requested further information on the impact of this change in the final rule. Additionally, the commenter recommended that the title for DRG 521 be changed from “Alcohol/Drug Abuse or Dependence with CC” to “Alcohol/Drug Abuse with CC, with or without Rehabilitation Therapy.”

Response: As described above, for FY 2001, cases receiving combined rehabilitation and detoxification (DRG 437) had a lower relative weight than patients receiving only detoxification (DRG 434) or rehabilitation (DRG 436). Since these relative weights are derived from actual claims data, we decided to review the issue to determine if other factors had any impact. It would be expected that those patients receiving the combination therapy would have a longer length of stay, require more services, and therefore be more costly to treat. This was not supported by the data.

The factor that seems to contribute the greatest to the costs of these cases is the presence of a CC. The presence of a CC had a greater impact on the average charges than did factors such as detoxification or rehabilitation. Once the importance of this factor was determined, the cases not leaving against medical advice (DRG 433) were split on whether or not a CC was present. Those with a CC were assigned to new DRG 521. The remaining cases were then split based on whether or not rehabilitation was provided.

As can be seen from the FY 2002 relative weights in the chart below, MDC 20 patients who have a CC are considerably more expensive to treat. They have the highest relative weight among this set of DRGs. The second highest weight is assigned to MDC 20 cases without CC who also received rehabilitation services.

DRG titleNumber of of casesFinal weights
DRG 433 Alcohol/Drug Abuse or Dependence, Left AMA5,522.2888
DRG 521 Alcohol/Drug Abuse or Dependence with CC28,014.7355
DRG 522 Alcohol/Drug Abuse or Dependence without CC, with Rehabilitation Therapy6,852.6249
DRG 523 Alcohol/Drug Abuse or Dependence without CC, without Rehabilitation Therapy14,954.3997

As can be seen from this chart, the majority of patients are assigned to DRG 521, which has the highest relative weight among the MDC 20 DRGs. As is the case for all DRGs, the relative weights reflect hospitals' actual charges submitted for bills in the FY 2000 MedPAR file. Data support the new splits based first on the presence of a CC and then on the presence of rehabilitation therapy. Therefore, we are adopting the proposed DRG classification changes as final without change.

While we appreciate the comment on modifying the title for DRG 521, we believe that it does not add to the clarity of the DRG. All MDC 20 patients who have not left AMA but who have a CC are assigned to DRG 521. The presence or absence of a code for rehabilitation therapy does not effect the DRG assignment for these cases. Therefore, we are adopting the proposed title as final without change.

8. MDC 25 (Human Immunodeficiency Virus Infections)

Effective October 1, 2000, ICD-9-CM diagnosis codes 783.2 (Abnormal loss of weight) and 783.4 (Lack of expected normal physiological development) were made invalid (65 FR 47171). These Start Printed Page 39850two old diagnosis codes were expanded to five digits and the following new diagnosis codes were created:

783.21 Loss of weight

783.22 Underweight

783.40 Unspecified lack of normal physiological development

783.41 Failure to thrive

783.42 Delayed milestones

783.43 Short stature

These six revised codes were created in response to an industry request. Specifically, code 783.2 did not differentiate between whether the patient had lost weight recently or whether the patient was underweight. Code 783.4 was expanded to capture concepts such as failure to thrive, delayed milestones, and short stature. None of these concepts were captured in the old codes.

We listed these new codes in the August 1, 2000 final rule on the hospital inpatient prospective payment system in Table 6A—New Diagnosis Codes (65 FR 47169). At the time the final rule was published, all of these codes were assigned to DRGs 296 through 298. After the final rule was published, we received an inquiry as to why these new diagnosis codes were not included in MDC 25 as human immunodeficiency virus (HIV)-related conditions. The inquirer pointed out that the predecessor codes (783.2 and 783.4) were included in MDC 25 as HIV-related conditions and suggested that the new codes be added to MDC 25. These cases will be assigned to other MDCs if the patient does not have HIV.

In the proposed rule, we stated that we agreed that the expanded codes should have been placed in the MDC 25 as HIV-related conditions. The omission was an oversight. Therefore, we proposed to add diagnosis codes 783.21, 783.22, 783.40, 783.41, 783.42, and 783.43 as HIV-related conditions within MDC 25. When these six revised codes are reported with code 042 HIV, the patient will be classified within MDC 25.

Comment: One commenter supported the placement of codes 783.21, 783.22, 783.40, 783.41, 783.42, and 783.43, as HIV-related conditions within MDC 25.

Response: We appreciate the commenter's support and are adopting the proposed changes as final.

9. 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 DRG within the MDC to which the principal diagnosis is assigned. Therefore, it is necessary to have a decision rule by which these cases are assigned to a single DRG. The surgical hierarchy, an ordering of surgical classes from most resource intensive to least, performs that function. Its application ensures that cases involving multiple surgical procedures are assigned to the DRG associated with the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can shift as a function of DRG reclassification and recalibration, we reviewed the surgical hierarchy of each MDC, as we have for previous reclassifications, to determine if the ordering of classes coincided with the intensity of resource utilization, as measured by the same billing data used to compute the DRG relative weights.

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

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

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

A second example occurs when the difference between the average weights for two surgical classes is very small. We have found that small differences generally do not warrant reordering of the hierarchy since, by virtue of the hierarchy change, the relative weights are likely to shift such that the higher-ordered surgical class has a lower average weight than the class ordered below it.

Based on the preliminary recalibration of the DRGs, we proposed the modification of the surgical hierarchy as set forth below. As we stated in the September 1, 1989 final rule (54 FR 36457), we are unable to test the effects of proposed revisions to the surgical hierarchy and to reflect these changes in the proposed relative weights due to the unavailability of the revised GROUPER software at the time the proposed rule is prepared. Rather, we simulate most major classification changes to approximate the placement of cases under the proposed reclassification and then determine the average charge for each DRG. These average charges then serve as our best estimate of relative resource use for each surgical class. We test the proposed surgical hierarchy changes after the revised GROUPER is received and reflect the final changes in the DRG relative weights in the final rule. Further, as discussed in section II.C. of this preamble, we anticipate that the final recalibrated weights will be somewhat different from those proposed, because they will be based on more complete data. Consequently, in the proposed rule we stated that further revision of the hierarchy, using the above principles, might be necessary in the final rule.

In the May 4 proposed rule, we proposed to revise the surgical hierarchy for the pre-MDC DRGs, MDC 5 (Diseases and Disorders of the Circulatory System), MDC 8 (Diseases Start Printed Page 39851and Disorders of the Musculoskeletal System & Connective Tissue) and MDC 20 (Alcohol/Drug Use & Alcohol/Drug Induced-Organic Mental Disorders) as follows:

  • In the pre-MDC DRGs, we proposed to reorder Lung Transplant (DRG 495) above Bone Marrow Transplant (DRG 481). We also proposed to reorder Simultaneous Pancreas/Kidney Transplant (DRG 512) and Pancreas Transplant (DRG 513) above Lung Transplant (DRG 495).
  • In MDC 5, we proposed to reorder Cardiac Defibrillator Implants (DRGs 514 and 515) above Other Cardiothoracic Procedures (DRG 108). We also proposed to reorder Percutaneous Cardiovascular Procedures (DRGs 516, 517, and 518) above Other Vascular Procedures (DRGs 478 and 479).
  • In MDC 8, we proposed to reorder Cervical Spinal Fusion (DRGs 519 and 520) above Back & Neck Procedures Except Spinal Fusion (DRGs 499 and 500).
  • In MDC 20, we proposed to order as follows: Alcohol/Drug Abuse or Dependence, Left AMA (DRG 433) above Alcohol/Drug Abuse or Dependence With CC (DRG 521); Alcohol/Drug Abuse or Dependence With CC (DRG 521) above Alcohol/Drug Abuse or Dependence With Rehabilitation Therapy Without CC (DRG 522); and Alcohol/Drug Abuse or Dependence With Rehabilitation Therapy Without CC (DRG 522) above Alcohol/Drug Abuse or Dependence Without Rehabilitation Therapy Without CC (DRG 523).

Comment: One commenter expressed support for hierarchy proposals.

Response: We appreciate the commenter's support. Based on a test of the proposed revisions using the March 2001 update of the FY 2000 MedPAR file and the revised GROUPER software, we have found that the revisions are still supported by the data, and no additional changes are indicated. Therefore, we are adopting these proposed changes as final.

10. Refinement of Complications and Comorbidities (CC) List

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 a valid CC in combination with a particular principal diagnosis. Thus, we created the CC Exclusions List. We made these changes for the following reasons: (1) to preclude coding of CCs for closely related conditions; (2) to preclude duplicative coding 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. We developed this standard 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 standard list of CCs, either by adding new CCs or deleting CCs already on the list. We stated in the proposed rule that we did not propose to delete any of the diagnosis codes on the CC list at that time.

In the May 19, 1987 proposed notice (52 FR 18877) concerning changes to the DRG classification system, 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 (as subsequently corrected in the September 1, 1987 final notice (52 FR 33154)).
  • Specific and nonspecific (that is, not otherwise specified (NOS)) diagnosis codes for a condition should not be considered CCs for one another.
  • Conditions that may not coexist, such as partial/total, unilateral/bilateral, obstructed/unobstructed, and benign/malignant, should not be considered CCs for one another.
  • 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. The FY 1988 revisions were intended only as a first step toward refinement of the CC list in that the criteria used for eliminating certain diagnoses from consideration as CCs were intended to identify only the most obvious diagnoses that should not be considered complications or comorbidities of another diagnosis. For that reason, and in light of comments and questions on the CC list, 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. (See the September 30, 1988 final rule (53 FR 38485) for the revision made for the discharges occurring in FY 1989; the September 1, 1989 final rule (54 FR 36552) for the FY 1990 revision; the September 4, 1990 final rule (55 FR 36126) for the FY 1991 revision; the August 30, 1991 final rule (56 FR 43209) for the FY 1992 revision; the September 1, 1992 final rule (57 FR 39753) for the FY 1993 revision; the September 1, 1993 final rule (58 FR 46278) for the FY 1994 revisions; the September 1, 1994 final rule (59 FR 45334) for the FY 1995 revisions; the September 1, 1995 final rule (60 FR 45782) for the FY 1996 revisions; the August 30, 1996 final rule (61 FR 46171) for the FY 1997 revisions; the August 29, 1997 final rule (62 FR 45966) for the FY 1998 revisions; the July 31, 1998 final rule (63 FR 40954) for the FY 1999 revisions, and the August 1, 2000 final rule (65 FR 47064) for the FY 2001 revisions.) In the July 30, 1999 final rule (64 FR 41490) we did not modify the CC Exclusions List for FY 2000 because we did not make any changes to the ICD-9-CM codes for FY 2000.

In this final rule, we are making a limited revision of the CC Exclusions List to take into account the changes that will be made in the ICD-9-CM diagnosis coding system effective October 1, 2001. (See section II.B.11. below, for a discussion of ICD-9-CM changes.) These changes are being made in accordance with the principles established when we created the CC Exclusions List in 1987.

Tables 6F and 6G in section V. of the Addendum to this final rule contain the revisions to the CC Exclusions List that will be effective for discharges occurring on or after October 1, 2001. Each table shows the principal diagnoses with changes to the excluded CCs. Each of these principal diagnoses is shown with an asterisk, and the additions or deletions to the CC Exclusions List are provided in an indented column immediately following the affected principal diagnosis.

CCs that are added to the list are in Table 6G—Additions to the CC Exclusions List. Beginning with discharges on or after October 1, 2001, the indented diagnoses will not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

CCs that are deleted from the list are in Table 6H—Deletions from the CC Exclusions List. Beginning with discharges on or after October 1, 2001, the indented diagnoses will be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

Copies of the original CC Exclusions List applicable to FY 1988 can be obtained from the National Technical Information Service (NTIS) of the Department of Commerce. It is available in hard copy for $133.00 plus shipping and handling. A request for the FY 1988 CC Exclusions List (which should Start Printed Page 39852include the identification accession number (PB) 88-133970) should be made to the following address: National Technical Information Service, United States Department of Commerce, 5285 Port Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.

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

Alternatively, the complete documentation of the GROUPER logic, including the current CC Exclusions List, is available from 3M/Health Information Systems (HIS), which, under contract with CMS, is responsible for updating and maintaining the GROUPER program. The current DRG Definitions Manual, Version 18.0, is available for $225.00, which includes $15.00 for shipping and handling. Version 19.0 of this manual, which includes the final FY 2002 DRG changes, will be available in October 2001 for $225.00. These manuals may be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303. Please specify the revision or revisions requested.

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

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

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

60.0 Incision of prostate

60.12 Open biopsy of prostate

60.15 Biopsy of periprostatic tissue

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 NEC

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

60.99 Other operations on prostate

All remaining OR procedures are assigned to DRGs 468 and 477, with DRG 477 assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis. The original list of the ICD-9-CM procedure codes for the procedures we consider nonextensive procedures, if performed with an unrelated principal diagnosis, was published in Table 6C in section IV. of the Addendum to the September 30, 1988 final rule (53 FR 38591). As part of the final rules published on September 4, 1990 (55 FR 36135), August 30, 1991 (56 FR 43212), September 1, 1992 (57 FR 23625), September 1, 1993 (58 FR 46279), September 1, 1994 (59 FR 45336), September 1, 1995 (60 FR 45783), August 30, 1996 (61 FR 46173), and August 29, 1997 (62 FR 45981), we moved several other procedures from DRG 468 to 477, and some procedures from DRG 477 to 468. No procedures were moved in FY 1999, as noted in the July 31, 1998 final rule (63 FR 40962); in FY 2000, as noted in the July 30, 1999 final rule (64 FR 41496); or in FY 2001, as noted in the August 1, 2000 final rule (65 FR 47064).

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

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

Our medical consultants identified those procedures occurring in conjunction with certain principal diagnoses with sufficient frequency to justify adding them to one of the surgical DRGs for the MDC in which the diagnosis falls. Based on this year's review, we did not identify any necessary changes in procedures under DRG 477 and, therefore, we did not propose to move any procedures from DRG 477 to one of the surgical DRGs. However, our medical consultants have identified a number of procedure codes that should be removed from DRG 468 and put into more clinically coherent DRGs. The movements of these codes are specified in the charts below:

Movement of Procedure Codes From DRG 468

Procedure codeDescriptionIncluded in DRGDescription
MDC 1—Diseases and Disorders of the Nervous System
5495Peritoneal Incision7Peripheral and Cranial Nerve and Other Nervous System Procedures with CC.
5495Peritoneal Incision8Peripheral and Cranial Nerve and Other Nervous System Procedures without CC.
MDC 3—Diseases and Disorders of the Ear
3821Blood Vessel Biopsy63Other Ear, Nose, Mouth and Throat OR Procedure.
MDC 4—Diseases and Disorders of the Respiratory System
3821Blood Vessel Biopsy76Other Respiratory System OR Procedures with CC.
Start Printed Page 39853
3821Blood Vessel Biopsy77Other Respiratory System OR Procedures with CC.
3929Vascular Shunt & Bypass NEC76Other Respiratory System OR Procedures with CC.
3929Vascular Shunt & Bypass NEC77Other Respiratory System OR Procedures with CC.
3931Suture of Artery76Other Respiratory System OR Procedures with CC.
3931Suture of Artery77Other Respiratory System OR Procedures with CC.
5411Exploratory Laparotomy76Other Respiratory System OR Procedures with CC.
5411Exploratory Laparotomy77Other Respiratory System OR Procedures with CC.
7749Bone Biopsy NEC76Other Respiratory System OR Procedures with CC.
7749Bone Biopsy NEC77Other Respiratory System OR Procedures with CC.
8669Free Skin Graft NEC76Other Respiratory System OR Procedures with CC.
8669Free Skin Graft NEC77Other Respiratory System OR Procedures with CC.
MDC 5—Diseases and Disorders of the Circulatory System
3402Exploratory Thoracotomy120Other Circulatory System OR Procedures.
3403Reopen Thoractomy Site120Other Circulatory System OR Procedures.
3421Transpleura Thoracoscopy120Other Circulatory System OR Procedures.
3422Mediastinoscopy120Other Circulatory System OR Procedures.
3426Open Mediastinal Biopsy120Other Circulatory System OR Procedures.
436Distal Gastrectomy120Other Circulatory System OR Procedures.
437Partial Gastrectomy with Jejunal Anastomosis120Other Circulatory System OR Procedures.
4389Partial Gastrectomy120Other Circulatory System OR Procedures.
4399Total Gastrectomy120Other Circulatory System OR Procedures.
4561Multiple Segment Small Bowel Excision120Other Circulatory System OR Procedures.
4562Partial Small Bowel Resection NEC120Other Circulatory System OR Procedures.
4572Cecectomy120Other Circulatory System OR Procedures.
4573Right Hemicolectomy120Other Circulatory System OR Procedures.
4574Transverse Colon Resection120Other Circulatory System OR Procedures.
4575Left Hemicolectomy120Other Circulatory System OR Procedures.
4579Partial Large Bowel Excision NEC120Other Circulatory System OR Procedures.
458Total Intra-Abdominal Colectomy120Other Circulatory System OR Procedures.
4593Small-to-Large Bowel NEC120Other Circulatory System OR Procedures.
4603Large Bowel Exteriorization120Other Circulatory System OR Procedures.
4613Permanent Colostomy120Other Circulatory System OR Procedures.
4709Other Appendectomy120Other Circulatory System OR Procedures.
4862Anterior Rectal Resection With Colostomy120Other Circulatory System OR Procedures.
4863Anterior Rectal Resection NEC120Other Circulatory System OR Procedures.
4869Rectal Resection120Other Circulatory System OR Procedures.
5012Open Liver Biopsy120Other Circulatory System OR Procedures.
540Abdominal Wall Incision120Other Circulatory System OR Procedures.
MDC 6—Diseases and Disorders of the Digestive System
5122Cholecystectomy170Other Digestive System OR Procedures with CC.
5122Cholecystectomy171Other Digestive System OR Procedures without CC.
5123Laparoscopic Cholecystectomy170Other Digestive System OR Procedures with CC.
5132GB-To-Intestine Anastomosis170Other Digestive System OR Procedures with CC.
5136Choledochoenterostomy170Other Digestive System OR Procedures with CC.
5136Choledochoenterostomy171Other Digestive System OR Procedures without CC.
5137Hepatic Duct-GI Anastomosis170Other Digestive System OR Procedures with CC.
5137Hepatic Duct-GI Anastomosis171Other Digestive System OR Procedures without CC.
5159Bile Duct Incision NEC170Other Digestive System OR Procedures with CC.
5159Bile Duct Incision NEC171Other Digestive System OR Procedures without CC.
MDC 7—Diseases and Disorders of the Hepatobiliary System and Pancreas
540Abdominal Wall Incision201Other Heptobiliary and Pancreas Procedure.
MDC 8—Diseases and Disorders of the Musculoskeletal System and Connective Tissue
3479Other Chest Wall Repair233Other Musculoskeletal System & Connective Tissue OR Procedure with CC.
3479Other Chest Wall Repair234Other Musculoskeletal System & Connective Tissue OR Procedure with CC.
MDC 11—Diseases and Disorders of the Kideny and Urinary Tract
540Abdominal Wall Incision315Other Kidney & Urinary Tract OR Procedure.
5451Laparoscopic Periton Adhesiolysis315Other Kidney & Urinary Tract OR Procedure.
5459Other Periton Adhesiolysis315Other Kidney & Urinary Tract OR Procedure.
Start Printed Page 39854

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

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal diagnosis code, result in assignment to DRGs 468, 476, and 477, to ascertain if any of those procedures should be moved from one of these DRGs to another of these DRGs based on average charges and length of stay. We look at the data for trends such as shifts in treatment practice or reporting practice that would make the resulting DRG assignment illogical. If our medical consultants were to find these shifts, we would propose moving cases to keep the DRGs clinically similar or to provide payment for the cases in a similar manner. Generally, we move only those procedures for which we have an adequate number of discharges to analyze the data. Based on our review this year, we did not propose to move any procedures from DRG 468 to DRGs 476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG 477 to DRGs 468 or 476.

c. Adding Diagnosis Codes to MDCs

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

We received one comment in support of the proposed changes to the procedure codes in DRG 468, 476, and 477. In this final rule, we are adopting these proposed changes without further modification.

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

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

The 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) (formerly American Medical Record Association (AMRA)), the American Hospital Association (AHA), and various physician specialty groups as well as physicians, medical record administrators, health information management professionals, and other members of the public to contribute ideas on coding matters. After considering the opinions expressed at the public meetings and in writing, the Committee formulates recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes for implementation in FY 2002 at public meetings held on May 11, 2000 and November 17, 2000, and finalized the coding changes after consideration of comments received at the meetings and in writing by January 08, 2001.

Copies of the Coordination and Maintenance Committee minutes of the 2000 meetings can be obtained from the CMS home page at: http://www.hcfa.gov/​medicare/​icd9cm.htm. Paper copies of these minutes are no longer available and the mailing list has been discontinued. 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 1100; 6525 Belcrest 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, Purchasing Policy Group, Division of Acute Care; C4-07-07; 7500 Security Boulevard; Baltimore, MD 21244-1850. Comments may be sent by E-mail to: pbrooks@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2001. The new ICD-9-CM codes are listed, along with their DRG classifications, in Tables 6A and 6B (New Diagnosis Codes and New Procedure Codes, respectively) in section V. of 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 proposed rule, we solicited comments only on the proposed DRG classification of these new codes.

Further, the Committee has approved the expansion of certain ICD-9-CM codes to require an additional digit for valid code assignment. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2001. For codes that have been replaced by new or expanded codes, the corresponding new or expanded diagnosis codes are included in Table 6A (New Diagnosis Codes). New procedure codes are shown in Table 6B. Table 6C contains invalid diagnosis codes, and Table 6D contains invalid procedure codes. Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), which also include the DRG assignments for these revised codes. Revisions to procedure code titles are in Table 6F (Revised Procedure Codes Titles).

In September 2000, the Department implemented a policy of paying for inpatient hospital stays for Medicare beneficiaries participating in clinical trials (HCFA Program Memorandum AB 00-89, September 19, 2000). Hospitals were encouraged to identify the patients involved by reporting an ICD-9-CM code. This would allow the examination of data on the patients involved in clinical trials. However, there was no clear ICD-9-CM diagnosis code for patients who took part in a clinical trial. There was a code for patients receiving an examination as part of the control group for clinical trials. This control group code was V70.7 (Examination for normal comparison or control in clinical research). Hospitals were instructed to use V70.5 (Health examination of defined subpopulations), for patients participating in a clinical trial.

This coding directive has created some confusion because of the title and description of the two codes. Hospitals also have requested that all clinical patients be captured under one code. They indicated that the use of one code Start Printed Page 39855would be especially useful because patients frequently do not know if they are part of the control group or are receiving new therapy.

To help alleviate the confusion, the ICD-9-CM Coordination and Maintenance Committee revised code V70.7. Effective October 1, 2001, the new title of code V70.7 is “Examination of patient in clinical trial.” This revision will make it easier to capture data on Medicare beneficiaries who are participating in a clinical trial.

Comment: One commenter questioned the DRG assignment of 525.12 (Loss of teeth due to periodontal disease) listed in Table 6A of the Addendum of the proposed rule. Table 6A in the proposed rule listed the proposed DRG assignments within MDC 3 for this new code as DRGs 182, 183, and 184. The commenter stated that the DRG assignments within MDC 3 should actually be DRGs 185, 186, and 187, since these were the DRGs used for its predecessor code, 525.1. The commenter also pointed out that the other new codes within this category (525.10-525.19) were assigned to DRGs 185, 186, and 187.

Response: The commenter is correct. We are assigning code 525.12 to DRGs 185, 186, and 187 within MDC 3. This is consistent with the way the other codes in the new category were assigned. In this final rule, we are correcting Table 6A to show that 525.12 is assigned to DRGs 185, 186, and 187 within MDC 3.

13. Other Issues

a. Pancreas Transplant

Effective July 1, 1999, Medicare covers whole organ pancreas transplantation if the transplantation is performed simultaneously with or after a kidney transplant (procedure codes 55.69 (Other kidney transplantation), or diagnosis code V42.0 (Organ or tissue replaced by transplant, Kidney), along with 52.80 (Pancreatic transplant, not otherwise specified), or 52.82 (Homotransplant of pancreas)). A discussion of the history of these coverage decisions and codes can be found in the August 1, 2000 final rule on the prospective payment system for FY 2001 (65 FR 47067).

We discussed the appropriate DRG classification for these cases in both the July 30, 1999 final rule (64 FR 41497) and the August 1, 2000 final rule (65 FR 47067). Currently, cases can be assigned to one of two major DRGs depending on principal diagnosis. If a kidney transplant and a pancreas transplant are performed simultaneously on a patient with chronic renal failure secondary to diabetes with renal manifestations (diagnosis codes 250.40 through 250.43), the cases will be assigned to DRG 302 (Kidney Transplant). If a pancreas transplant is performed following a kidney transplant (during a different hospital admission) on a patient with chronic renal failure secondary to diabetes with renal manifestations, the case is assigned to DRG 468 (Extensive OR Procedure Unrelated to Principal Diagnosis). This is because pancreas transplant is not assigned to MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract), the MDC to which a principal diagnosis of chronic renal failure secondary to diabetes is assigned.

In the August 1, 2000 final rule, we noted that we would continue to monitor these transplant cases to determine the appropriateness of establishing a new DRG. For the May 4 proposed rule, using data in the FY 2000 MedPAR file (updated through May 31, 2000), we analyzed the cases for which procedure codes 52.80 and 52.82 were reported. (Our data showed that 15 of the cases were coded using 52.83 (Heterotransplant of pancreas), which is not a covered procedure under any circumstances.) We identified a total of 221 cases for this time period. The United Network for Organ Sharing (UNOS) reported it had identified 270 cases through September 2000.

These 221 MedPAR cases were distributed over 6 DRGs, with the majority (158 cases or 72 percent) assigned to DRG 302, and 23 cases (10 percent) assigned to DRG 468. The remaining 40 cases were distributed between 4 other DRGs, with the majority (25 cases) being assigned to DRG 292 (Other Endocrine, Nutritional and Metabolic OR Procedures with CC). Four cases were assigned to DRG 483 (Tracheostomy with Principal Diagnosis except Face, Mouth and Neck Diagnoses) in the Pre-MDC grouping, which took precedence over any other DRG assignment.

We arrayed the data based on the presence or absence of kidney transplant; that is, pancreas transplant codes with or without 55.69. The majority of cases (166 or 75 percent) had the combined kidney-pancreas transplant in one operative episode, with 55 (25 percent) of the cases having pancreas transplant subsequent to the kidney transplant. Differences in hospital charges were significantly higher for a pancreas transplant plus a kidney transplant ($138,809) than a pancreas transplant alone ($85,972), and both were higher than average standardized charges in DRG 302 ($64,760) or DRG 468 ($39,707), although it must be noted that these figures do reflect the resource intensive patients assigned to DRG 483. Those patients in DRG 483 had average standardized charges of $377,934.

Because these categories of patients do not fit into existing DRGs from either a clinical or resource perspective, in the May 4 proposed rule, we proposed to create two new DRGs that would reflect these patients' unique clinical profiles: DRG 512 (Simultaneous Pancreas/Kidney Transplant) and DRG 513 (Pancreas Transplants). Cases grouped to either DRGs 512 or 513 must have a principal or secondary diagnosis code and procedure code or combination of procedure codes as indicated in the chart below:

Composition of Proposed DRGs 512 and 513

Diagnosis and procedure codesIncluded in DRG 512Included in DRG 513
Principal or Secondary ICD-9-CM Diabetes Mellitus Code:
250.00 Diabetes mellitus without mention of complication, Type II or unspecified type, not as stated as uncontrolledXX
250.01 Diabetes mellitus without mention of complication, Type I, not stated as uncontrolledXX
250.02 Diabetes mellitus without mention of complication, Type II or unspecified type, uncontrolledXX
250.03 Diabetes mellitus without mention of complication, Type I, uncontrolledXX
250.10 Diabetes with ketoacidosis, Type II or Unspecified type, not stated as uncontrolledXX
250.11 Diabetes with ketoacidosis, Type I, not stated as uncontrolledXX
250.12 Diabetes with ketoacidosis, Type II or unspecified type, uncontrolledXX
250.13 Diabetes with ketoacidosis, Type I, controlledXX
250.20 Diabetes with hyperosmolarity, Type II or unspecified type, not stated as uncontrolledXX
250.21 Diabetes with hyperosmolarity, Type I, not stated as uncontrolledXX
Start Printed Page 39856
250.22 Diabetes with hyperosmolarity, Type II or unspecified type, uncontrolledXX
250.23 Diabetes with hyperosmolarity, Type I, uncontrolledXX
250.30 Diabetes with other coma, Type II or unspecified type, not stated as uncontrolledXX
250.31 Diabetes with other coma, Type I, not stated as uncontrolledXX
250.32 Diabetes with other coma, Type II or unspecified type, uncontrolledXX
250.33 Diabetes with other coma, Type I, uncontrolledXX
250.40 Diabetes with renal manifestations, Type II or unspecified type, not stated as uncontrolledXX
250.41 Diabetes with renal manifestations, Type I, not stated as uncontrolledXX
250.42 Diabetes with renal manifestations, Type II or unspecified type, uncontrolledXX
250.43 Diabetes with renal manifestations, Type I, uncontrolledXX
250.50 Diabetes with ophthalmic manifestations, Type II or unspecified type, not stated as uncontrolledXX
250.51 Diabetes with ophthalmic manifestations, Type I, not stated as uncontrolledXX
250.52 Diabetes with ophthalmic manifestations, Type II or unspecified type, uncontrolledXX
250.53 Diabetes with ophthalmic manifestations, Type I, uncontrolledXX
250.60 Diabetes with neurological manifestations, Type II or unspecified type, not stated as uncontrolledXX
250.61 Diabetes with neurological manifestations, Type I, not stated as uncontrolledXX
250.62 Diabetes with neurological manifestations, Type II or unspecified type, uncontrolledXX
250.63 Diabetes with neurological manifestations, Type I uncontrolledXX
250.70 Diabetes with peripheral circulatory disorders, Type II or unspecified type, not stated as uncontrolledXX
250.71 Diabetes with peripheral circulatory disorders, Type I, not stated as uncontrolledXX
250.72 Diabetes with peripheral circulatory disorders, Type II or unspecified type, uncontrolledXX
250.73 Diabetes with peripheral circulatory disorders, Type I, uncontrolledXX
250.80 Diabetes with other specified manifestations, Type II or unspecified type, not stated as uncontrolledXX
250.81 Diabetes with other specified manifestations, Type I, not states as uncontrolledXX
250.82 Diabetes with other specified manifestations, Type II or unspecified type, uncontrolledXX
250.83 Diabetes with other specified manifestations, Type I, uncontrolledXX
250.90 Diabetes with unspecified complication, Type II or unspecified type, not states as uncontrolledXX
250.91 Diabetes with unspecified complication, Type I, not stated as uncontrolledXX
250.92 Diabetes with unspecified complication, Type II or unspecified type, uncontrolledXX
250.93 Diabetes with unspecified complication, Type I, uncontrolledXX
Principal or Secondary Diagnosis Code:
585 Chronic renal failure.XX
403.01 Hypertensive renal disease, malignant, with renal failureXX
403.11 Hypertensive renal disease, benign, with renal failureXX
403.91 Hypertensive renal disease, unspecified, with renal failureXX
404.02 Hypertensive heart & renal disease, malignant, with renal failureXX
404.03 Hypertensive heart & renal disease, malignant, with congestive heart failure and renal diseaseXX
404.12 Hypertensive heart & renal disease, benign, with renal failureXX
404.13 Hypertensive heart & renal disease, benign, with congestive heart failure and renal diseaseXX
404.92 Hypertensive heart & renal disease, unspecified, with renal failureXX
404.93 Hypertensive heart & renal disease, unspecified, with congestive heart failure and renal failureXX
V42.0 Organ or tissue replaced by transplant, kidneyXX
V43.89 Organ or tissue replaced by other means, other (Kidney)XX
Procedure Code:
52.80 Pancreatic transplant, not otherwise specifiedX
52.82 Homotransplant of pancreasX
Combination Procedure Codes:
52.80 Pancreatic transplant, not otherwise specified,
Plus
55.69 Other kidney transplantationX
Or
52.82 Homotransplant of pancreas
Plus
55.69 Other kidney transplantationX

The logic for the DRG 512 accepts the pair of diagnosis codes in any position (principal/secondary or secondary/secondary). The pair of procedure codes must be present along with the two diagnosis codes. This DRG will be placed in the Pre-MDC GROUPER logic immediately following DRG 480 (Liver Transplant).

The logic for DRG 513 accepts the pair of diagnosis codes in any position (principal/secondary or secondary/secondary). Only one procedure code must be used along with the two diagnosis codes. This DRG will be placed in the Pre-MDC GROUPER logic immediately following new DRG 512 (Simultaneous Pancreas/Kidney Transplant).

We received two comments on this proposal. One commenter supported the creation of the two new DRGs; a summary of the other comment follows:

Comment: One commenter noted that, as pancreas transplants were approved by Medicare on July 1, 1999, a special billing procedure should be made available to hospitals to enable hospitals to bill for the transplant DRG back to the effective date of the covered service.

Response: DRGs 512 and 513 are effective for discharges occurring on or Start Printed Page 39857after October 1, 2001, for FY 2002. Discharges involving pancreas transplants occurring prior to that time are assigned to existing DRGs as described above. Therefore, there is no need for hospitals to resubmit their bills.

We are adopting the establishment of proposed DRGs 512 and 513 as final.

b. Intestinal Transplantation

Effective April 1, 2001, Medicare covers intestinal transplantation for the purpose of restoring intestinal function in patients with irreversible intestinal failure (Medicare Program Memorandum Transmittal No. AB-01-58, April 12, 2001). This procedure is covered only when performed for patients who have failed total parenteral nutrition (TPN) and only when performed in centers that meet approval criteria.

Intestinal failure is defined as the loss of absorptive capacity of the small bowel secondary to severe primary gastrointestinal disease or surgically induced short bowel syndrome. Intestinal failure prevents oral nutrition and may be associated with both mortality and profound morbidity.

If an intestinal transplantation alone is performed on a patient with an intestinal principal diagnosis, the case would be assigned to either DRG 148 (Major Small & Large Bowel Procedures With CC) or DRG 149 (Major Small & Large Bowel Procedures Without CC). If an intestinal transplantation and a liver transplantation are performed simultaneously, the case would be assigned to DRG 480 (Liver Transplant).

If an intestinal transplantation alone is performed on a patient with an intestinal principal diagnosis, the case would be assigned to either DRG 148 (Major Small & Large Bowel Procedures with CC) or DRG 149 (Major Small & Large Bowel Procedures Without CC). If an intestinal transplantation and a liver transplantation are performed simultaneously, the case would be assigned to DRG 480 (Liver Transplant).

If an intestinal transplantation and a pancreas transplantation are performed simultaneously, currently the case would be assigned to either DRG 148 or DRG 149. Effective October 1, 2001, the case would be assigned to DRG 513 (Pancreas Transplant). We proposed to make a conforming change to the regulations at § 412.2(e)(4) and § 486.302 to include intestines (and multivisceral organs) in the list of organs for which Medicare pays for the acquisition costs on a reasonable cost basis.

Effective October 1, 2000, procedure code 46.97 (Transplant of intestine) was created. For the proposed rule, we examined our Medicare claims data to determine whether it was appropriate to propose a new intestinal transplant DRG. We examined data in the FY 2000 MedPAR file containing bills submitted through May 31, 2000. Because procedure code 46.97 was not in place during this time we focused our examination on the previous code assignment for intestinal transplant, code 46.99 (Other operations on intestines), and facilities that are currently performing intestinal transplantation. We were able to identify only one case, with an average charge of approximately $10,738 as compared to the average standardized charges for DRGs 148 and 149, which are approximately $37,961, and $16,965, respectively. We will continue to monitor these cases to determine whether it may be appropriate in the future to establish a new DRG.

Comment: One commenter recommended performing data analysis next year to determine if a separate intestinal transplantation DRG should be created based on the fact that these procedures are being performed on a more frequent basis. Another commenter suggested that the preamble specifically state that while the acquisition costs for heart, liver, lung, and pancreas transplants continue to be paid on a reasonable cost basis, the acquisition costs for intestinal transplantation will be paid through the hospital inpatient prospective payment system DRG payment mechanism.

Response: It is our intent to continue to monitor these cases to determine whether it may be appropriate in the future to establish a new DRG.

To clarify the issue of acquisition costs, Medicare Program Memorandum Transmittal No. AB-01-58, released April 12, 2001, states that Medicare will not pay transplant facilities on a reasonable cost basis for organ acquisition for intestinal or multivisceral transplants. The DRG payment will be payment in full for hospital services related to this procedure. However, in this final rule, we are implementing a conforming change to the regulations at § 412.2(e)(4) and § 486.302, to include intestines (and multivisceral organs) in the list of organs for which Medicare pays for the acquisition costs on a reasonable cost basis. This change is effective with acquisition costs incurred on or after October 1, 2001. After that date, costs associated with the acquisition of intestines and multivisceral organs will be paid on a reasonable cost basis. Costs associated with intestines procured separately will be allocated to an intestine cost center and allocated on Worksheet D-6. Multivisceral organ transplantation includes organs in the digestive system (that is, stomach, duodenum, pancreas, liver, intestine, and colon). Multivisceral procurements, including an organ(s) as defined at § 486.302 as well as the intestine (small bowel), will be allocated to the intestinal acquisition cost center. Multivisceral procurements are procured en bloc and the entire cost of procuring all of the organs will be allocated to the intestinal acquisition cost center.

c. Payment for Blood Clotting Factor Administered to Hemophilia Inpatients

Comment: Although this issue was not addressed in the proposed rule, we received one comment requesting that the add-on payment for blood clotting factors administered to hemophilia inpatients include adequate reimbursement for hospitals that treat beneficiaries with acquired hemophilia.

Response: According to section 4452 of Public Law 105-33, which amended section 6011(d) of Public Law 101-239, prospective payment hospitals receive an additional payment for costs of administering blood clotting factor to Medicare hemophiliacs who are hospital inpatients.

Hemophilia, a bleeding disorder characterized by prolonged clotting time, is caused by a deficiency of a factor necessary for blood to clot. In the August 29, 1997 final rule implementing section 4452 of Public Law 105-33 (62 FR 46002), we stated that hemophilia was considered to encompass the following conditions: Factor VIII deficiency (classical hemophilia); Factor IX deficiency (also termed plasma thromboplastin component (PTC) or Christmas factor deficiency); and Von Willebrand's disease. The most common factors required by hemophiliacs to increase coagulation are Factor VIII and Factor IX; a small number of hemophiliacs have developed inhibitors to these factors and require special treatment. We did not receive any comments regarding this coverage until, most recently, the cases of acquired hemophilia, which affects a small subset of individuals (1 in 1 million), were brought to our attention.

We are revising our claims processing instructions to permit add-on payments for the following ICD-9-CM diagnosis codes associated with acquired hemophilia:

286.5 Hemorrhagic disorder due to circulating anticoagulants

286.7 Acquired coagulation factor deficiency.Start Printed Page 39858

C. Recalibration of DRG Weights

We proposed to use the same basic methodology for the FY 2002 recalibration as we did for FY 2001 (August 1, 2000 final rule (65 FR 47069)). That is, we would recalibrate the weights based on charge data for Medicare discharges. However, we proposed to use the most current charge information available, the FY 2000 MedPAR file. (For the FY 2001 recalibration, we used the FY 1999 MedPAR file.) The MedPAR file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills.

The final recalibrated DRG relative weights are constructed from FY 2000 MedPAR data (discharges occurring between October 1, 1999 and September 30, 2000), based on bills received by CMS through March 31, 2001, from all hospitals subject to the prospective payment system and short-term acute care hospitals in waiver States. The FY 2000 MedPAR file includes data for approximately 11,094,323 Medicare discharges.

The methodology used to calculate the DRG relative weights from the FY 2000 MedPAR file is as follows:

  • To the extent possible, all the claims were regrouped using the DRG classification revisions discussed in section II.B. of this preamble.
  • Charges were standardized to remove the effects of differences in area wage levels, indirect medical education and disproportionate share payments, and, for hospitals in Alaska and Hawaii, the applicable cost-of-living adjustment.
  • The average standardized charge per DRG was calculated by summing the standardized charges for all cases in the DRG and dividing that amount by the number of cases classified in the DRG.
  • We then eliminated statistical outliers, using the same criteria used in computing the current weights. That is, all cases that are outside of 3.0 standard deviations from the mean of the log distribution of both the charges per case and the charges per day for each DRG are eliminated.
  • The average charge for each DRG was then recomputed (excluding the statistical outliers) and divided by the national average standardized charge per case to determine the relative weight. A transfer case is counted as a fraction of a case based on the ratio of its transfer payment under the per diem payment methodology to the full DRG payment for nontransfer cases. That is, transfer cases paid under the transfer methodology equal to half of what the case would receive as a nontransfer would be counted as 0.5 of a total case.
  • We established the relative weight for heart and heart-lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner consistent with the methodology for all other DRGs except that the transplant cases that were used to establish the weights were limited to those Medicare-approved heart, heart-lung, liver, and lung transplant centers that have cases in the FY 1999 MedPAR file. (Medicare coverage for heart, heart-lung, liver, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)
  • Acquisition costs for kidney, heart, heart-lung, liver, lung, and pancreas transplants continue to be paid on a reasonable cost basis. Unlike other excluded costs, the acquisition costs are concentrated in specific DRGs: DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant); DRG 480 (Liver Transplant); DRG 495 (Lung Transplant); and proposed new DRGs 512 (Simultaneous Pancreas/Kidney Transplant) and 513 (Pancreas Transplant). Because these costs are paid separately from the prospective payment rate, it is necessary to make an adjustment to prevent the relative weights for these DRGs from including the acquisition costs. Therefore, we subtracted the acquisition charges from the total charges on each transplant bill that showed acquisition charges before computing the average charge for the DRG and before eliminating statistical outliers.

When we recalibrated the DRG weights for previous years, we set a threshold of 10 cases as the minimum number of cases required to compute a reasonable weight. We use that same case threshold in recalibrating the DRG weights for FY 2002. Using the FY 2000 MedPAR data set, there are 37 DRGs that contain fewer than 10 cases. We computed the weights for these 37 low-volume DRGs by adjusting the FY 2001 weights of these DRGs by the percentage change in the average weight of the cases in the other DRGs.

The new weights are normalized by an adjustment factor (1.44556) so that the average case weight after recalibration is equal to the average case weight before recalibration. This adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the prospective payment system, and accounts for the gradual shift in cases toward higher-weighted DRGs over time.

We received no comments on DRG recalibration.

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

III. Changes to the Hospital Wage Index

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 Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New England County Metropolitan Areas (NECMAs) issued by the Office of Management and Budget (OMB). The OMB also designates Consolidated MSAs (CMSAs). A CMSA is a metropolitan area with a population of one million or more, comprising two or more PMSAs (identified by their separate economic and social character). For purposes of the hospital wage index, we use the PMSAs rather than CMSAs since they allow a more precise breakdown of labor costs. If a metropolitan area is not designated as part of a PMSA, we use the applicable MSA. Rural areas are areas outside a designated MSA, PMSA, or NECMA. For purposes of the wage index, we combine all of the rural counties in a State to calculate a rural wage index for that State.

We note that, effective April 1, 1990, the term Metropolitan Area (MA) replaced the term MSA (which had been used since June 30, 1983) to describe the set of metropolitan areas consisting of MSAs, PMSAs, and CMSAs. The terminology was changed by OMB in Start Printed Page 39859the March 30, 1990 Federal Register to distinguish between the individual metropolitan areas known as MSAs and the set of all metropolitan areas (MSAs, PMSAs, and CMSAs) (55 FR 12154). For purposes of the prospective payment system, we will continue to refer to these areas as MSAs.

Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we update the wage index annually. Furthermore, this section provides that the Secretary base the update on a survey of wages and wage-related costs of short-term, acute care hospitals. The survey should measure, to the extent feasible, the earnings and paid hours of employment by occupational category, and must exclude the wages and wage-related costs incurred in furnishing skilled nursing services. As discussed below in section III.F. of this preamble, we also take into account the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating the wage index.

B. FY 2002 Wage Index Update

The FY 2002 wage index values in section V of the Addendum to this final rule (effective for hospital discharges occurring on or after October 1, 2001 and before October 1, 2002) are based on the data collected from the Medicare cost reports submitted by hospitals for cost reporting periods beginning in FY 1998 (the FY 2001 wage index was based on FY 1997 wage data).

The final FY 2002 wage index includes the following categories of data associated with costs paid under the hospital inpatient prospective payment system (as well as outpatient costs), which were also included in the FY 2001 wage index:

  • Salaries and hours from short-term, acute care hospitals.
  • Home office costs and hours.
  • Certain contract labor costs and hours.
  • Wage-related costs.

Consistent with the wage index methodology for FY 2001, the wage index for FY 2002 also continues to exclude the direct and overhead salaries and hours for services not paid through the inpatient prospective payment system such as skilled nursing facility (SNF) services, home health services, or other subprovider components that are not subject to the prospective payment system.

We calculate a separate Puerto Rico-specific wage index and apply it to the Puerto Rico standardized amount. (See 62 FR 45984 and 46041.) This wage index is based solely on Puerto Rico's data. Finally, 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 not located in a rural area may not be less than the area wage index applicable to hospitals located in rural areas in that State.

C. FY 2002 Wage Index

Because the hospital wage index is used to adjust payments to hospitals under the prospective payment system, the wage index should, to the extent possible, reflect the wage costs associated with the areas of the hospital included under the hospital inpatient prospective payment system. In response to concerns within the hospital community related to the removal, from the wage index calculation, of costs related to graduate medical education (GME) (teaching physicians and residents) and certified registered nurse anesthetists (CRNAs), which are paid by Medicare separately from the prospective payment system, the AHA convened a workgroup to develop a consensus recommendation on this issue. The workgroup recommended that costs related to GME and CRNAs be phased out of the wage index calculation over a 5-year period. Based upon our analysis of hospitals' FY 1996 wage data, and consistent with the AHA workgroup's recommendation, we specified in the July 30, 1999 final rule (64 FR 41505) that we would phase-out these costs from the calculation of the wage index over a 5-year period, beginning in FY 2000. In keeping with the decision to phase-out costs related to GME and CRNAs, the final FY 2002 wage index is based on a blend of 40 percent of an average hourly wage including these costs, and 60 percent of an average hourly wage excluding these costs.

Beginning with the FY 1998 cost reports, we revised the Worksheet S-3, Part II so that hospitals can separately report teaching physician Part A costs on lines 4.01, 10.01, 12.01, and 18.01. Therefore, it is no longer necessary for us to conduct the special survey we used for the FY 2000 and FY 2001 wage indexes (64 FR 41505 and 65 FR 47071).

1. Health Insurance and Health-Related Costs

In the August 1, 2000 final rule, we clarified our definition of “purchased health insurance costs” and “self-insurance” for hospitals that provide health insurance to employees (65 FR 47073). For purposes of the wage index, purchased or self-funded health insurance plan costs include the hospitals' insurance premium costs, external administration costs, and the share of costs for services delivered to employees.

In response to a comment received concerning this issue, we stated that, for self-funded health insurance costs, personnel costs associated with hospital staff that deliver the services to the employees must continue to be excluded from wage-related costs if the costs are already included in the wage data as salaries on Worksheet S-3, Part II, Line 1. However, after further consideration of this policy, particularly with respect to concerns expressed by our fiscal intermediaries about the level of effort required during the wage index desk review process to ensure hospitals are appropriately identifying and excluding these costs, in the May 4, 2001 proposed rule we proposed a revision. Effective with the calculation of the FY 2003 wage index, for either purchased or self-funded health insurance, we proposed to allow personnel costs associated with hospital staff who deliver services to employees to be included as part of the wage-related costs. We believe the proposed revised policy will ensure that health insurance costs are consistently reported by hospitals. Health insurance costs would continue to be developed using generally accepted accounting principles.

In the August 1, 2000 final rule (65 FR 47073), we further clarified that health-related costs (including employee physical examinations, flu shots, and clinic visits, and other services that are not covered by employees' health insurance plans but are provided at no cost or at discounted rates to employees of the hospital) may be included as “other” wage-related costs if, among other criteria, the combined cost of all such health-related costs is greater than one percent of the hospital's total salaries (less excluded area salaries).

For purposes of calculating the FY 2003 wage index (which will be based on data for cost reporting periods beginning in FY 1999), we proposed to revise this policy to allow hospitals to include health-related costs as allowable core wage-related costs.

Comment: One commenter supported our proposal to include health-related costs as core wage-related costs. The commenter also agreed with our proposal to include all personnel costs associated with hospital staff who deliver health services to employees. However, the commenter expressed concern that the proposed changes would require burdensome and duplicative revisions to cost reports that have already been filed.

Response: We believe that these revised policies (to eliminate the Start Printed Page 39860distinction between purchased health insurance and self-funded health insurance, and to treat costs associated with health-related services that are not part of the employees' health insurance plan consistent with costs included in the plan) will ensure that these costs are treated consistently across hospitals and fiscal intermediaries.

In response to the commenter's concern that the policy will require revisions to previously submitted cost reports, we believe the changes are not significant, particularly in light of the volume of changes submitted every year by hospitals during the wage data review process (see discussion in section III.G. of this final rule). The cost report changes necessary to implement these policy changes involve including costs previously disallowed. In the case of personnel costs associated with hospital staff who deliver services to employees, these costs would have already been identified in order to be excluded from the wage data. With respect to health services provided outside the employees' health insurance plan, we acknowledge that some hospitals may not have tracked these costs because they did not qualify for inclusion as other wage-related costs. However, due to concerns expressed by fiscal intermediaries about the difficulty of identifying these costs separate from those that are part of the insurance plan, we believe there may be inconsistencies in the current data with regard to how these costs are treated. Therefore, we believe, in the interest of improving the consistency of the data, that we should begin to allow these costs as core wage-related costs effective with the FY 2003 wage index.

2. Costs of Contracted Pharmacy and Laboratory Services

Our policy concerning inclusion of contract labor costs for purposes of calculating the wage index has evolved over the years. We recognize the role of contract labor in meeting special personnel needs of many hospitals. In addition, improvements in the wage data have allowed us to more accurately identify contract labor costs and hours. As a result, effective with the FY 1994 wage index, we included the costs of direct patient care contract services in the wage index calculation. The FY 1999 wage index included the costs and hours of certain management contract services, and the FY 2000 wage index included the costs for contract physician Part A services. (The 1996 proposed rule (61 FR 27456) provided an in-depth background to the issues related to the inclusion of contract labor costs in the wage index calculation.)

We revised the 1998 cost report to collect the data associated with contract pharmacy, Worksheet S-3, Part II, Line 9.01, and contract laboratory, Worksheet S-3, Part II, Line 9.02. The cost reporting instructions for these line numbers followed that for all contract labor lines; that is, to include the amount paid for services furnished under contract for direct patient care, and not include cost for equipment, supplies, travel expenses, and other miscellaneous or overhead items (Medicare Provider Reimbursement Manual, Part 2, Cost Reporting Forms and Instructions, Chapter 36, Transmittal 6, pages 36-32). Effective with the FY 2002 wage index, which uses FY 1998 wage data, we are including in this final rule (as proposed in the May 4 proposed rule) the costs and hours of contract pharmacy and laboratory services.

Comment: Two commenters supported our proposed policy to include the costs and hours of contract pharmacy and laboratory as direct patient care contract labor in the FY 2002 wage index. However, both commenters recommended that clearer guidelines be provided to ensure consistency in interpretation by fiscal intermediaries and contract vendors.

Response: Beginning with the FY 2002 wage index, we are including the costs and hours of contract pharmacy and laboratory services in the calculation of the wage index. Further instructions for reporting contract pharmacy and laboratory costs will be included in Transmittal 8 of the cost report, due for release in early fall 2001.

3. Collection of Occupational Mix Data

Section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E) of the Act to require that the Secretary must provide 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. The initial collection of these data must be completed by September 30, 2003, for application beginning October 1, 2004.

Currently, the wage data collected on the cost report reflect the sum of wages, hours, and wage-related costs for all hospital employees. There is no separate collection by occupational categories of employees, such as registered nurses or physical therapists. Total salaries and hours reflect management decisions made by hospitals in terms of how many employees within a certain occupation to employ to treat different types of patients. For example, a large academic medical center may tend to hire more high-cost specialized employees to treat its more acutely ill patient population. The argument is that the higher labor costs incurred to treat this patient population are reflected in the higher case mix of these hospitals, and therefore, reflecting these costs in the wage index is essentially counting them twice.

An occupational mix adjustment can be used to account for hospital management decisions about how many employees to hire in each occupational category. Occupational mix data measure the price the hospital must pay for employees within each category. A wage index that reflected only these market prices would remove the impact of management decisions about the mix of employees needed and, therefore, better capture geographic variations in the labor market.

We have examined this issue previously. In the May 27, 1994 Federal Register (59 FR 27724), we discussed the outcome of consideration of this issue by a hospital workgroup. At that time, the workgroup's consensus was that the data required to implement an occupational mix adjustment were not available and the likelihood of obtaining such data would be minimal. There seemed to be little support among hospital industry representatives for developing a system that would create additional reporting burdens with an unproven or minimal impact on the distribution of payments. Also, in the August 30, 1991 Federal Register (56 FR 43219), we stated our belief that the collection of these data would be costly and difficult.

In considering the format to collect occupational mix data, we looked to data currently being collected by the Bureau of Labor Statistics (BLS), which conducts an annual mail survey to produce estimates of employment and wages for specific occupations. This program, Occupational Employment Statistics (OES), collects data on wage and salary workers in nonfarm establishments in order to produce employment and wage estimates for over 700 occupations.

The OES survey collects wage data in 12 hourly rate intervals. Employers report the number of employees in an occupation per each wage range. To illustrate, the wage intervals used for the 1999 survey are as follows:Start Printed Page 39861

IntervalHourly wagesAnnual wages
Range AUnder $6.75Under $14,040.
Range B$6.75 to $8.49$14,040 to $17,659.
Range C8.50 to 10.7417,660 to 22,359.
Range D10.75 to 13.4922,360 to 28,079.
Range E13.50 to 16.9928,080 to 35,359.
Range F17.00 to 21.4935,360 to 44,719.
Range G21.50 to 27.2444,720 to 56,679.
Range H27.25 to 34.4956,680 to 71,759.
Range I34.50 to 43.7471,760 to 90,999.
Range J43.75 to 55.4991,000 to 115,439.
Range K55.50 to 69.99115,440 to 145,599.
Range L70.00 and over145,600 and over.

We noted that this table is for illustrative purposes, and that we may update the data ranges in our actual collection instrument.

Although we initially considered using the OES data, section 304(c) of Public Law 106-554 requires us to collect data from every short-term, acute care hospital. The OES data are a sample survey and, therefore, as currently conducted, are not consistent with the statutory requirement to include data from every hospital. Another issue with using OES data is that, for purposes of the Medicare wage index, the hospitals' data must be reviewed and verified by the fiscal intermediaries. The OES survey is a voluntary survey for most States.

Although we decided to pursue a separate data collection effort than OES, we proposed in the May 4, 2001 proposed rule to model our format after the one used by OES. In this way, hospitals participating in the OES survey would have no additional recordkeeping and reporting requirements beyond those of the OES survey.

The OES survey of the hospital industry is designed to capture all occupational categories within the industry. For purposes of adjusting the wage index for occupational mix, we do not believe it is necessary to collect data from such a comprehensive scope of categories. Furthermore, because the data must be audited, a comprehensive list of categories would be excessively burdensome.

In deciding which occupational categories to include, we reviewed the occupational categories collected by OES and identified those with at least 35,000 hospital employees. Our goal is to collect data from a sample of occupational categories that provides a valid measure of wage rates within a geographical area. In the May 4 proposed rule, using this threshold of at least 35,000 employees within a category nationally, we proposed to collect data on the number of employees by wage range as illustrated in the above table, for the occupational categories listed below. The following data, which was also listed in the proposed rule, are based on the 1998 OES survey. (These data are no longer available on the internet.)

OES codeCategoryNumber of employeesPercent of total hospital employeesMean hourly wage
15008Medicine and Health Services Manager93,6801.9$27.38
27302Social Workers, Medical and Psychiatric53,3601.116.33
32102Physicians and Surgeons125,6402.643.76
32308Physical Therapists39,8400.826.14
32502Registered Nurses1,231,98025.021.12
32505Licensed Practical Nurses206,3604.213.39
32517Pharmacists46,8601.028.62
32911, 32928, and 32931Clinical Technologists and Technicians122,3802.5011.69
51002, 55105, 55108, 55305, 55332, and 55347First-Line Supervisors and Clerical Workers445,7309.511.39
65038, 67002, and 67005Food Preparation Workers and Housekeeping218,4404.58.17
66008Nursing Aides, Orderlies, and Attendants301,2406.28.67

We proposed that this list of occupational categories provides a good representation of the employee mix at most hospitals. It has since come to our attention that the occupational categories listed in the proposed rule have been replaced by Standard Occupational Category definitions.

Because we had not yet settled on the methodology to use the occupational mix data in the wage index, we discussed in the proposed rule one option to weight each hospital's wage index by its occupational mix index. This requires calculating a national occupational mix index and then breaking it down by MSA and by hospital, similar to how the wage index is broken down. In this way, the wage index would capture geographic differences in wage rates. The decision about how to apply the occupational mix index to the wage index depends on the quality of the data collected, since this effort will be the first time wage and hour data by occupation are collected in this audited manner.

Section 304(c) directs the Secretary to provide for the collection of these data by September 30, 2003, and to apply them in the wage index by October 1, 2004. Therefore, the data are to be incorporated in the FY 2005 wage index. Under our current timetable, the FY 2005 wage index will be based on wage data collected from hospitals' cost reporting periods beginning during FY 2001. In order to facilitate the fiscal intermediaries' review of these data, we believe the occupational mix data should coincide with the data otherwise Start Printed Page 39862used to calculate the cost report. Therefore, we will conduct a special survey of all short-term acute-care hospitals that are required to report wage data to collect these data coinciding with hospitals' FY 2001 cost reports.

Comment: Several commenters expressed interest in working with us to develop an appropriate data collection tool. They suggested that the data be relatively simple for hospitals to gather and submit, and should be collected on 100 percent of hospital employees. Another commenter recommended that, at least initially, only data on nursing categories would be sufficient since nurses are 35 percent of hospital employees and can be divided into a few easily distinguishable categories. Two commenters offered examples for how these data are collected in their area. Some commenters wanted these data incorporated in the cost report to limit the number of forms hospitals must complete and to improve the response rate.

Response: We agree that it would be beneficial to work with the industry to develop a workable data collection tool, especially given the importance of the wage index in adjusting hospital payments. We appreciate the comments on the option presented in the proposed rule and believe that these comments will help initiate further thought toward the development of an occupational mix survey that can be administered without excessive burden on hospitals, the fiscal intermediaries, or CMS.

Due to time constraints in meeting the statutory deadlines, our intention at this point is to attempt to develop a survey instrument for the initial collection of occupational mix data that can be used by hospitals during calendar year 2002. Therefore, prior to January 1, 2002, we plan to work with the hospital community to develop a survey instrument. We believe issues related to the sample size of the data collected and the appropriate occupational categories to collect can best be resolved through consultation with the industry. Therefore, we will be contacting those organizations that expressed an interest in consultation in their comments. Other interested parties are encouraged to contact us as well.

After developing a method that appropriately balances the need to collect accurate and reliable data with the need to collect data hospitals can be reasonably expected to have available, we will issue instructions as to the type of data to be collected, in advance of actually requiring hospitals to begin providing the data.

Comment: Some commenters asked us to further develop the planned use of the occupation information and then decide what information is required. They requested that we publish the projected economic effects of an occupational mix adjustment upon each hospital as soon as feasible, and demonstrate tangible benefits prior to requiring hospitals to collect data. One commenter offered a specific methodology that could be employed. Other commenters want the methodology phased-in over time to allow hospitals time to adjust to different payment levels.

Response: In the proposed rule, we stated that we had not yet settled on the actual methodology for using the occupational mix data in the calculation of the wage index. We indicated the decision as to how the data will be used is dependent on the quality of the data collected. That is still the case. Furthermore, as discussed above, we intend to develop an appropriate data collection instrument in consultation with the hospital community. Therefore, until decisions are made with regard to the specific data to be collected, we cannot specify how the data will be used. However, the selection of an appropriate methodology (including a possible phase-in) will be influenced by analysis of the impacts of the method on hospital payments.

Comment: Two commenters expressed concerns that adopting the occupational mix adjustment for the wage index will lower the average hourly wage of teaching hospitals because of their mix of highly skilled, higher paid employees to treat patients with more complex conditions. These commenters argued that implementation of the occupational mix adjustment should proceed only in conjunction with the adoption of severity-adjusted DRGs. These commenters wrote that the current DRG system does not adequately recognize patient severity and pay for the higher resource costs associated with complex patients, but teaching hospitals can recoup some of these losses because their higher employee skill mix is reflected in their average hourly wage.

Furthermore, one commenter countered the argument that the higher labor costs incurred to treat a more severely ill patient population are reflected in the higher case mix of these hospitals and, therefore, reflecting these costs in the wage index is essentially counting them twice. This commenter pointed out that, because the DRG weights are based on hospital charges that are standardized by, among other factors, the area wage index, the weights of tertiary care DRGs are lower than they would be if the average charge per case were not first standardized by the wage index. However, the commenter went on to state that it is preferable to account for skill mix in the wage index rather than the case-mix index.

Response: As we stated in the August 1, 2000 final rule (65 FR 47103), we agree that severity-adjusted DRGs have potential for reducing discrepancies between payments and costs for individual cases (60 FR 29246). We have stated that, prior to implementing severity-adjusted DRGs, we would need specific legislative authority to offset any significant anticipated increase in payments attributable to changes in coding practices caused by significant changes to the DRG classification system. Section 301 of Public Law 106-554 authorized the Secretary to adjust the average standardized amounts if he determines that DRG coding or classification changes are likely to result in a change in aggregate payments. Therefore, based on this authority, we are beginning to evaluate the potential for implementing severity-adjusted DRGs. Because we are at the initial stages of that effort, we cannot yet estimate when, or if, such implementation may occur. However, we agree with these commenters' points that significant changes to any of the adjustments under the prospective payment system must be considered in light of the effects such changes may have to other such adjustments.

Comment: One commenter interpreted our proposal to suggest that the fiscal year for which the data will be collected will be closed by the time the methodology and data requirements have been established.

Response: In the proposed rule, we indicated we would conduct a special survey to collect these data to coincide with hospitals' cost reports beginning during FY 2001. We do not intend to require hospitals to retroactively adjust their payroll records to collect these data. Therefore, given our intention to gather input from the industry prior to designing the survey instrument, it likely will not be possible to completely coincide the data collection period with hospitals' FY 2001 cost reports.

Although there may be some auditing benefits to having the data overlap, this type of data is not routinely collected through the cost reports, so that the auditing benefits of such overlap may be minimal. In addition, there may be a benefit to collecting occupational mix for a more recent period in terms of reflecting current trends, such as higher wages paid to nurses during a shortage.Start Printed Page 39863

Comment: Other commenters raised specific technical concerns about the occupational mix discussion in the proposed rule.

Response: Rather than respond individually at this time to technical issues associated with the occupational mix discussion in the proposed rule, we will address these issues through direct consultation with the industry, as described above.

D. Verification of Wage Data From the Medicare Cost Report

The data for the FY 2002 wage index were obtained from Worksheet S-3, Parts II and III of the FY 1998 Medicare cost reports. The data file used to construct the wage index includes FY 1998 data submitted to us as of July 2001. As in past years, we performed an intensive review of the wage data, mostly through the use of edits designed to identify aberrant data.

We asked our fiscal intermediaries to revise or verify data elements that resulted in specific edit failures. The unresolved data elements that were included in the calculation of the proposed FY 2002 wage index have been resolved and are reflected in the calculation of the final FY 2002 wage index. We note that, as part of this process to identify aberrant data and correct any errors prior to the calculation of the final FY 2002 wage index, we notified by letter those hospitals that were leading to large variations in the wage indexes of their labor market areas compared to the FY 2001 wage index. These hospitals were advised to review their data to identify the reason for the large increases or decreases and notify their fiscal intermediary of any necessary corrections.

Also, as part of our editing process, in the final wage index, we removed data for 30 hospitals that failed edits. For 24 of these hospitals, we were unable to obtain sufficient documentation to verify or revise the data because the hospitals are no longer participating in the Medicare program or are in bankruptcy status. Six hospitals had incomplete or inaccurate data resulting in exceptionally large, zero, or negative average hourly wages. Therefore, they were removed from the calculation. As a result, the final FY 2002 wage index is calculated based on FY 1998 wage data for 4,880 hospitals.

Comment: One commenter recommended that we incorporate additional fatal edits in the cost reporting systems to eliminate obvious errors on the Worksheet S-3 that result in incomplete or erroneous wage data that are difficult to correct 4 years later.

Response: We do not agree with the recommendation of the commenter. A separate desk review is performed for the wage index. The desk review, combined with the level two edits, is sufficient to provide fiscal intermediaries with information to identify discrepancies, such as zero or negative average hourly wage or missing hours, that can be resolved by the fiscal intermediary during the cost reporting process.

E. Computation of the FY 2002 Wage Index

We note a technical change to the FY 2002 calculation. For the FY 2001 wage index calculation, we initially proposed to subtract Line 13 of Worksheet S-3, Part III from total hours when determining the excluded hours ratio used to estimate the amount of overhead attributed to excluded areas (65 FR 26299). However, the formula resulted in large and inappropriate increases in the average hourly wages for some hospitals (65 FR 47074), particularly hospitals that have large overhead and excluded area costs. Therefore, for the final FY 2001 wage index calculation, we reverted to the FY 2000 excluded hours ratio formula, which did not subtract Line 13.

Subsequently, we analyzed how the application of this formula resulted in overstated average hourly wages for some hospitals and how we could improve the overall accuracy of the overhead allocation methodology. We became aware that the problem was not in the excluded hours ratio formula. Rather, our wage index calculation did not also remove the overhead wage-related costs associated with excluded areas, an amount that must be estimated before it can be subtracted from the calculation. The combined effect of applying the excluded hours ratio formula, which appropriately removes salaries of lower-wage, overhead employees, and not subtracting overhead wage-related costs associated with excluded areas, resulted in overstated salary costs and average hourly wages.

For the FY 2002 wage index calculation, we are applying the excluded hours ratio formula that subtracts Part III, Line 13 from total hours. Additionally, for the first time in the wage index calculation, we estimated and subtracted overhead wage-related costs allocated to excluded areas.

After we applied this new calculation, there were still a few hospitals that experienced large increases in their average hourly wages. The intermediaries verified that the hospitals' wage data were accurate, so we kept the data in the wage index calculation. These hospitals primarily function as SNFs, psychiatric hospitals, or rehabilitation hospitals that have few acute care beds. The hospitals' higher average hourly wages reflect the costs of the higher salaried employees that remain in the wage index calculation after we subtract the costs of excluded area and associated overhead employees.

The method used to compute the final FY 2002 wage index follows.

Step 1—As noted above, we based the FY 2002 wage index on wage data reported on the FY 1998 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, 1997 and before October 1, 1998. In addition, we included data from any hospital that had cost reporting periods beginning before October 1997 and reported a cost reporting period covering all of FY 1998. These data were included because no other data from these hospitals would be available for the cost reporting period described above, and because particular labor market areas might be affected due to the omission of these hospitals. However, we generally describe these wage data as FY 1998 data. We note that, if a hospital had more than one cost reporting period beginning during FY 1998 (for example, a hospital had two short cost reporting periods beginning on or after October 1, 1997 and before October 1, 1998), we included wage data from only one of the cost reporting periods, the longest, 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 latest period in the wage index calculation.

Step 2—Salaries—The method used to compute a hospital's average hourly wage is a blend of 40 percent of the hospital's average hourly wage including all GME and CRNA costs, and 60 percent of the hospital's average hourly wage after eliminating all GME and CRNA costs.

In calculating a hospital's average salaries plus wage-related costs, including all GME and CRNA costs, we subtracted from Line 1 (total salaries) the Part B salaries reported on Lines 3 and 5, home office salaries reported on Line 7, and excluded salaries reported on Lines 8 and 8.01 (that is, direct salaries attributable to skilled nursing facility services, home health services, and other subprovider components not Start Printed Page 39864subject to the inpatient prospective payment system). We also subtracted from Line 1 the salaries for which no hours were reported on Lines 2, 4, and 6. To determine total salaries plus wage-related costs, we added to the net hospital salaries the costs of contract labor for direct patient care, certain top management, pharmacy, laboratory, and physician Part A services (Lines 9, 9.01, 9.02, 10, and 10.01), home office salaries and wage-related costs reported by the hospital on Lines 11, 12, and 12.01, and nonexcluded area wage-related costs (Lines 13, 14, 16, 18, 18.01, and 20).

We note that contract labor and home office salaries for which no corresponding hours are reported were not included. In addition, wage-related costs for specific categories of employees (Lines 16, 18, 18.01, and 20) are excluded if no corresponding salaries are reported for those employees (Lines 2, 4, 4.01, and 6, respectively).

We then calculated a hospital's salaries plus wage-related costs by subtracting from total salaries the salaries plus wage-related costs for teaching physicians, Lines (4.01, 10.01, 12.01, and 18.01), Part A CRNAs (Lines 2 and 16), and residents (Lines 6 and 20).

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

Step 4—For each hospital reporting both total overhead salaries and total overhead hours greater than zero, we then allocated overhead costs to areas of the hospital excluded from the wage index calculation. First, we determined the ratio of excluded area hours (sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours (Line 1 minus the sum of Part II, Lines 3, 5, 7, and Part III, Line 13 of Worksheet S-3). We then computed the amounts of overhead salaries and hours to be allocated to excluded areas by multiplying the above ratio by the total overhead salaries and hours reported on Line 13 of Worksheet S-3, Part III. Next, we computed the amounts of overhead wage-related costs to be allocated to excluded areas using three steps: (1) We determined the ratio of overhead hours (Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 3, 5, and 7); (2) we computed overhead wage-related costs by multiplying the overhead hours ratio by wage-related costs reported on Part II, Lines 13, 14, 16, 18, 18.01, and 20; and (3) we multiplied the computed overhead wage-related costs by the above excluded area hours ratio. Finally, we subtracted the computed overhead salaries, wage-related costs, and hours associated with excluded areas from the total salaries (plus wage-related costs) and hours derived in Steps 2 and 3. Using the above method for computing overhead salaries, wage-related costs, and hours to allocate to excluded areas, we also computed these costs excluding all costs associated with GME and CRNAs (Lines 2, 4.01, 6, 10.01, 12.01, and 18.01).

Step 5—For each hospital, we adjusted the total salaries plus wage-related costs to a common period to determine total adjusted salaries plus wage-related costs. To make the wage adjustment, we estimated the percentage change in the employment cost index (ECI) for compensation for each 30-day increment from October 14, 1997 through April 15, 1999 for private industry hospital workers from the Bureau of Labor Statistics' Compensation and Working Conditions. We use the ECI because it reflects the price increase associated with total compensation (salaries plus fringes) rather than just the increase in salaries. In addition, the ECI includes managers as well as other hospital workers. This methodology to compute the monthly update factors uses actual quarterly ECI data and assures that the update factors match the actual quarterly and annual percent changes. The factors used to adjust the hospital's data were based on the midpoint of the cost reporting period, as indicated below.

Midpoint of Cost Reporting Period

AfterBeforeAdjustment factor
10/14/9711/15/971.03822
11/14/9712/15/971.03561
12/14/9701/15/981.03292
01/14/9802/15/981.03048
02/14/9803/15/981.02828
03/14/9804/15/981.02621
04/14/9805/15/981.02411
05/14/9806/15/981.02200
06/14/9807/15/981.01973
07/14/9808/15/981.01714
08/14/9809/15/981.01424
09/14/9810/15/981.01137
10/14/9811/15/981.00885
11/14/9812/15/981.00669
12/14/9801/15/991.00462
01/14/9902/15/991.00239
02/14/9903/15/991.00000
03/14/9904/15/990.99746

For example, the midpoint of a cost reporting period beginning January 1, 1998 and ending December 31, 1998 is June 30, 1998. An adjustment factor of 1.01973 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 1998 and covered a period of less than 360 days or more than 370 days, we annualized the data to reflect a 1-year cost report. Annualization is accomplished by dividing the data by the number of days in the cost report and then multiplying the results by 365.

Step 6—Each hospital was assigned to its appropriate urban or rural labor market area before any reclassifications under section 1886(d)(8)(B) or section 1886(d)(10) of the Act. Within each urban or rural labor market area, we added the total adjusted salaries plus wage-related costs obtained in Step 5 (with and without GME and CRNA costs) for all hospitals in that area to determine the total adjusted salaries plus wage-related costs for the labor market area.

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

Because the FY 2002 wage index is based on a blend of average hourly wages, we then added 40 percent of the average hourly wage calculated without removing GME and CRNA costs, and 60 percent of the average hourly wage calculated with these costs excluded.

Step 8—We added the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in the nation and then divided the sum by the national sum of total hours from Step 4 to arrive at a national average hourly wage (using the same blending methodology described in Step 7). Using the data as described above, the national average hourly wage is $22.3096.

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

Step 10—Following the process set forth above, we developed a separate Puerto Rico-specific wage index for purposes of adjusting the Puerto Rico standardized amounts. (The national Puerto Rico standardized amount is adjusted by a wage index calculated for all Puerto Rico labor market areas based on the national average hourly wage as described above.) We added the total adjusted salaries plus wage-related costs (as calculated in Step 5) for all hospitals in Puerto Rico and divided the sum by the total hours for Puerto Rico (as calculated in Step 4) to arrive at an overall average hourly wage of $10.7529 for Puerto Rico. For each labor market area in Puerto Rico, we calculated the Start Printed Page 39865Puerto 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 may not be less than the area wage index applicable to hospitals located in rural areas in that State. Furthermore, this wage index floor is to be implemented in such a manner as to ensure that aggregate prospective payment system payments are not greater or less than those that would have been made in the year if this section did not apply. For FY 2002, this change affects 217 hospitals in 40 MSAs. The MSAs affected by this provision are identified in Table 4A by a footnote.

F. Revisions to the Wage Index Based on Hospital Redesignation

Under section 1886(d)(8)(B) of the Act, hospitals in certain rural counties adjacent to one or more MSAs are considered to be located in one of the adjacent MSAs if certain standards are met. Under section 1886(d)(10) of the Act, the Medicare Geographic Classification Review Board (MGCRB) considers applications by hospitals for geographic reclassification for purposes of payment under the prospective payment system.

1. Provisions of Public Law 106-554

Section 304 of Public Law 106-554 made changes to several provisions of section 1886(d)(10) of the Act relating to hospital reclassifications and the wage index:

  • Section 304(a) amended section 1886(d)(10)(D) of the Act by adding a clause (v) to provide that, beginning with FY 2001, an MGCRB decision on a hospital reclassification for purposes of the wage index is effective for 3 years, unless the hospital elects to terminate the reclassification. Section 304(a) also provides that the MGCRB must use the 3 most recent years' average hourly wage data in evaluating a hospital's reclassification application for FY 2003 and any succeeding fiscal year (section 1886(d)(10)(D)(vi) of the Act).
  • Section 304(b) provides that, by October 1, 2001, 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. Section 304(b) further requires that if the Secretary applies a statewide wage index to a State, an application under section 1886(d)(10) of the Act by an individual hospital in that State would not be considered.

We address our policy proposals relating to implementation of these three provisions of sections 304(a) and (b) of Public Law 106-554 in section IV.G. of this final rule. The following discussion of the revisions to the wage index based on hospital redesignations reflects those policies.

2. Effects of Reclassification

The methodology for determining the wage index values for redesignated hospitals is applied jointly to the hospitals located in those rural counties that were deemed urban under section 1886(d)(8)(B) of the Act and those hospitals that were reclassified as a result of the MGCRB decisions under section 1886(d)(10) of the Act. 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. 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 area to which the hospitals are redesignated, both the area and the redesignated hospitals receive the combined wage index value.
  • The wage index value for a redesignated urban or rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located.
  • Rural areas whose wage index values would be reduced by excluding the wage data for hospitals that have been redesignated to another area continue to have their wage index values calculated as if no redesignation had occurred.
  • Rural areas whose wage index values increase as a result of excluding the wage data for the hospitals that have been redesignated to another area have their wage index values calculated exclusive of the wage data of the redesignated hospitals.
  • Currently, the wage index value for an urban area is calculated exclusive of the wage data for hospitals that have been reclassified to another area.

For the FY 2002 wage index, we include the wage data for a reclassified urban hospital in both the area to which it is reclassified and the MSA where the hospital is physically located. We believe this improves consistency and predictability in hospital reclassification and wage indexes, as well as alleviates the fluctuations in the wage indexes due to reclassifications. For example, hospitals applying to reclassify into another area will know which hospitals' data will be included in calculating the wage index, because even if some hospitals in the area are reclassified, their data will be included in the calculation of the wage index of the area where they are geographically located. Also, in some cases, excluding the data of hospitals reclassified to another MSA could have a large downward impact on the wage index of the MSA in which the hospital is physically located. The negative impact of removing the data of the reclassified hospitals from the wage index calculation could lead to large wage disparities between the reclassified hospitals and other hospitals in the MSA, as the remaining hospitals would receive reduced payments due to a lower wage index. Our approach is to promote consistency and simplify our rules with respect to how we construct the wage indexes of rural and urban areas. As noted above, in the case of rural hospitals redesignated to another area, the wage index of the rural area where the hospitals are geographically located is calculated by including the wage data of the redesignated hospitals (unless doing so would result in a lower wage index).

Finally, we note that the Medicare Payment Advisory Commission (MedPAC), in its March 2001 “Report to the Congress: Medicare Payment Policy,” recommended this policy (p. 82). (Section VII. of this preamble includes a discussion of MedPAC's recommendations and our responses.) To illustrate the potential negative impact on hospitals in an area where reclassifications of some hospitals to another area results in a decline in the wage index after the reclassified hospitals are excluded from the wage Start Printed Page 39866index calculation, MedPAC points out that hospitals in several MSAs have organized to pay qualifying hospitals not to reclassify. Our policy change in this final rule removes this distorted incentive.

Comment: One commenter had some concerns about the reclassification of rural hospitals. This commenter had two points. The first point was that rural hospitals that seek reclassification to urban areas and end up “empty” because all the urban hospitals have successfully sought reclassification elsewhere continue to be disadvantaged because the rural hospitals continue to compete with the urban hospitals in that area, but those urban hospitals are receiving even higher payments, while the rural hospitals are not receiving the same payments. The commenter believed that the solution to this dilemma is to allow the rural hospitals that seek reclassification to an “empty” MSA to receive the same wage index as the urban hospitals that were able to reclassify out of that MSA, essentially reclassifying both the urban hospitals and the proximate rural hospitals to the same area. One other commenter made this same point about urban hospitals.

The commenter's second point was that, periodically, based on updated census data, new MSAs appear. Sometimes, a rural hospital seeking reclassification to the nearest MSA or rural area is disadvantaged when this occurs because reclassification to the new MSA does not afford the rural hospital the same advantages as reclassification to the MSA to which it formerly sought reclassification, but now is not the closest MSA. The commenter wrote that rural hospitals previously qualified for geographic reclassification to an MSA should retain the option to reclassify to that MSA despite the fact that a closer MSA is created.

Response: First, both rural and, for FY 2002, urban hospitals are advantaged by the fact that we hold all areas harmless when calculating the wage index for hospitals reclassifying into both MSAs and rural areas. While we understand the commenter's point about its competitors, we do not believe that this justifies a “piggyback” effect for reclassification purposes wherein either rural or urban hospitals that obtain reclassification into an empty MSA should then be reclassified again to an area to which these hospitals are not proximate. Since a hospital in this type of situation could not obtain reclassification on its own to the area to which the hospitals that have vacated the MSA have reclassified, we do not believe that it would be appropriate to reclassify them based on the reclassification of another hospital.

Second, a hospital that is not subject to the proximity criteria because it has a special status as either a rural referral center or a SCH already has an advantage over other reclassifying hospitals in that it can utilize a larger radius in seeking reclassification opportunities (under § 412.230(a)(3)). Rural referral centers and SCHs may also reclassify to any MSA to which they qualify under § 412.230(b). We believe these criteria provide adequate opportunity for rural referral centers and SCHs to reclassify.

Comment: Commenters generally supported our proposal to include the wage data for a reclassified urban hospital in both the area to which it is reclassified and the MSA where the hospital is physically located. The commenters expressed that this would provide more stability in the calculation of the wage index, allowing them to plan their budgets from year-to-year with more predictability.

We did not receive any negative comments on this proposal; however, we did receive one additional comment that encouraged us to extend the hold harmless provision to a further degree. This commenter believed that both rural and urban hospitals should benefit from the same hold-harmless policy. In other words, an urban hospital's wage data should be included in the area in which it is physically located if it benefits the area. However, The commenter further stated that, on the other hand, if it benefits the area to exclude that hospital's wage data in the event the hospital successfully seeks reclassification for the wage index to another area, then the hospital's data should be excluded. The commenter believed that some urban areas may be harmed by retaining the wage data of urban hospitals that are reclassifying out of those areas.

Response: We appreciate the commenters' support of our proposal to retain an urban hospital's wage data in the area in which it is physically located, even if that hospital successfully seeks reclassification to another area. As we proposed in the proposed rule, in this final rule we are calculating the wage index for urban areas effective for FY 2002 payments by including the wage data for a reclassified urban hospital in both the area to which it is reclassified and the MSA where the hospital is physically located.

In reference to the commenter who believed that we should apply the same hold-harmless policy to urban hospitals as we do to rural hospitals, we note that the rural hold-harmless policy (as described above) is dictated by section 1886(d)(8)(C)(iii) of the Act. We believe that hospitals continue to compete for services with the hospitals that are grouped with them in their respective MSAs. Therefore, it would be appropriate to continue to calculate the wage index for those areas as if those hospitals had not reclassified to another area. As a result, we intend to implement our policy to hold urban areas harmless to the extent that the wages of the hospitals that are physically located within urban areas will continue to be used in the compilation of the wage index whether or not these hospitals successfully seek reclassification elsewhere.

Comment: Several commenters expressed interest in utilizing the occupational mix data to apply for reclassification for the wage index. These commenters pointed out that, at one time, hospitals did have the option to use occupational mix data to seek reclassification for the wage index as those data were made available by the AHA. In addition to the other applicable criteria for reclassification, a hospital that applied for reclassification for the wage index using this criterion was required to show that its average hourly wage, based on occupational mix data, was 90 percent of the area to which it sought reclassification.

Response: Prior to requests for reclassification effective during FY 1999, a hospital could be reclassified for the wage index by showing that its average hourly wage weighted for occupational categories was at least 90 percent of the average hourly wage of the hospitals in the area to which it sought reclassification (in addition to the other applicable criteria for reclassification). Occupational mix data were available from the AHA; however, the AHA stopped collecting the data in 1993. Therefore, because there was no other suitable source of occupational mix data for hospitals to use, we eliminated the option for using this data effective with reclassification requests for FY 1999 (62 FR 45988).

Section 304(c) of Public Law 106-554 requires that the Secretary must provide 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. These data are to be collected by September 30, 2003. Section 304(c) also requires that the data are to be applied in the wage index by October 1, 2004. At that point, the data will be incorporated into a hospital's average Start Printed Page 39867hourly wages. Therefore, the occupational mix data will be reflected in hospital reclassifications for the wage index as it is incorporated into the wage index data. In addition, as soon as viable occupational mix data become available, we will consider providing hospitals with the opportunity to use it to support their reclassification requests.

The wage index values for FY 2002 are shown in Tables 4A, 4B, 4C, and 4F in the Addendum to this final rule. Hospitals that are redesignated should use the wage index values shown in Table 4C. Areas in Table 4C may have more than one wage index value because the wage index value for a redesignated urban or rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located. When the wage index value of the area to which a hospital is redesignated is lower than the wage index value for the rural areas of the State in which the hospital is located, the redesignated hospital receives the higher wage index value; that is, the wage index value for the rural areas of the State in which it is located, rather than the wage index value otherwise applicable to the redesignated hospitals.

As mentioned earlier, section 304(a) of Public Law 106-554 amended section 1886(d)(10)(D) of the Act by adding a new clause (v) to provide that a reclassification of a hospital by the MGCRB for purposes of the wage index is effective for 3 years (instead of 1 year) unless, under procedures established by the Secretary, the hospital elects to terminate the reclassification before the end of the 3-year period. Section 304(a) of Public Law 106-554 also amended section 1886(d)(10)(D) of the Act to specify that, for applications for reclassification for the wage index for FYs 2003 and later, the MGCRB must base any comparison of the average hourly wage of the hospital with the average hourly wage for hospitals in the area in which it is located and the area to which it seeks reclassification, using data from the most recently published hospital wage survey (as of the date of the hospital's application), as well as data from each of the two immediately preceding surveys. (Our policies in this final rule to incorporate the provisions of section 304(a) of Public Law 106-554 in the regulations are addressed in section IV.G. of this final rule).

Consistent with the section 304(a) amendment, Tables 3A and 3B list the 3-year average hourly wage for each labor market area before the redesignation of hospitals, based on FY 1996, 1997, and 1998 wage data. 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 1996 and FY 1997 cost reporting periods, as well as the FY 1998 period used to calculate the FY 2002 wage index. Table 2 also shows the 3-year average that the MGCRB will use to evaluate a hospital's application for reclassification for FY 2003 (unless that average hourly wage is later revised in accordance with § 412.63(w)(2)). The 3-year averages are calculated by dividing the sum of the dollars (adjusted to a common reporting period using the method described previously in this section) 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.

Applications for FY 2003 reclassifications are due to the MGCRB by September 4, 2001. (We note that, as of May 21, 2001, the new location and mailing address of the MGCRB and the Provider Reimbursement Review Board (PRRB) is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670. Also, please specify whether the mail is intended for the MGCRB or the PRRB.)

We indicated in the proposed rule that, at the time the proposed wage index was constructed, the MGCRB had completed its review of FY 2002 reclassification requests. The final FY 2002 wage index values incorporate all 643 hospitals redesignated for purposes of the wage index (hospitals redesignated under section 1886(d)(8)(B) or section 1886(d)(10) of the Act for FY 2002. Since publication of the May 4 proposed rule, the number of reclassifications has changed because some MGCRB decisions were still under review by the Administrator and because some hospitals decided to withdraw their requests for reclassification.

Changes to the wage index that resulted from withdrawals of requests for reclassification, wage index corrections, appeals, and the Administrator's review process have been incorporated into the wage index values published in this final rule. The changes may 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 value for the area to which they are redesignated, or a wage index value 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.

Under § 412.273, hospitals that have been reclassified by the MGCRB were permitted to withdraw their applications within 45 days of the publication of the May 4, 2001 proposed rule. The request for withdrawal of an application for reclassification that would be effective in FY 2002 had to be received by the MGCRB by June 18, 2001. A hospital that requested to withdraw its application may not later request that the MGCRB decision be reinstated.

In addition, because the 3-year effect of the amendment made by section 304(a) of Public Law 106-554 is applicable to reclassifications for FY 2001 (which had already taken place prior to the date of enactment of Public Law 106-554) and because the application process for reclassification for FY 2002 had already been completed by the date of enactment, we are deeming hospitals that are reclassified for purposes of the wage index to one area for FY 2001 and are reclassified for purposes of the wage index or the standardized amount to another area for FY 2002 to be reclassified to the area for which they applied for FY 2002, unless they elected to receive the wage index reclassification they were granted for FY 2001. Consistent with our application withdrawal procedures under § 412.273, we allowed hospitals that wished to receive, for FY 2002, the reclassification they were granted for FY 2001, to withdraw their applications by June 18, 2001 also.

Comment: Two commenters requested us to continue publishing the case-mix index because it assists hospitals in monitoring possible referral center qualifying status and in preparing applications for reclassification to use another area's standardized amount. (We also received numerous telephone calls with this request.)

Response: Prior to this year, the case-mix index was published in Table 3C. This index shows the average DRG relative weight for discharges from a prior fiscal year. Due to the requirement to publish so much additional average hourly wage data in Tables 2, 3A, and 3B, we stopped publishing the case-mix index beginning with the May 4, 2001 proposed rule.

In light of public comments and in balancing the requirements for additional publication of average hourly wage data, we will resume publishing the case-mix index, but not in the Federal Register. Beginning with the publication date of this final rule, we will make the case-mix index for FY 2000 and future fiscal years available on Start Printed Page 39868the internet at: http://www.hcfa.gov/​medicare/​ippsmain.htm. We intend to update the case-mix index at this website to coincide with the publication of the annual proposed and final rules.

3. Statewide Wage Index

As stated earlier, section 304(b) of Public Law 106-554 requires the Secretary to establish, by October 1, 2001, a process (based on the voluntary process utilized by the Secretary under section 1848 of the Act) under which an appropriate statewide entity may apply to have all the geographic areas in the State treated as a single geographic area for purposes of computing and applying a single wage index, beginning in FY 2003. Section 304(b) further requires that, if the Secretary applies a statewide wage index to an area, an application by an individual hospital in that area would not be considered. We believe the reference to the voluntary process utilized by the Secretary under section 1848 of the Act refers to the process whereby we allow a State containing multiple physician fee schedule payment areas (and thus multiple geographic adjustment factors) to voluntarily convert to a single statewide payment area with a single geographic adjustment factor (see § 414.4(b), as discussed in the June 24, 1994 Federal Register (59 FR 32759).

Section IV.G. of this final rule contains our policy for implementing the provisions of section 304(b) in regulations. We are providing that hospitals that seek a statewide geographic reclassification under the amendments made by section 304(b) of Public Law 106-554 must apply to the MGCRB with the same deadlines as other hospitals. An approved application by the MGCRB will mean that the data of all the hospitals in the State will be used in computing and applying the wage index for that State. We are providing that the statewide wage index is applicable for 3 years from the date of approval or until all of the participating hospitals terminate their approved statewide wage index reclassification (effective with the next full fiscal year after their termination request), whichever occurs first.

4. Section 402 of Public Law 106-113

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

During FY 1994, we incorporated the revised MSA definitions based on 1990 census population data. As a result, some counties that previously were treated as an adjacent county under section 1886(d)(8)(B) of the Act officially became part of certain MSAs. However, as specified in the Act, we continued to utilize the January 3, 1980 standards. For FY 2000, there were 27 hospitals in 22 counties affected by this provision.

On March 30, 1990, OMB issued revised 1990 standards (55 FR 12154). There has been an increasing amount of interest by the hospital industry in using the 1990 standards as opposed to the 1980 standards to determine which hospitals qualify under the provisions set forth in section 1886(d)(8)(B) of the Act. Section 402 of Public Law 106-113 provides that, with respect to FYs 2001 and 2002, a hospital may elect to have the 1990 standards applied to it for purposes of section 1886(d)(8)(B) and that, beginning with FY 2003, hospitals will be required to use the standards published in the Federal Register by the Director of OMB based on the most recent decennial census.

We worked with staff of the Population Distribution Branch within the Population Division of the Census Bureau to compile a list of hospitals that meet the March 30, 1990 standards using 1990 census population data and information prepared for the Metropolitan Area Standards Review Project. The conditions that must be met for a hospital located in a rural county adjacent to one or more urban areas to be treated as being located in the urban area to which the greatest number of workers in the rural county commute are as follows:

  • The rural county would otherwise be considered part of an MSA but for the fact that the rural county does not meet the standard established by OMB relating to the commuting rate of workers between the county and the central county or counties of any adjacent MSA.
  • The county would meet the commuting standard if commuting to (and where applicable, from) the central county or central counties of all adjacent MSAs or NECMAs (rather than to just one) were considered.

A county meeting the above commuting standards must also meet the other standards established by OMB for inclusion in an MSA as an outlying county. In order to meet these requirements, the rural county must have a degree of “metropolitan character.” “Metropolitan character” is established by meeting one of the following OMB standards, which were published in the Federal Register on March 30, 1990:

a. At least 50 percent of the employed workers residing in the county commute to the central county/counties, and either—

  • The population density of the county is at least 25 persons per square mile; or
  • At least 10 percent of the population, or at least 5,000 persons, lives in the qualifier urbanized area(s).

b. From 40 to 50 percent of the employed workers commute to the central county/counties, and either—

  • The population density is at least 35 persons per square mile; or
  • At least 10 percent of the population, or at least 5,000 persons, lives in the qualifier urbanized area(s).

c. From 25 to 40 percent of the employed workers commute to the central county/counties and either the population density of the county is at least 50 persons per square mile, or any two of the following conditions exist:

  • Population density is at least 35 persons per square mile.
  • At least 35 percent of the population is urban.
  • At least 10 percent of the population, or at least 5,000 persons, lives in the qualifier urbanizer area(s).

d. From 15 to 25 percent of the employed workers commute to the central county/counties, the population density of the county is at least 50 persons per square mile, and any two of the following conditions also exist:

  • Population density is at least 60 persons per square mile.
  • At least 35 percent of the population is urban.
  • Population growth between the last two decennial censuses is at least 20 percent.
  • At least 10 percent of the population, or at least 5,000 persons, lives in the qualifier urbanized area(s).

Also accepted as meeting this commuting requirement under item d. are:Start Printed Page 39869

  • The number of persons working in the county who live in the central county/counties is equal to at least 15 percent of the number of employed workers living in the county; or
  • The sum of the number of workers commuting to and from the central county/counties is equal to at least 20 percent of the number of employed workers living in the county.

e. From 15 to 25 percent of the employed workers commute to the central county/counties, the population density of the county is less than 50 persons per square mile, and any two of the following conditions also exist:

  • At least 35 percent of the population is urban.
  • Population growth between the last two decennial censuses is at least 20 percent.
  • At least 10 percent of the population, or at least 5,000 persons, lives in the qualifier urbanized area(s).

f. At least 2,500 of the population lives in a central city of the MSA located in the qualifier urbanized area(s).

When we apply the 1990 standards as opposed to 1980 standards, the number of qualifying counties increases from 22 to 31. On the basis of the evaluation of these data, effective for discharges occurring on or after October 1, 2001, hospitals listed in the first column of the following table are considered, for purposes of assigning the inpatient standardized amount and the wage index, to be located in the corresponding urban area in the second column:

Rural countyMSA
Chilton, ALBirmingham, AL
Marshall, ALHuntsville, AL
Talladega, ALAnniston, AL
Bradford, FLJacksonville, FL
Hendry, FLWest Palm Beach-Boca Raton, FL
Putnam, FLGainesville, FL
Jackson, GAAthens, GA
Christian, ILSpringfield, IL
Macoupin, ILSt. Louis, MO-IL
Piatt, ILChampaign-Urbana, IL
Brown, INIndianapolis, IN
Carroll, INLafayette, IN
Henry, INIndianapolis, IN
Jefferson, KSTopeka, KS
Barry, MIKalamazoo-Battle Creek, MI
Cass, MIBenton Harbor, MI
Ionia, MIGrand Rapids-Muskegon-Holland, MI
Shiawassee, MIFlint, MI
Tuscola, MISaginaw-Bay City-Midland, MI
Caswell, NCGreensboro-Winston Salem-High Point, NC
Greene, NCGreenville, NC
Harnett, NCRaleigh-Durham-Chapel Hill, NC
Wilson, NCRocky Mount, NC
Preble, OHDayton-Springfield, OH
Van Wert, OHLima, OH
Adams, PAYork, PA
Lawrence, PAPittsburgh, PA
Monroe, PANewark, NJ
Schuylkill, PAReading, PA
Jefferson, WIMilwaukee-Waukesha, WI
Walworth, WIMilwaukee-Waukesha, WI

There are 14 counties that meet the qualifying criteria using 1990 standards that did not meet the criteria using the 1980 standards. These 14 counties are:

Chilton, AL

Talladega, AL

Bradford, FL

Hendry, FL

Putnam, FL

Jackson, GA

Piatt, IL

Brown, IN

Carroll, IN

Greene, NC

Wilson, NC

Adams, PA

Monroe, PA

Schuylkill, PA.

In addition, when we apply the 1980 standards for three of the counties, the MSA assigned is different from the MSA that would be assigned using the 1990 standards. These counties are as follows:

Rural county1980 MSA designation1990 MSA designation
Ionia, MILansing-East Lansing, MIGrand Rapids-Muskegon-Holland, MI.
Caswell, NCDanville, VAGreensboro-Winston Salem-High Point, NC.
Harnett, NCFayetteville, NCRaleigh-Durham-Chapel Hill, NC.

Section 402 of Public Law 106-113 states that hospitals may elect to use either the January 3, 1980 standards or the March 30, 1990 standards for payments during FY 2001 and FY 2002. We are assuming hospitals will elect to go to the MSA resulting in the highest payment amount accounting for the applicable wage indexes and standardized amounts. Based on our analysis, we believe all hospitals in the designated rural counties would benefit by being included in the respective MSAs shown above. Therefore, we proposed to assign the FY 2002 Start Printed Page 39870standardized amount and wage index of each respective MSA to the affected hospitals. Hospitals electing not to use the 1990 standards would be required to notify their fiscal intermediary in writing of such election prior to September 1, 2001, in order to allow sufficient time to reflect this change in our payment systems.

We note that five rural counties no longer meet the qualifying criteria when we apply the revised OMB standards. These rural counties are as follows: Indian River, FL; Mason, IL; Owen, IN; Morrow, OH; and Lincoln, WV. For FY 2002, we continue to treat these hospitals as attached to an MSA on the basis of the 1980 standards. Beginning FY 2003, they must meet the 1990 standards to continue to be treated as such.

We stated in the August 1, 2000 final rule that implemented changes to the prospective payment system for FY 2001 that we were in the process of working with OMB to identify the hospitals that would be affected by section 402 of Public Law 106-113 (65 FR 47076). We further indicated we would revise payments to hospitals in the affected counties as soon as data were available. Now that the affected counties have been identified, hospitals in the 14 counties identified above will be offered the opportunity to elect this designation, as previously described. We will provide further information related to this election, including recalculated wage indexes, through a forthcoming program memorandum.

Finally, three hospitals located in counties affected by the revised OMB standards also have been reclassified by the MGCRB. The affected hospitals are listed below. If the hospitals did not wish to be reclassified for FY 2002 based on their new designation as described above, they had to follow the procedures described above for requesting that their application for reclassification be withdrawn.

Provider No.1990 MSA DesignationFY 2002 reclassification, MSA
34-0071Raleigh-Durham-Chapel Hill, NCFayetteville, NC.
34-0124Raleigh-Durham-Chapel Hill, NCFayetteville, NC.
34-0126Rocky Mount, NCRaleigh-Durham-Chapel Hill, NC (wage index only).

5. Provisions of the August 1, 2000 Interim Final Rule: Sections 152(a), 153, and 154a) of Public Law 106-113

In the August 1, 2000 interim final rule with comment period, we implemented sections 152(a), 153, and 154(a) of Public Law 106-113. These sections contained provisions under which hospitals in certain counties are deemed to be located in specified areas for purposes of payment under the hospital inpatient prospective payment system, for discharges occurring during FY 2000. For payment purposes, hospitals under section 152(a) are to be treated as though they were reclassified for purposes of both the standardized amount and the wage index. Sections 153 and 154(a) did not affect the standardized amount. In the interim final rule, we calculated FY 2000 wage indexes for hospitals in the affected counties. These wage indexes are listed below. No other hospitals' FY 2000 wage indexes were affected, including those hospitals in the areas to which these affected hospitals were reclassified, as well as nonreclassified hospitals located in the areas from which these hospitals were reclassified.

We also implemented section 152(a), which provided that, for purposes of making payments under section 1886(d) of the Act for FY 2000—

  • To hospitals in Iredell County, North Carolina, Iredell County was deemed to be located in the Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina MSA;
  • To hospitals in Orange County, New York, Orange County was deemed to be located in the New York, New York MSA;
  • To hospitals in Lake County, Indiana and Lee County, Illinois, Lake County and Lee County were deemed to be located in the Chicago, Illinois MSA;
  • To hospitals in Hamilton-Middletown, Ohio, Hamilton-Middletown was deemed to be located in the Cincinnati, Ohio-Kentucky-Indiana MSA;
  • To hospitals in Brazoria County, Texas, Brazoria County was deemed to be located in the Houston, Texas MSA;
  • To hospitals in Chittenden County, Vermont, Chittenden County was deemed to be located in the Boston-Worcester-Lawrence-Lowell-Brockton, Massachusetts-New Hampshire MSA.

In accordance with section 153 of Public Law 106-113, for discharges occurring during FY 2000, the Hattiesburg, Mississippi MSA wage index was recalculated by including the wage data for Wesley Medical Center. In accordance with section 154(a), the Allentown-Bethlehem-Easton, Pennsylvania MSA FY 2000 wage index was recalculated by including the wage data for Lehigh Valley Hospital.

The following table shows the changes to the FY 2000 wage index values for the hospitals in the affected counties. Hospitals affected by section 152(a) of Public Law 106-113 were also considered reclassified for purposes of the standardized amount.

County or MSANew MSA (for wage index and standardized amount)New wage indexNew Georgraphic Adjustment Factor (GAF)
Iredell County, NC15200.94340.9609
Orange County, NY56001.43421.2801
Lake County, IN16001.07501.0508
Lee County, IL16001.07501.0508
Hamilton-Middletown, OH16400.94190.9598
Brazoria County, TX33600.93880.9577
Chittenden County, VT11231.13591.0912
Hattiesburg, MS MSA32850.76340.8312
Allentown-Bethlehem-Easton, PA MSA02401.02281.0156
Start Printed Page 39871

G. Requests for Wage Data Corrections

In the May 4, 2000 proposed rule, we stated that, to allow hospitals time to construct the proposed FY 2002 hospital wage index, we would make available in May 2001 a final public data file containing the FY 1998 hospital wage data.

The final wage data file was released on May 4, 2001. As noted above in section III.D. of this preamble, this file included hospitals' cost report data obtained from Worksheet S-3, Parts II and III of their FY 1998 Medicare cost reports. In addition, Table 2 in the Addendum to this final rule contains each hospital's adjusted average hourly wage used to construct the wage index values for the past 3 years, including the FY 1998 data used to construct the final FY 2002 wage index.

Under revised procedures, hospitals were given an opportunity to correct any incorrectly reported FY 1998 wage data on their cost reports and submit complete detailed supporting documentation to their intermediaries by March 9, 2001. Wage data corrections had to be reviewed and verified by the intermediary and transmitted to HCFA on or before April 9, 2001. These deadlines were necessary to allow sufficient time to review and process the data so that the final wage index calculation could be completed for development of the final prospective payment rates in this final rule.

We created the process described above to resolve all substantive wage data correction disputes before we finalize the wage data for the FY 2002 payment rates. Accordingly, hospitals that did not meet the procedural deadlines set forth above were not afforded a later opportunity to submit wage data corrections or to dispute the intermediary's decision with respect to requested changes. Specifically, our policy is that hospitals that do not meet the procedural deadlines set forth above will not be permitted to later challenge, before the Provider Reimbursement Review Board, HCFA's failure to make a requested data revision (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001)).

As stated above, the final wage data public use file was released on May 4, 2001. Hospitals had an opportunity to examine both Table 2 of the proposed rule and the May 4 final public use wage data file (which reflected revisions to the data used to calculate the values in Table 2) to verify the data HCFA was using to calculate the wage index. Hospitals had until June 4, 2001, to submit requests to correct errors in the final wage data due to data entry or tabulation errors by the intermediary or HCFA. The correction requests considered at that time were limited to errors in the entry or tabulation of the final wage data that the hospital could not have known about before the release of the final wage data public use file.

If, after reviewing the May 2001 final data file, a hospital believed that its wage data are incorrect due to a fiscal intermediary or HCFA error in the entry or tabulation of the final wage data, it was provided an opportunity to send a letter to both its fiscal intermediary and HCFA, outlining why the hospital believed an error exists and provide all supporting information, including dates. These requests had to be received by us and the intermediaries no later than June 4, 2001.

Changes to the hospital wage data were made in those very limited situations involving an error by the intermediary or HCFA that the hospital could not have known about before its review of the final wage data file. Specifically, neither the intermediary nor HCFA accepted the following types of requests at that stage of the process:

  • Requests for wage data corrections that were submitted too late to be included in the data transmitted to HCFA on or before April 9, 2001.
  • Requests for correction of errors that were not, but could have been, identified during the hospital's review of the February 2001 wage data file.
  • Requests to revisit factual determinations or policy interpretations made by the intermediary or HCFA during the wage data correction process.

Verified corrections to the wage index received timely (that is, by June 4, 2001) are incorporated into the final wage index in this final rule, to be effective October 1, 2001.

Again, we believe the wage data correction process described above provides hospitals with sufficient opportunity to bring errors in their wage data to the intermediary's attention. Moreover, because hospitals had access to the final wage data by early May 2001, they had the opportunity to detect any data entry or tabulation errors made by the intermediary or HCFA before the development and publication of the FY 2002 wage index and its implementation on October 1, 2001. If hospitals availed themselves of this opportunity, the wage index implemented on October 1 should be accurate. Nevertheless, in the event that errors are identified after that date, we retain the right to make midyear changes to the wage index under very limited circumstances.

Specifically, in accordance with § 412.63(w)(2), we may make midyear corrections to the wage index only in those limited circumstances in which a hospital can show (1) that the intermediary or HCFA made an error in tabulating its data; and (2) that the hospital could not have known about the error, or did not have an opportunity to correct the error, before the beginning of FY 2002 (that is, by the June 4, 2001 deadline). As indicated earlier, since a hospital had the opportunity to verify its data, and the intermediary notified the hospital of any changes, we do not foresee any specific circumstances under which midyear corrections would be necessary. However, should a midyear correction be necessary, the wage index-change for the affected area will be effective prospectively from the date the correction is made.

H. Modification of the Process and Timetable for Updating the Wage Index

Although the wage data correction process described above has proven successful in the past for ensuring that the wage data used each year to calculate the wage indexes are generally reliable and accurate, we are concerned about the growing volume of wage data revisions initiated by hospitals during February and the first week of March. We first discussed this issue in the FY 1998 proposed rule (62 FR 29918). At that time, we noted that, in developing the FY 1997 wage index, the wage data were revised between the proposed and final rules for more than 13 percent of the hospitals (approximately 700 of 5,200). Last year, in developing the FY 2001 wage index, the wage data were revised between the proposed and final rules for more than 32 percent of the hospitals (1,605 of 4,950). This year, in developing the FY 2002 wage index, the wage data were revised between the proposed rule and the final rule for 30 percent of the hospitals (1,473 of 4,910).

In the May 4, 2001 proposed rule, we indicated that since hospitals are expected to submit complete and accurate cost report data, and intermediaries review and request hospitals to correct problematic wage data before the data are submitted to HCFA in mid-November, we believed there should be limited revisions at this stage of the process. We reminded the hospital community that the primary purpose of this file is to allow hospitals to verify that we have their correct data on file. However, according to information received from the intermediaries, these late revisions are frequently due to hospitals' lack of responsiveness in providing sufficient information to the intermediaries during the desk reviews (that is, during the Start Printed Page 39872intermediary's review of the hospital's cost report).

In the proposed rule, we proposed two changes to the wage index development process and timetable beginning with the FY 2003 wage index. We believed these changes would encourage earlier submissions of wage data revisions by hospitals and would allow intermediaries more time to address the heavy volume of revisions requested after the intermediaries have completed their desk reviews of these data. First, we proposed to release the preliminary wage data file by early January rather than early February. As with the current preliminary file, the January file would include desk reviewed wage data that intermediaries submitted to us by November of the previous year and any timely revisions we received from intermediaries prior to release of the January file. Hospitals would be allowed until early February to submit requests for wage data revisions to their intermediaries. Second, intermediaries would be allowed approximately 8 weeks from the hospitals' deadline for submitting revision requests (that is, until early March) to review and transmit revised wage data to us.

We believed that the proposed revised schedule would improve the quality of the wage index by allowing intermediaries more time to sufficiently review wage data revisions before the data are submitted to us. Further, we believed the proposed revised process would encourage hospitals to submit revisions earlier, so the proposed wage index, from which hospitals base geographic reclassification decisions, is more accurate.

The timetable for developing the annual update to the wage index is as follows (an asterisk indicates no change from prior years):

Mid-November *

All desk reviews for hospitals wage data are completed and revised data transmitted by the fiscal intermediaries to HCRIS.

Early December *

CMS compiles file of wage data, received by mid-November, and sends it to the fiscal intermediaries for verification.

Early January

Edited wage data are available for release to the public.

Early February

Deadline for hospitals to request wage data revisions and provide adequate documentation to support the request.

April/May *

Proposed rule published with 60-day comment period and 45-day withdrawal deadline for hospitals applying for geographic reclassification.

Early April *

Deadline for the fiscal intermediaries to submit all revisions resulting from the hospitals' requests for adjustments (as of early February) (and verification of data submitted as of early January).

Deadline for hospital's to request CMS's intervention in cases where the hospital disagrees with the fiscal intermediary's policy interpretations pertaining to the allowability of particular costs.

Late April *

Fiscal intermediaries will alert hospitals to the availability of the final wage data file for their review and inform hospitals of the June deadline for hospitals to submit correction requests for corrections to errors due to CMS or fiscal intermediary mishandling of the final wage data.

Early May *

Release of final wage data public use file on CMS web page and through public use files office.

Early June *

Deadline for hospitals to submit correction requests to both CMS and the fiscal intermediaries to correct errors due to CMS or fiscal intermediary mishandling of the final wage data.

August 1 *

Publication of the final rule.

October 1 *

Effective date of updated wage index.

Comment: One commenter agreed, in general, with the premise of the proposed revised schedule. The commenter recommended that we publish the preliminary wage data file in August, using data from the hospitals' as-filed cost reports before fiscal intermediaries begin the wage index desk reviews. Hospitals would then have until October 1 to submit requests, along with supporting documentation, to correct errors. The commenter's proposal would give fiscal intermediaries until November 30 to complete the desk review and transmit the wage index data to us. The commenter believed that implementation of the recommended schedule eliminates the fiscal intermediary's duplication of effort (that is, reviewing the data a second time when hospitals request changes after the desk review, and then resubmitting the data to us) that exists in the current process.

Response: We appreciate the commenter's general support for our proposal to revise the wage index schedule, and we will give the commenter's recommended process careful consideration in developing future updates to the wage index. Having received no other comments opposing our proposed schedule, we will implement that schedule, beginning with the FY 2003 wage index. We believe that our revised schedule is a logical step in the evolution of the wage index development process. We will monitor the effectiveness of the revised schedule.

IV. Other Decisions and Changes to the Prospective Payment System for Inpatient Operating Costs and Graduate Medical Education Costs

A. Sole Community Hospitals (SCHs) (§§ 412.63, 412.71, 412.72, 412.73, 412.75, 412.77, and 412.92)

For the benefit of the reader, in this final rule, we are discussing and clarifying many of the rules and policies governing SCHs because of the legislative changes that have occurred in recent years. It has been several years since the SCH criteria have been published in one location. Rather than continue to refer to various Federal Register documents and sections of the Code of Federal Regulations, we are publishing a detailed discussion of these policies, making further changes to incorporate the provisions of sections 213, 302, 303, 304, and 311 of Public Law 106-554, and clarifying other related policies.

Under the hospital inpatient prospective payment system, special payment protections are provided to an SCH. Section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that, by reason of factors such as isolated location, weather conditions, travel conditions, absence of other like hospitals (as determined by the Secretary), or historical designation by the Secretary as an Essential Access Community Hospital (EACH), is the sole source of inpatient hospital services reasonably available to Medicare beneficiaries. The regulations that set forth the criteria that a hospital must meet to be classified as an SCH are at § 412.92. To be classified as an SCH, a hospital must either have been designated as an SCH prior to the beginning of the prospective payment system on October 1, 1983, and must be located more than 35 miles from other like hospitals, or the hospital must be Start Printed Page 39873located in a rural area and meet one of the following requirements:

  • It is located more than 35 miles from other like hospitals.
  • It is located between 25 and 35 miles from other like hospitals, and it—

—Serves at least 75 percent of all inpatients, or 75 percent of Medicare beneficiary inpatients, within a 35-mile radius or, if larger, within its service area; or

—Has fewer than 50 beds and would qualify on the basis of serving 75 percent of its area s inpatients except that some patients seek specialized care unavailable at the hospital.

  • It is located between 15 and 25 miles from other like hospitals, and because of local topography or extreme weather conditions, the other like hospitals are inaccessible for at least 30 days in each of 2 out of 3 years.
  • The travel time between the hospital and the nearest like hospital is at least 45 minutes because of distance, posted speed limits, and predictable weather conditions.

Effective with hospital cost reporting periods beginning on or after April 1, 1990, section 1886(d)(5)(D)(i) of the Act, as amended by section 6003(e) of Public Law 101-239, provides that SCHs are paid based on whichever of the following rates yields the greatest aggregate payment:

  • The Federal rate applicable to the hospital.
  • The updated hospital-specific rate based on FY 1982 costs per discharge.
  • The updated hospital-specific rate based on FY 1987 costs per discharge.

Effective with hospital cost reporting periods beginning on or after October 1, 2000, section 1886(b)(3)(I)(i) of the Act, as added by section 405 of Public Law 106-113 and amended by section 213 of Public Law 106-554, provides for other options, in addition to the three bulleted options in the above paragraph, for determining which rate would yield the greatest aggregate payment. For discharges for FY 2001 through FY 2003, these additional optional rates are—

  • A phase-in blended rate of the updated hospital-specific rate based on FY 1982 costs per discharge and an FY 1996 hospital-specific rate; or
  • A phase-in blended rate of the updated hospital-specific rate based on FY 1987 costs per discharge and an FY 1996 hospital-specific rate.

For discharges beginning in FY 2004, the additional optional rate would be 100 percent of the FY 1996 hospital-specific rate.

For each cost reporting period, the fiscal intermediary determines which of the payment options will yield the highest rate of payment. Payments are automatically made at the highest rate using the best data available at the time the fiscal intermediary makes the determination. However, it may not be possible for the fiscal intermediary to determine in advance precisely which of the rates will yield the highest payment by year's end. In many instances, it is not possible to forecast the outlier payments, the amount of the DSH adjustment, or the IME adjustment, all of which are applicable only to payments based on the Federal rate. The fiscal intermediary makes a final adjustment at the close of the cost reporting period to determine precisely which of the payment rates would yield the highest payment to the hospital.

If a hospital disagrees with the fiscal intermediary's determination regarding the final amount of program payment to which it is entitled, it has the right to appeal the fiscal intermediary's decision in accordance with the procedures set forth in Subpart R of Part 405, which concern provider payment determinations and appeals.

In calculating a hospital-specific rate for an SCH based on its FY 1996 cost reporting period, we will, to the extent possible, use the same methodology that we used to calculate the hospital-specific rate based on either the FY 1982 or FY 1987 cost reporting period. That methodology is set forth in §§ 412.71, 412.72, 412.73, 412.75 and 412.77.

  • If a hospital has a cost reporting period ending in FY 1982, it will be paid a hospital-specific rate based on its FY 1982 costs; or a hospital-specific rate based on its FY 1987 costs; or a hospital-specific rate based on its FY 1996 costs (which, until FY 2004, would be a blend of the greater of the FY 1982 or FY 1987 costs and the FY 1996 costs); or it will be paid based on the Federal rate.
  • If a hospital has no cost reporting period ending in FY 1982, it will be paid a hospital-specific rate based on its FY 1987 costs; or a hospital-specific rate based on its FY 1996 costs (which, until FY 2004, would be a blend of its FY 1987 costs and FY 1996 costs); or it will be paid based on the Federal rate.
  • If a hospital has no cost reporting period ending in either FY 1982 or FY 1987, it will be paid based on its FY 1996 costs; or it will be paid based on the Federal rate.
  • If a hospital has no cost reporting period ending in FY 1982, FY 1987, or FY 1996, it cannot be paid based on a hospital-specific rate; it will be paid based on the Federal rate.
  • If a hospital was operating during any or all of FY 1982, FY 1987, or FY 1996, but, for some reason, the cost report records are no longer available, the hospital will be treated as if it had no cost report for the applicable period. Section 1886(b)(3)(C) of the Act specifies the available periods that may be used.

For each SCH, the fiscal intermediary will calculate a hospital-specific rate based on the hospital's FY 1982, FY 1987, or FY 1996 cost report as follows:

  • Determine the hospital's total allowable Medicare inpatient operating cost, as stated on the cost report.
  • Divide the total Medicare operating cost by the number of Medicare discharges (without adjusting for transfers) in the cost reporting period to determine the base period cost per case.
  • In order to take into consideration the hospital's individual case-mix, the base year cost per case is divided by the hospital's case-mix index applicable to the cost reporting period. This step is necessary to adjust the hospital's base period cost for case mix. This is done to remove the effects of case mix from the base period costs per case. Payments using these base period costs are then adjusted to reflect the actual case mix during the payment year. A hospital's case mix is computed based on its Medicare patient discharges subject to DRG-based payment.

The fiscal intermediary will inform each SCH of its hospital-specific rate based on its applicable cost reporting period within 180 days after the start of its cost reporting period.

(The provisions of section 213 of Public Law 106-554 relating to the extension to all SCHs the option to rebase using their FY 1996 operating costs, for cost reporting periods beginning on or after October 1, 2000, were addressed in the June 13, 2001 interim final rule with comment period, and are finalized in this final rule.)

An SCH is also eligible for a payment adjustment if, for reasons beyond its control, it experiences a decline in volume of greater than 5 percent compared to its preceding cost reporting period. This adjustment is also available to hospitals that could qualify as SCHs but choose not to be paid as SCHs; that is, hospitals that qualify and successfully apply to be designated as SCHs but continue to receive payments based on the Federal rate. In addition, section 6003(c)(1) of Public Law 101-239 deleted the sunset date on the 5-percent volume decline adjustment, thus allowing SCHs to receive the adjustment indefinitely. The sunset provision was included under section 1886(d)(5)(C)(ii) of the Act. (Section 6003(c)(1) of Public Law 101-239 amended that provision and Start Printed Page 39874redesignated it as section 1886(d)(5)(D) of the Act.)

In the September 1, 1983, issue of the Federal Register (48 FR 39781), we stated that any hospital designated as an SCH would retain that status until it experienced a change in circumstances. Section 6003(e)(3) of Public Law 101-239 specifically stated that any hospital classified as an SCH as of the date of enactment of Public Law 101-239 (December 19, 1989), will retain its SCH status even if the hospital did not meet the criteria established under section 6003(e)(1) of that law. These hospitals are the “grandfathered” SCH hospitals. Therefore, we have continued to allow hospitals designated as SCHs prior to December 19, 1989, to be “grandfathered” under current criteria.

In the June 4, 1991 Federal Register, we stated that a hospital's special status as an SCH would not be retained in light of the hospital's geographic reclassification for purposes of the standardized amount. In the event the hospital's reclassification ceases, it must reapply for special status and must meet all of the applicable qualifying criteria in effect at the time it seeks requalification (56 FR 25482). However, in the event a “grandfathered” SCH was successfully reclassified, it would be reinstated as an SCH if its reclassification ceased.

Section 401(a) of Public Law 106-113 established that any subsection (d) hospital (section 1886(d) of the Act) located in an urban area may be redesignated as being located in a rural area if the hospital meets one of several criteria established by the legislation. One of these criteria is that the hospital could qualify as an SCH if the hospital were located in a rural area. Under this provision, an urban hospital that may have been “grandfathered” as an SCH could now qualify and receive payment as an SCH if it met the criteria of a rural SCH instead of as an urban SCH. Given this extension of SCH eligibility, we no longer believe it is necessary to extend special protection to “grandfathered” SCHs that successfully apply for geographic reclassification through the MGCRB for the standardized amount after their MGCRB reclassification ends. Therefore, a hospital that loses its SCH status through a change in circumstances, such as reclassification through the MGCRB for the standardized amount, will not be reinstated as a SCH unless it can meet all of the SCH qualifying criteria in effect at the time it seeks requalification. This circumstance falls under the provisions of §§ 412.92 (b)(3) and (b)(5), which state that an approved classification as an SCH remains in effect without need for reapproval unless there is a change in the circumstances under which the classification was approved. We believe that a successful reclassification by the MGCRB fits the definition of a change in circumstances.

Because some hospitals may not have understood the effect reclassification would have on their special status, in the May 4 proposed rule we permitted affected hospitals, under existing § 412.273(a), the option to withdraw their applications for reclassification for FY 2002, even if the MGCRB had issued a decision, by submitting a withdrawal request to the MGCRB within 45 days of publication of this proposed rule. Finally, just as a competing hospital that closes leaves an opportunity for an existing hospital to qualify as an SCH, a new hospital that opens in an area with an existing hospital designated as an SCH endangers the SCH status of the existing hospital.

As of October 1, 1997, no designations of hospitals as EACHs can be made. The EACHs designated by CMS before October 1, 1997, will continue to be paid as SCHs for as long as they comply with the terms, conditions, and limitations under which they were designated as EACHs.

Under § 412.92(b)(2), we define the effective dates for several situations in which a hospital gains or gives up SCH status. First, SCH status and the associated payment adjustment is effective 30 days after CMS's written notification to the SCH. Thus, 30 days after the issuance of CMS's notice of approval, the hospital is considered to be an SCH and the payment adjustment is applied to discharges occurring on or after that date.

Second, § 412.92(b)(4)(ii) defines the effective date when a hospital chooses to give up its SCH status. Our policy has always been that an SCH can elect to give up its SCH status at any time by submitting a written request to the appropriate CMS regional office through its fiscal intermediary. The change to fully national rates becomes effective no later than 30 days after the hospital submits its request. We believe that the “no later than 30 days” policy for the effective date for cancelling SCH status is in keeping with the prospective nature of the prospective payment system. In addition, the 30-day timeframe to give up SCH status provides the fiscal intermediaries with enough time to alter their automated payment systems prospectively, thus avoiding expensive and time-consuming reprocessing of claims. The variable timeframe of “no later than 30 days from the date of the hospital's request” also permits the regional office, the fiscal intermediary, and the hospital to select a mutually agreeable date, for example, at the end of a month, to facilitate the change in SCH status. We expect that hospitals will anticipate when they wish to give up SCH status and to submit their requests in sufficient time to permit the 30-day period for making the change.

In addition, § 412.92(b)(2)(ii) defines the effective date of SCH status in the situation where a final and nonappealable administrative or judicial decision reverses CMS's denial of SCH status to a hospital. In this situation, if the hospital's application was submitted on or after October 1, 1983, the effective date will be 30 days after the date of CMS's original written notification of denial.

Under § 412.92(b)(2)(iii), we define retroactive approval of SCH status. If a hospital is granted retroactive approval of SCH status by a final and nonappealable court order or an administrative decision under subpart R of part 405 of the regulations, and it wishes its SCH status terminated prior to the current date (that is, it wishes to be paid as an SCH for a time-limited period, all of which is in the past), it must submit written notice to the CMS regional office through its fiscal intermediary within 90 days of the court order or the administrative decision. This written notice must clearly state that, although SCH status was granted retroactively by the court order or by the administrative decision, the hospital wants this status terminated as of a specific date. If written notice is not received within 90 days of the court order or the administrative decision, SCH status will continue. Written requests to terminate SCH status that are received subsequent to the 90-day period will be effective no later than 30 days after the request is submitted, as discussed above.

Under § 412.92(c)(1), we define mileage. We believe that mileage should continue to be measured by the shortest route over improved roads maintained by any local, State, or Federal government entity for public use. We consider improved roads to include the paved surface up to the front entrance of the hospital because this portion of the distance is utilized by the public to access the hospital. This definition provides consistency with the interpretation of the MGCRB when considering hospital reclassification applications. The MGCRB measures the distance between the hospital and the county line of the area to which it seeks reclassification beginning with the paved area outside the front entrance of Start Printed Page 39875the hospital. This provides a consistent, national definition that is easily recognizable for each hospital. Finally, rounding of mileage is not permissible. This is also consistent with the MGCRB definition of mileage (56 FR 25483). In this final rule, we are revising the definition of “miles” under § 412.92(c)(1) to state that an improved road includes the paved surface up to the front entrance of the hospital.

Under § 412.92(c)(2), we define “like” hospital. We consider like hospitals to be those hospitals furnishing short-term acute care. That is, a hospital may not qualify for an SCH classification on the grounds that neighboring hospitals offer specialty services, thereby seeking to exclude close-by competitors as like hospitals, in order to meet the mileage criteria by measuring to a like hospital that is located further away. For example, we believe that competing hospitals within a given area may each have their own specialty services, while all the facilities continue to be considered short-term acute care hospitals. We note that under § 412.92(a)(1)(ii), a hospital with fewer than 50 beds may qualify for SCH status under a special provision if patients that it would normally serve are seeking care elsewhere due to the unavailability of specialty services. This means that, if a hospital can prove that the patients from its service area are seeking specialty services elsewhere (such as, among others, heart surgery, transplants, and burn care), rather than routine care, and, because of that fact, that it otherwise would have met the criteria of section § 412.92(a)(1)(i), it can qualify as an SCH.

We note that § 412.92(b)(1)(iii)(A) retains an outdated reference to “hospitals located within a 50 mile radius of the hospital.” With the issuance of the September 1, 1989 Federal Register (54 FR 36481, 36482), the 50 mile radius was determined to be unreasonable and all references should have been changed to 35 miles in accordance with § 412.92(a)(1)(i). In this final rule. we are revising the reference to “a 50 mile radius” in § 412.92(b)(1)(iii)(A) to read “a 35 mile radius”.

We note that the travel time and weather conditions criteria set forth in § 412.92(a)(3) were discussed in detail in the September 4, 1990 Federal Register (55 FR 36050 through 36055 and 36162 through 36163).

Under § 412.92(a)(1)(i) and (b)(1)(ii), we define the market area analysis criteria used to determine SCH status. In the May 4, 2001 proposed rule, we discussed several points concerning these requests for SCH status that we proposed to clarify.

First, a hospital seeking an SCH designation based on these criteria must make its initial request to the fiscal intermediary with all the appropriate documents as will be discussed below (§ 412.92(b)(1)(i)). The fiscal intermediary will make a recommendation on the request, based on receipt of all the appropriate documentation and its own investigation and analysis, and that recommendation will be forwarded to the CMS regional office for another level of review and final approval or disapproval. The fiscal intermediary would forward its recommendation to the CMS regional office located in the hospital's area as opposed to the fiscal intermediary's area, if there is a difference in these areas. As discussed above, an approval of the request for SCH status will be effective 30 days after CMS issues the approval letter. If a determination on the request requires the use of data that are available at CMS central office only, upon receipt of the fiscal intermediary's recommendation, the CMS regional office will forward the request and the fiscal intermediary's recommendation to the appropriate contact at CMS central office where the determination will be made.

Second, a hospital must provide patient origin data (the number of patients from each zip code from which the hospital draws inpatients) for all inpatient discharges to document the boundaries of its service area (§ 412.92(b)(1)(ii)(A)). Or, the hospital can request that CMS develop patient origin data to define its service area based on the number of patients from each zip code from which the hospital draws Medicare Part A inpatients (§ 412.92(b)(1)(iii)). Then, the lowest number of zip codes in descending percentage order of Medicare inpatients that meets the 75-percent threshold will be used to represent the hospital's service area. We note that hospitals cannot substitute zip codes elsewhere on the list in order to manipulate the service area. (See Howard Young Medical Center, Inc. v. Shalala, 207 F.3d 437 (7th Cir. 2000).)

Third, the hospital must provide patient origin data from all other hospitals located within a 35-mile radius of it or, if larger, within its service area, to document that no more than 25 percent of either all of the population or the Medicare beneficiaries residing in the hospital's service area and hospitalized for inpatient care were admitted to other like hospitals for care (§ 412.92(b)(1)(ii)(B)). Again, CMS central office can develop patient origin data for other hospitals within the requesting hospital's service area if the hospital is requesting SCH status based on an examination of Medicare Part A inpatient utilization. In either case, the requesting hospital is required to submit a comprehensive list of hospitals located within a 35-mile radius or, if larger, within its service area. This list will be checked by both the fiscal intermediary and CMS. Again, a requesting hospital cannot argue that a competing hospital should be excluded from the service area based on the existence of specialty services at that hospital if both hospitals are short-term acute care facilities. Distances between all reported hospitals will be checked by both the fiscal intermediary and CMS, through electronic geographic mapping services (such as Yahoo or Mapquest) or by physically driving the distance involved.

In addition, data will be analyzed based on the year for which the hospital requests SCH status. Subsequent hospital mergers or terminations will not be taken into consideration in processing the request. For example, if a hospital requests SCH status using data for FY 1999, and that data show that there is a competing hospital in existence that subsequently closed its doors in FY 2000, the data will be analyzed with the terminated hospital in existence, unless the hospital seeking SCH status applies using later data, such as FY 2001. This principle is consistent with how we analyze wage index data. If a terminated hospital has a viable cost report for the year of wage data that is being analyzed to produce the wage index, its data are included as part of the computation.

We received the following comments on our May 4, 2001 proposed rule and the June 13, 2001 interim final rule with comment period:

Comment: Several commenters were concerned with the following issues related to the qualifying criteria for sole community hospitals: (1) Utilizing TAC worksheets or other data sources in order to develop a base year alternative for a new SCH; (2) determining a service area; (3) recognition of hospital mergers and terminations that influence a hospital seeking SCH status; (4) including competing hospitals within a 35-mile radius of the requesting hospital as opposed to a 35-road-mile distance; (5) obtaining patient origin data from competing hospitals, (6) timeliness of SCH approvals; (7) SCH status for hospitals with fewer than 50 beds; (8) CAHs as like hospitals; (9) the effect of wage index reclassifications on a hospital's SCH status; and (10) the use of affidavits and other certifications in Start Printed Page 39876verifying time and distance when applying for SCH status.

Response: We would like to reiterate that in the proposed rule we were restating historical and current policy and criteria for SCHs. We were not proposing new SCH policies or criteria, or revisions to existing policies or criteria. Rather, we were striving to publish criteria that has been developed over the past several years in one location for the reader's benefit.

First, we appreciate the input concerning a hospital's access to alternative data when a cost report from a prior year may not be readily available. We will take this comment into consideration in working with the fiscal intermediaries in the future to adjust a SCH's payments.

Second, we believe that, using discharge data available on the MedPAR file, we can accurately determine a hospital's service area based on the zip codes that contain the highest number of discharges for that facility and rank those zip codes accordingly. Several commenters suggested that we use patient destination data that are available in some States and, also, that we not be concerned if these data were not available based on a hospital's cost reporting period. As in other aspects of the Medicare program, we must rely on data that are consistent, verifiable by the fiscal intermediaries, and nationally available so that no one hospital or group of hospitals receives a distinct advantage by using an alternative source of data that is not widely available. Therefore, we believe that it is appropriate to determine the hospital's service area based on Medicare discharges.

Third, if a hospital chooses to have a merger recognized in its request for SCH status, or, likewise, a hospital termination, then it is free to wait until its cost report data reflects these changes. Then, CMS will consider the data in light of these facts.

Fourth, we believe it is reasonable to examine a hospital's competitors within a 35-mile radius. Most competing hospitals will not be at the outer limit of the 35-mile radius, and, if these hospitals are not truly competitors, the discharge data will bear out that fact. Also, we examine a hospital's service area based on discharges within zip code areas, and, often, this will exceed a 35-mile radius. Therefore, we believe the 35-mile radius is reasonable.

Fifth, we realize that obtaining patient origin data from competing hospitals may be a difficult proposition, which is why CMS offers to provide this information for the requesting hospital in § 412.92(b)(1)(iii)(A). CMS’ data are based on Medicare discharges.

Sixth, approvals of SCH status are effective prospectively. There are several ways in which a hospital may qualify as a SCH, and fiscal intermediaries are required to collect and examine detailed documentation which sometimes requires the assistance of our regional or central office staff. We appreciate the fact that hospitals are concerned that their applications be approved in a timely manner, and we will make every effort to work diligently with our contractors as well as our regional offices to achieve that goal.

Seventh, a commenter suggested that we should be more specific when defining the criteria under which a hospital with fewer than 50 beds could qualify as an SCH at § 412.92(a)(ii). We will take this into consideration as we develop further criteria in the future. In the meantime, we will continue to work closely with our fiscal intermediaries in approving a hospital's SCH status under this provision.

Eighth, we do not consider CAHs like hospitals to be SCHs. CAHs are generally smaller with a very limited length of stay, while SCHs operate as full-service acute-care hospitals.

Ninth, a hospital's status as an SCH is not affected by a wage index reclassification approved by the MGCRB. A hospital's SCH status is affected by an approval for a standardized amount reclassification only, as a reclassification for purposes of a hospital's base payment rate changes its status for all inpatient hospital prospective payment purposes except the wage index.

Finally, hospitals are encouraged to provide as much documentation as possible to assist the fiscal intermediary and CMS in evaluating requests for SCH status. The more complete the documentation, the quicker a decision can be rendered. If a hospital can provide affidavits or other verification of mileage, distances, competing hospital locations, etc., then it is encouraged to do so.

B. Rural Referral Centers (§ 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act, the regulations at § 412.96 set forth the criteria a hospital must meet in order to receive special treatment under the prospective payment system as a rural referral center. For discharges occurring before October 1, 1994, rural referral centers received the benefit of payment based on the other urban amount rather than the rural standardized amount. Although the other urban and rural standardized amounts were the same for discharges beginning with that date, rural referral centers would continue to receive special treatment under both the disproportionate share hospital (DSH) payment adjustment and the criteria for geographic reclassification.

Section 401 of Public Law 106-113 amended section 1886(d)(8) of the Act by adding subparagraph (E), which creates a mechanism, separate and apart from the MGCRB, permitting an urban hospital to apply to the Secretary to be treated as being located in the rural area of the State in which the hospital is located. The statute directs the Secretary to treat a qualifying hospital as being located in the rural area for purposes of provisions under section 1886(d) of the Act. Congress clearly intended hospitals that become rural under section 1886(d)(8)(E) of the Act to receive some benefit as a result. In addition, one of the criteria under section 1886(d)(8)(E) of the Act is that the hospital would qualify as an SCH or a rural referral center if it were located in a rural area. An SCH would be eligible to be paid on the basis of the higher of its hospital-specific rate or the Federal rate. On the other hand, the only benefit under section 1886(d) of the Act for an urban hospital to become a rural referral center would be waiver of the proximity requirements that are otherwise applicable under the MGCRB process, as set forth in § 412.230(a)(3)(i).

In the August 1, 2000 final rule (65 FR 47089), we stated that we believed Congress contemplated that hospitals might seek to be reclassified as rural under section 1886(d)(8)(E) of the Act in order to become rural referral centers so that the hospitals would be exempt from the MGCRB proximity requirement and could be reclassified by the MGCRB to another urban area. Therefore, in that final rule we sought a policy approach that would appropriately address our concern that these urban to rural redesignations not be utilized inappropriately, and that would benefit hospitals seeking to reclassify under the MGCRB process by achieving rural referral center status. (We became aware of several specific hospitals that were rural referral centers for FY 1991, but subsequently lost their status when the county in which they were located became urban, and had expressed their wish to be redesignated as a rural referral center in order to be eligible to reclassify.) Accordingly, in light of section 1886(d)(8)(E) of the Act and the language in the accompanying Conference Report, effective as of October 1, 2000, hospitals located in what is now an urban area, if they were ever a rural referral center, were reinstated to rural referral center status.Start Printed Page 39877

In addition, as discussed in 62 FR 45999 and 63 FR 26317, under section 4202 of Public Law 105-33, a hospital that was classified as a rural referral center for FY 1991 is to be classified as a rural referral center for FY 1998 and later years so long as that hospital continued to be located in a rural area and did not voluntarily terminate its rural referral center status. Otherwise, a hospital seeking rural referral center status must satisfy applicable criteria. One of the criteria under which a hospital may qualify as a rural referral center is to have 275 or more beds available for use. A rural hospital that does not meet the bed size requirement can qualify as a rural referral center if the hospital meets two mandatory prerequisites (specifying a minimum case-mix index and a minimum number of discharges) and at least one of three optional criteria (relating to specialty composition of medical staff, source of inpatients, or referral volume). With respect to the two mandatory prerequisites, a hospital may be classified as a rural referral center if its—

  • Case-mix index is at least equal to the lower of the median case-mix index for urban hospitals in its census region, excluding hospitals with approved teaching programs, or the median case-mix index for all urban hospitals nationally; and
  • Number of discharges is at least 5,000 per year, or if fewer, the median number of discharges for urban hospitals in the census region in which the hospital is located. (The number of discharges criterion for an osteopathic hospital is at least 3,000 discharges per year.)

1. Case-Mix Index

Section 412.96(c)(1) provides that CMS will establish updated national and regional case-mix index values in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. The methodology we use to determine the national and regional case-mix index values is set forth in regulations at § 412.96(c)(1)(ii). The proposed national case-mix index value for FY 2002 in the May 4 proposed rule included all urban hospitals nationwide, and the proposed regional values for FY 2002 were the median values of urban hospitals within each census region, excluding those with approved teaching programs (that is, those hospitals receiving indirect medical education payments as provided in § 412.105). Those values were based on discharges occurring during FY 2000 (October 1, 1999 through September 30, 2000) and included bills posted to CMS's records through December 2000. (The proposed rule language erroneously cited the period as FY 1999 (October 1, 1998 through September 30, 1999.)

We proposed that, in addition to meeting other criteria, hospitals with fewer than 275 beds, if they are to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2001, must have a case-mix index value for FY 2000 that is at least—

  • 1.3286; or
  • The median case-mix index value for urban hospitals (excluding hospitals with approved teaching programs as identified in § 412.105) calculated by CMS for the census region in which the hospital is located. (See the table set forth in the May 4, 2001 proposed rule at 66 FR 22687.)Based on the latest data available (FY 2000 bills received through March 31, 2001), in addition to meeting other criteria, hospitals with fewer than 275 beds, if they are to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2001, must have a case-mix index value for FY 2000 that is at least—
  • 1.3289; or
  • The median case-mix index value for urban hospitals (excluding hospitals with approved teaching programs as identified in § 412.105) calculated by CMS for the census region in which the hospital is located. The final median case-mix values by region are set forth in the following table:
RegionCase-Mix Index Value
1. New England (CT, ME, MA, NH, RI, VT)1.2381
2. Middle Atlantic (PA, NJ, NY)1.2319
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)1.3055
4. East North Central (IL, IN, MI, OH, WI)1.2588
5. East South Central (AL, KY, MS, TN)1.2530
6. West North Central (IA, KS, MN, MO, NE, ND, SD)1.1690
7. West South Central (AR, LA, OK, TX)1.2443
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)1.3275
9. Pacific (AK, CA, HI, OR, WA)1.2991

Hospitals seeking to qualify as rural referral centers or those wishing to know how their case-mix index value compares to the criteria should obtain hospital-specific case-mix values from their fiscal intermediaries. Data are available on the Provider Statistical and Reimbursement (PS&R) System. In keeping with our policy on discharges, these case-mix index values are computed based on all Medicare patient discharges subject to DRG-based payment.

2. Discharges

Section 412.96(c)(2)(i) provides that CMS will set forth the national and regional numbers of discharges in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. As specified in section 1886(d)(5)(C)(ii) of the Act, the national standard is set at 5,000 discharges. However, in the May 4 proposed rule, we proposed to update the regional standards based on discharges for urban hospitals' cost reporting periods that began during FY 2000 (that is, October 1, 1999 through September 30, 2000). (The proposed rule language erroneously cited the period as FY 1999 (October 1, 1998 through September 30, 1999.) That is the latest year for which we have complete discharge data available.

Therefore, we proposed that, in addition to meeting other criteria, a hospital, if it is to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2001, must have as the number of discharges for its cost reporting period that began during FY 2000 a figure that is at least—

  • 5,000; or
  • The median number of discharges for urban hospitals in the census region in which the hospital is located. (See the table set forth in the May 4, 2001 proposed rule at 66 FR 22687.)Start Printed Page 39878

Based on the latest discharge data available for FY 2000, the final median number of discharges for urban hospitals by census region areas are as follows:

RegionNumber of Discharges
1. New England (CT, ME, MA, NH, RI, VT)7,064
2. Middle Atlantic (PA, NJ, NY)8,488
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA,WV)8,562
4. East North Central (IL, IN, MI, OH, WI)7,616
5. East South Central (AL, KY, MS, TN)6,276
6. West North Central (IA, KS, MN, MO, NE, ND, SD)5,210
7. West South Central (AR, LA, OK, TX)6,196
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)8,878
9. Pacific (AK, CA, HI, OR, WA)7,106

We reiterate that an osteopathic hospital, if it is to qualify for rural referral center status for cost reporting periods beginning on or after October 1, 2001, must have at least 3,000 discharges for its cost reporting period that began during FY 2000.

We did not receive any comments on the criteria for rural referral centers.

C. Indirect Medical Education (IME) Adjustment (§ 412.105)

1. IME Adjustment Factor Formula Multiplier (Section 111 of Public Law 106-113 and section 302 of Public Law 106-554 and § 412.105(d)(3)).

Section 1886(d)(5)(B) of the Act provides that prospective payment hospitals that have residents in an approved graduate medical education (GME) program receive an additional payment to reflect the higher indirect operating costs associated with GME. The regulations regarding the calculation of this additional payment, known as the indirect medical education (IME) adjustment, are located at § 412.105. The additional payment is based in part on the applicable IME adjustment factor. The IME adjustment factor is calculated using a hospital's ratio of residents to beds, which is represented as r, and a multiplier, which is represented as c, in the following equation: c × [(1 + r).405−1]. The formula is traditionally described in terms of a certain percentage increase in payment for every 10-percent increase in the resident-to-bed ratio.

Section 302 of Public Law 106-554 amended section 1886(d)(5)(B) of the Act to modify the transition for the IME formula multiplier, or c, that was first established by Public Law 105-33 and revised by Public Law 106-113.

As discussed in the August 1, 2000 final rule and the June 13, 2001 interim final rule with comment period, section 111(a) of Public Law 106-113 revised the formula multiplier for discharges occurring during FY 2001 (established under Public Law 105-33 at 1.6) to 1.54. However, section 302(b) of Public Law 106-554 provides a special payment rule which states that, for discharges occurring on or after April 1, 2001 and before October 1, 2001, IME payments are to be made as if ‘c’ equaled 1.66, rather than 1.54. The multiplier of 1.54 for the first 6 months of FY 2001 represents a 6.25 percent increase in the level of the IME adjustment for every 10 percent increase in the resident-to-bed ratio, and the multiplier for the second 6 months of FY 2001 represents a 6.75 percent increase in the level of the IME adjustment for every 10 percent increase in the resident-to-bed ratio. This results in an aggregate 6.5 percent increase for every 10 percent increase in the resident-to-bed ratio for FY 2001. Section 547(a)(2) of Public Law 106-554 provides further clarification that these payment increases will not apply to discharges occurring after FY 2001 and will not be taken into account in calculating the payment amounts applicable for discharges occurring after FY 2001. In the June 13 interim final rule, we revised § 412.105(d)(3)(v) to reflect the additional payment provided for discharges occurring during FY 2001 under section 302(b) of Public Law 106-554.

As discussed in the May 4, 2001 proposed rule, section 302(a) of Public Law 106-554 provides that, for discharges occurring during FY 2002, the formula multiplier is 1.6. For discharges occurring during FY 2003 and thereafter, the formula multiplier is 1.35. As explained above, section 302(b) of Public Law 106-554 provides for a special payment rule which states that, for discharges occurring on or after April 1, 2001 and before October 1, 2001, IME payments are to be made as if “c” equaled 1.66 rather than 1.54. The multiplier of 1.6 for FY 2002 represents a 6.5 percent increase for every 10 percent increase in the resident-to-bed ratio. The multiplier for FY 2003 and thereafter (1.35) represents a 5.5-percent increase for every 10-percent increase in the resident-to-bed ratio. In the May 4 proposed rule, we proposed to revise § 412.105(d)(3)(vi) to reflect the change in the formula multiplier for FY 2002 to 1.6 as made by section 302(a) of Public Law 106-554 for discharges occurring during FY 2002. We also proposed to add § 412.105(d)(3)(vii) to incorporate the formula multiplier of 1.35 for discharges occurring on or after October 1, 2002.

We did not receive any comments on the IME formula provisions of the June 13 interim final rule with comment period or the proposed amendments under the May 4 proposed rule. Therefore, we are adopting both changes to § 412.105(d)(3) as final without change.

2. Resident-to-Bed Ratio Cap (§ 412.105(a)(1))

In the May 4, 2001 proposed rule, we indicated that it had come to our attention that there is some misunderstanding about § 412.105(a)(1) regarding the determination of the resident-to-bed ratio that is used in calculating the IME adjustment. Section 4621(b)(1) of Public Law 105-33 amended section 1886(d)(5)(B) of the Act by adding a new clause (vi) to provide that, effective for cost reporting periods beginning on or after October 1, 1997, the resident-to-bed ratio may not exceed the ratio calculated during the prior cost reporting period (after accounting for the cap on the hospital's number of full-time equivalent (FTE) residents). We implemented this policy in the August 29, 1997 final rule with comment period (62 FR 46003) and the May 12, 1998 final rule (63 FR 26323) under regulations at § 412.105(a)(1). Existing § 412.105(a)(1) specifies that “[e]xcept for the special circumstances for affiliated groups and new programs described in paragraphs (f)(1)(vi) and (f)(1)(vii) of this section, for a hospital's cost reporting periods beginning on or Start Printed Page 39879after October 1, 1997, this ratio may not exceed the ratio for the hospital's most recent prior cost reporting period.” In the May 4 proposed rule, we proposed to clarify § 412.105(a)(1) to add a provision that this ratio may not exceed the ratio for the hospital's most recent prior cost reporting period after accounting for the cap on the number of FTE residents.

In general, the resident-to-bed ratio from the prior cost reporting period, which is to be used as the cap on the resident-to-bed ratio for the current payment cost reporting period, should only include an FTE count subject to the FTE cap on the number of allopathic and osteopathic residents, but is not subject to the rolling average. (An explanation of rolling average appears in section IV.H.3. of this preamble.)

The following illustrates the steps for determining the resident-to-bed ratio for the current payment year cost reporting period and the cap on the resident-to-bed ratio:

Current payment year cost reporting period resident-to-bed ratio:

Step 1. Determine the hospital's number of FTE residents in the current payment year cost reporting period.

Step 2. Compare the number of allopathic and osteopathic FTEs from step 1 to the hospital's FTE cap (§ 412.105(f)(1)(iv)). If the number of allopathic and osteopathic FTEs from step 1 exceeds the FTE cap, replace it with the number of FTEs in the FTE cap. Add any dental and podiatry FTEs from step 1 to the capped allopathic and osteopathic FTE count.

Step 3. Determine the 3-year rolling average of the FTE residents using the FTEs from the current payment year cost reporting period and the prior two cost reporting periods (subject to the FTE cap in each cost reporting period). (Include podiatry and dental residents, and exclude residents in new programs in accordance with § 412.105(f)(1)(iv) and revised (f)(1)(v). Residents in new programs are added to the quotient of the rolling average.)

Step 4. Determine the hospital's number of beds (see § 412.105(b)) in the current payment year cost reporting period.

Step 5. Determine the ratio of the number of FTEs from step 3 to the number of beds from step 4. The lower of this resident-to-bed ratio or the resident-to-bed ratio cap (calculated below) from the immediately preceding cost reporting period is used to calculate the hospital's IME adjustment factor for the current payment year cost reporting period.

Resident-to-bed ratio cap:

Step 1. Determine the hospital's number of FTE residents in its cost reporting period that immediately precedes the current payment year cost reporting period.

Step 2. Compare the number of allopathic and osteopathic FTEs from step 1 to the hospital's FTE cap. If the number of allopathic and osteopathic FTEs from step 1 exceeds the FTE cap, replace it with the number of FTEs in the FTE cap. Add any dental and podiatry FTEs from step 1 to the capped allopathic and osteopathic FTE count. (If there is an increase in the number of FTEs in the current payment year cost reporting period due to a new program or an affiliation agreement, these FTEs are added to FTEs in the preceding cost reporting period after applying the FTE cap.)

Step 3. Determine the hospital's number of beds (§ 412.105(b)) in its cost reporting period that immediately precedes the current payment year cost reporting period.

Step 4. Determine the ratio of the number of FTEs in step 2 to the number of beds in step 3. This ratio is the resident-to-bed ratio cap for the current payment year cost reporting period.

Step 5. Compare the resident-to-bed ratio cap in step 4 to the resident-to-bed ratio in the current payment year cost reporting period. The lower of the resident-to-bed ratio from the current payment year cost reporting period or the resident-to-bed ratio cap from the immediately preceding cost reporting period is used to calculate the hospital's IME adjustment factor for the current payment year cost reporting period.

We note that the resident-to-bed ratio cap is a cap on the resident-to-bed ratio calculated for all residents, including allopathic, osteopathic, dental, and podiatry residents (63 FR 26324, May 12, 1998). However, as described in existing § 412.105(a)(1), the resident-to-bed ratio cap may be adjusted to reflect an increase in the current cost reporting period's resident-to-bed ratio due to residents in a new GME program or an affiliation agreement. While an exception does not apply if the resident-to-bed ratio increases because of an increase in the number of podiatry or dentistry residents or because of a change in the number of beds, the ratio could increase after a one-year delay. An increase in the current cost reporting period's ratio (while subject to the FTE cap on the overall number of allopathic and osteopathic residents) thereby establishes a higher cap for the following cost reporting period.

The following is an example of the application of the cap on the resident-to-bed ratio:

Example—Part 1:

  • Assume Hospital A has 50 FTEs in its cost reporting period ending September 30, 1996, thereby establishing an IME FTE resident cap of 50 FTEs.
  • In its cost reporting period of October 1, 1996 to September 30, 1997 (the prior year), it has 50 FTEs and 200 beds, so that its resident-to-bed ratio for this period is 50/200 = .25.
  • In the (current year) cost reporting period of October 1, 1997 to September 30, 1998 (the first cost reporting period in which the FTE resident cap, the resident-to-bed ratio cap, and the rolling average apply), Hospital A has 50 FTEs and 200 beds.
  • Hospital A's FTEs do not exceed its FTE cap, so its current number of FTEs (50) is used to calculate the 2-year rolling average: (50 + 50)/2 = 50.
  • The result of the rolling average is used as the numerator of the resident-to-bed ratio. Thus, the resident-to-bed ratio is 50/200 = .25.
  • .25 is compared to the resident-to-bed ratio from the prior period of October 1, 1996 to September 30, 1997. Because the FTE resident cap and the rolling average were not yet effective in the period of October 1, 1996 to September 30, 1997, that period s resident-to-bed ratio does not have to be recalculated to account for the FTE resident cap. Accordingly, the resident-to-bed ratio cap for October 1, 1997 to September 30, 1998 is .25.
  • Because the resident-to-bed ratio does not exceed the prior year ratio, Hospital A would use the resident-to-bed ratio of .25 to determine the IME adjustment in its cost reporting period of October 1, 1997 to September 30, 1998.

Example—Part 2:

  • In the (current year) cost reporting period of October 1, 1998 to September 30, 1999, Hospital A adds 1 podiatric and 1 dental resident, so that it has a total of 52 FTEs and 200 beds. Since the FTE resident cap only includes allopathic and osteopathic residents, Hospital A has not exceeded its FTE resident cap with the addition of a podiatric and a dental resident.
  • Accordingly, the (now) 3-year rolling average would be (52 + 50 + 50)/3 = 50.67.
  • 50.67 is used in the numerator of the current payment year's resident-to-bed ratio, so that the resident-to-bed ratio is 50.67/200 = .253.
  • .253 is compared to the resident-to-bed ratio from the prior year's cost reporting period of October 1, 1997 to September 30, 1998 that is recalculated to account for the FTE resident cap. Because Hospital A did not exceed its FTE resident cap of 50 FTEs in this period of October 1, 1997 to September 30, 1998, the recalculated resident-to-bed ratio would be 50/200 = .25.
  • Compare the current year resident-to-bed ratio (.253) to the resident-to-bed ratio cap (.25); .253 does exceed .25.
  • Therefore, the resident-to-bed ratio in the period of October 1, 1998 to September 30, 1999 is capped at .25, which is to be used in calculating Hospital A s IME adjustment for October 1, 1998 to September 30, 1999.

Example—Part 3:

  • In the cost reporting period of October 1, 1999 to September 30, 2000, Hospital A adds Start Printed Page 398802 internal medicine residents so that it has a total of 54 FTEs and 200 beds. While podiatric and dental residents are not included in the FTE resident cap, internal medicine residents are included. Hospital A has exceeded its IME FTE resident cap of 50 by 2 FTEs. Thus, 2 FTEs are excluded from the FTE count.
  • Accordingly, the rolling average would be (52 + 52 + 50)/3 = 51.33.
  • 51.33 is used in the numerator of the resident-to-bed ratio, so that the resident-to-bed ratio is 51.33/200 = .257.
  • .257 is compared to the resident-to-bed ratio from October 1, 1998 to September 30, 1999 that is recalculated to only account for the FTE resident cap. The recalculated resident-to-bed ratio would be 50 allopathic or osteopathic FTEs plus 1 podiatric and 1 dental resident, which is 52/200 = .26.
  • .26 is the resident-to-bed ratio cap for October 1, 1999 to September 30, 2000. .257 does not exceed .26.
  • Therefore, the resident-to-bed ratio in the period of October 1, 1998 to September 30, 1999 is .257, which is to be used in calculating this period s IME adjustment.

If a hospital starts a new GME program, the adjustment to the resident-to-bed ratio cap applies for the period of years equal to the minimum accredited length for each new program started. (For example, for a new internal medicine program, the period of years equals 3; for a new surgery program, the period of years equals 5.) Within these program years, the number of new FTE residents in the current cost reporting period is added to the FTE resident count used in the numerator of the resident-to-bed ratio from the previous cost reporting period. The lower of the resident-to-bed ratio from the current cost reporting period or the adjusted resident-to-bed ratio from the preceding cost reporting period is used to calculate the hospital's IME adjustment for the current cost reporting period. If a hospital subsequently continues to expand its program, the numerator of the resident-to-bed ratio from the preceding cost reporting period would not be adjusted to reflect these additional residents. However, an increase in the ratio of the current cost reporting period would establish a higher cap for the following cost reporting period.

We also proposed to add a provision that the exception for new programs described in § 412.105(f)(1)(vii) applies for the period of years equal to the minimum accredited length for each new program.

Similarly, if a hospital increases the number of FTE residents in the current cost reporting period because of an affiliation agreement, the number of additional FTEs is added to the FTE resident count used in the numerator of the resident-to-bed ratio from the previous cost reporting period. The lower of the resident-to-bed ratio from the current cost reporting period or the adjusted resident-to-bed ratio from the preceding cost reporting period is used to calculate the hospital's IME adjustment for the current cost reporting period.

Comment: Several commenters addressed our clarifications to the regulations at § 412.105(a)(1) regarding the cap on the resident-to-bed ratio. One commenter stated that the explanation in the proposed rule regarding the resident-to-bed ratio was thorough. Another commenter expressed appreciation for the inclusion of examples in the proposed rule's preamble. One commenter noted that, in the proposed rule under step 2 of the example of the calculation of the resident-to-bed ratio cap, we indicate that the lesser of the prior year FTEs or the FTE cap is used in the numerator of the resident-to-bed ratio. The commenter noted that we do not specify that, while the FTE cap only applies to allopathic and osteopathic FTEs, dentistry and podiatry FTEs should be included in the numerator of the resident-to-bed ratio. The commenter asked that we specify that the prior year podiatry and dentistry FTEs must be added to the FTE count used in the resident-to-bed ratio after the FTE cap has been applied.

Response: We agree with the commenter concerning the inclusion of dental and podiatry FTEs in step 2, and we have clarified the language in step 2 of the examples of both the current year resident-to-bed ratio and the resident-to-bed ratio cap calculation in the preamble of this final rule. Specifically, we state, “Compare the number of allopathic and osteopathic FTEs from step 1 to the hospital's FTE cap. If the number of allopathic and osteopathic FTEs from step 1 exceeds the FTE cap, replace it with the FTE cap. Add any dental or podiatry FTEs from step 1 to the capped allopathic and osteopathic FTE count.” Furthermore, we are revising the proposed changes to the regulations text at § 412.105(a)(1) to state that “. . . this ratio may not exceed the ratio for the hospital's most recent prior cost reporting period after accounting for the cap on the number of allopathic and osteopathic residents as described in paragraph (f)(1)(iv) of this section, and adding to the capped numerator any dental and podiatric full-time equivalent residents. . . .”

Comment: One commenter noted that, in clarifying the regulations at § 412.105(a)(1) regarding the resident-to-bed ratio cap, we added that the exception to the resident-to-bed ratio cap “. . . for new programs . . . applies for the period of years equal to the minimum accredited length for that type of program” (emphasis added). The commenter asked how we would apply the exception to the resident-to-bed ratio cap in a situation where a hospital has started several new programs with varying minimum accredited lengths.

Response: The exception at proposed § 412.105(a)(1) for new programs allows a hospital to add a full complement of residents and complete the initial cycle of a program before residents in the new programs are included in the application of the resident-to-bed ratio cap. In a situation where a hospital has started several new programs under § 412.105(f)(1)(vii), we would apply the exception to the resident-to-bed ratio cap to each new program individually based on each program's minimum accredited length. For example, if a hospital simultaneously starts a new internal medicine program (which has a minimum accredited length of 3 years) and an anesthesiology program (which has a minimum accredited length of 4 years), the FTE residents in the new internal medicine program will be subject to the resident-to-bed ratio cap in the fourth program year of the internal medicine program, while the anesthesiology FTE residents would still be excluded from the resident-to-bed ratio cap in the fourth program year of the anesthesiology programs. However, in subsequent program years, the anesthesiology FTE residents would be subject to the resident-to-bed ratio cap, as well.

The rules regarding the exception from the rolling average calculation for IME are the same for direct GME. The proposed revised regulations at § 412.105(f)(1)(v) and § 413.86(g)(5) in the May 4, 2001 proposed rule state that FTE residents in a new program are excluded from the rolling average calculation for the period of years equal to the minimum accredited length for the type of program. In this final rule, we are revising the regulations regarding the exceptions to the resident-to-bed ratio cap and the rolling average calculation for both IME and direct GME to clarify that these exceptions apply to each new program individually for which the FTE cap may be adjusted based on each program's minimum accredited length (§ 412.105(a)(1), 412.105(f)(1)(v), and 413.86(g)(5)(v)).

Comment: One commenter asserted that, in the proposed rule, it is inconsistent to account for both the FTE cap and the rolling average count of residents in the current year resident-to-bed ratio, but account for only the FTE cap in the resident-to-bed ratio cap Start Printed Page 39881(which is the prior year's ratio). The commenter stated that their willingness to support the proposed rule depended on whether the residency program is increasing or decreasing its FTEs every year.

Response: Section 1886(d)(5)(B)(v)(I) of the Act, as amended by Public Law 105-33, states that the resident-to-bed ratio “may not exceed the ratio of the number of interns and residents, subject to the limit under clause (v), with respect to the hospital for its most recent cost reporting period to the hospital's available beds . . . during that cost reporting period . . .” (emphasis added). Clause (v) is the FTE cap requirement; the statute does not specify clause (vi)(II), which is the rolling average requirement, in relation to the resident-to-bed ratio cap. Accordingly, the implementing regulations require that the resident-to-bed ratio cap should only account for the cap on the number of FTEs.

In addition, we note that the commenter is mistaken in indicating that the rules regarding the determination of the resident-to-bed ratio and the resident-to-bed ratio cap are proposed rules. These rules have been in place based on the statute since the effective date of Public Law 105-33. We simply took the opportunity in the proposed rule published on May 4, 2001 to further clarify our existing policy because we realized that there was some confusion surrounding these rules.

Comment: One commenter noted that, since under the provisions of § 413.86(g)(6)(i), the FTE cap for new programs is established based on the number of residents in the third year of the first program's existence, it follows that the FTE cap on the residents in the new programs is effective in the fourth program year. The commenter asked if the application of the cap is delayed until the expiration of the minimum accredited length of the new programs.

Response: The application of the FTE adjusted caps for new programs under § 413.86(g)(6)(i) and (g)(6)(ii) are not delayed until the expiration of the minimum accredited length of the new programs. Only the application of the resident-to-bed ratio cap for IME and the rolling average for both IME and direct GME are dependent upon the minimum accredited length of each new program. The regulations at § 413.86(g)(6)(i) state that the cap for new programs will be adjusted based on “the product of the highest number of residents in any program year during the third year of the first program's existence for all new residency training programs and the number of years in which residents are expected to complete the program based on the minimum accredited length for the type of program” (emphasis added). In general, when a hospital qualifies for a cap adjustment under § 413.86(g)(6)(i), the hospital has three years from the time that a resident first begins training in the first new program to establish its FTE cap. The first day of the fourth program year, the FTE cap on that first program, and any other programs that may have been started within the initial three years of that first program, is permanently established and takes effect.

For example, if a hospital that qualifies for a cap adjustment under § 413.86(g)(6)(i) starts a newly accredited dermatology program on July 1, 2001, and then starts a newly accredited anesthesiology program on July 1, 2002, the cap for both programs, and for the hospital as a whole, will be adjusted as of July 1, 2004, the first day of the fourth program year of dermatology, which is the first program that the hospital started. The hospital's cap will be based on the sum of: (a) The product of the highest number of residents in either PGY1, PGY2, or PGY3 in the third year of the dermatology program and 4 years (the minimum accredited length of dermatology); and (b) the product of the highest number of residents in either PGY1 or PGY2 for the anesthesiology program and 4 years (the minimum accredited length for anesthesiology). Any programs begun after the first program's start date but before the fourth program year of the first program will not have a full 3 years before the hospital's cap is permanently adjusted.

The rules under § 413.86(g)(6)(ii) differ for hospitals that qualify for an FTE cap adjustment for new programs started on or after January 1, 1995 and on or before August 5, 1997. Section 413.86(g)(6)(ii) states that the FTE cap adjustment is “based on the product of the highest number of residents in any program year during the third year of the newly established program and the number of years in which residents are expected to complete the program based on the minimum accredited length for the type of program” (emphasis added). In contrast to hospitals that qualify for a cap adjustment under § 413.86(g)(6)(i), where the cap for the hospital takes effect for all programs in the fourth program year of the first program that was started by the hospital, hospitals that qualify for an FTE cap adjustment under § 413.86(g)(6)(ii) have a full 3 years to grow each new program, as long as those programs all started training residents or received accreditation between January 1, 1995 and on or before August 5, 1997. The adjustment to the cap for each of those new programs would be applied individually, beginning with the first day of the fourth program year of each new program. (We note that rural hospitals that qualify for a cap adjustment under § 413.86(g)(6)(iii) may receive an FTE cap adjustment in the same manner as hospitals that qualify for the cap adjustment under § 413.86(g)(6)(ii), except that rural hospitals may receive this adjustment for programs started after August 5, 1997).

For example, assume a hospital that qualifies for a cap adjustment under § 413.86(g)(6)(ii) started a newly accredited internal medicine program on July 1, 1996, and a newly accredited dermatology program on July 1, 1997. The adjustment to the hospital's FTE cap because of the internal medicine program was effective July 1, 1999 (the first day of the fourth program year of internal medicine), and the cap adjustment resulting from the dermatology program was effective July 1, 2000 (the first day of the fourth program year for dermatology). The hospital's ultimate FTE cap is the sum of the FTE cap based on FTEs in the hospital's most recent cost reporting period ending on or before December 31, 1996, and the cap adjustments for the internal medicine and dermatology programs. (We note that since the internal medicine program began in 1996, depending on the hospital's cost reporting period, a portion of those FTEs may have already been included in the hospital's FTE cap. That portion that was included in the FTE cap must be subtracted from the cap adjustment that was calculated for the internal medicine program to avoid any double counting of the FTEs). The hospital's adjusted cap will be based on the sum of: (a) the product of the highest number of internal medicine residents in either PGY1, PGY2, or PGY3 in the third year of the internal medicine program and three (the minimum accredited length of internal medicine); and (b) the product of the highest number of dermatology residents in either PGY1, PGY2, or PGY3 for the dermatology program and four (the minimum accredited length for dermatology).

In summary, we reiterate that the application of the FTE cap adjustments for new programs is not delayed until the program year in which the minimum accredited length of each program expires. This would even apply to a new program with a minimum accredited length that exceeds 3 years. The FTE cap adjustment takes effect on the first day of the fourth program year of the first new program that was started Start Printed Page 39882by hospitals qualifying for a cap adjustment under § 413.86(g)(6)(i). For hospitals qualifying for a cap adjustment under § 413.86(g)(6)(ii) and (g)(6)(iii), the cap adjustments take effect on the first day of the fourth program year of each new program. However, the application of the resident-to-bed ratio cap for IME and the rolling average for both IME and direct GME are dependent upon the minimum accredited length of each new program.

Comment: With regard to the counting of residents for IME payment purposes in nonhospital sites, one commenter stated that although time spent in nonhospital sites may be included in the IME FTE count effective for discharges occurring on or after October 1, 1997, the application of the 1996 FTE cap effectively disallows the current year's FTEs training in the nonhospital site, because the 1996 FTE cap was based on residents training only in the hospital. The commenter added that only those hospitals that are in a position to elect a Medicare affiliation agreement are able to “circumvent” the 1996 FTE limit; those that cannot are “penalized.” The commenter further stated that the regulatory intent of allowing nonhospital training time to be counted is not fully met by having only certain hospitals able to affiliate. The commenter recommended that we should allow hospitals to recalculate the 1996 IME FTE cap to include those FTEs training in nonhospital sites, so that hospitals will effectively be able to count residents currently training in nonhospital sites for IME purposes.

Response: The commenter is addressing a provision in Public Law 105-33 that was implemented in regulations at § 412.105(f)(1)(ii)(C). We did not propose any substantive changes to this policy; we simply were correcting an oversight in the regulations text for IME. (Comments on regulations implementing this provision were addressed in the May 12, 1998 final rule (63 FR 26323) and the July 31, 1998 final rule (63 FR 40954).)

3. Conforming Changes (§ 412.105(f)(1)(ii)(C) and (f)(1)(v))

In the August 29, 1997 final rule with comment period (62 FR 46003), the May 12, 1998 final rule (63 FR 26323), and the July 31, 1998 final rule (63 FR 40986), to implement the provisions of Public Law 105-33, we set forth certain policies that affected payment for both direct and indirect GME. Some of these policies related to the FTE cap on allopathic and osteopathic residents, the rolling average, and payment for residents training in nonhospital settings. In the May 4 proposed rule, we indicated that when we amended the regulations under § 413.86 for direct GME, we inadvertently did not make certain conforming changes in § 412.105 for IME. We proposed to make the following conforming changes:

  • To revise § 412.105(f)(1)(ii)(C) to specify that, effective for discharges occurring on or after October 1, 1997, the time residents spend training in a nonhospital setting in patient care activities under an approved medical residency training program may be counted towards the determination of full-time equivalency if the criteria set forth at § 413.86(f)(3) or § 413.86(f)(4), as applicable, are met.
  • To revise § 412.105(f)(1)(v) to specify that residents in new residency programs are not included in the rolling average for a period of years equal to the minimum accredited length for the type of program.

In addition, we proposed to revise § 412.105(f)(1)(ix) to specify, for IME purposes, a temporary adjustment to a hospital's FTE cap to reflect residents added because of another hospital's closure of its medical residency program (to conform to the May 4, 2001 proposed change for GME discussed in section IV.H.5. of this preamble).

We did not receive any comments on these conforming changes and are adopting them as final.

D. Payments to Disproportionate Share Hospitals (DSH) (Sections 211 and 303 of Public Law 106-554 and § 412.106)

Effective for discharges beginning on or after May 1, 1986, hospitals that serve a disproportionate number of low-income patients (the DSH patient percentage as defined in section 1886(d)(5)(F) of the Act) receive additional payments through the DSH adjustment. Hospitals that meet the DSH patient percentage criteria are entitled to the DSH payment adjustment.

1. Qualifying Thresholds for DSHs

In the June 13, 2001 interim final rule with comment period, we discussed the provisions of section 1886(d)(5)(F)(v) of the Act, as it existed prior to enactment of Public Law 106-554 and under § 412.106(c) of the existing regulations, which provided that a hospital qualified for DSH if the hospital had a DSH patient percentage equal to:

  • At least 15 percent for an urban hospital with 100 or more beds or a rural hospital with 500 or more beds;
  • At least 40 percent for an urban hospital with fewer than 100 beds;
  • At least 45 percent for a rural hospital with 100 beds or fewer, if it is not also classified as an SCH;
  • At least 30 percent for a rural hospital with more than 100 beds and fewer than 500 beds or which is classified as an SCH; or
  • The hospital has 100 or more beds, is located in an urban area, and receives more than 30 percent of its net inpatient revenues from State and local government sources for the care of indigent patients not eligible for Medicare or Medicaid.

Section 211(a) of Public Law 106-554 amended section 1886(d)(5)(F)(v) to provide that, beginning with discharges occurring on or after April 1, 2001, the qualifying threshold is reduced to 15 percent for all hospitals. Therefore, in the June 13 interim final rule, we revised § 412.106(c) to reflect the change in DSH qualifying threshold percentages.

Comment: Several commenters responded on the subject of the calculation of the DSH payment adjustment. These commenters were concerned about how to apply the threshold changes as of April 1, 2000. They were also concerned about counting days in the calculation when a stay crosses over two cost reporting periods. Finally, these commenters were concerned about counting section 1115 expansion waiver days in the DSH payment adjustment calculation.

Response: Section 211(a) of Public Law 106-554 amended section 1886(d)(5)(F) of the Act to change the qualifying thresholds for the DSH payment adjustment to 15 percent for all hospital types, effective with discharges occurring on or after April 1, 2001. This means that the legislation is effective with discharges occurring on or after April 1, 2001, but not before. Therefore, fiscal intermediaries are required to determine whether a hospital meets the thresholds in place either before or after April 1, 2001, by applying the DSH patient percentage in the formula to each separate period. Days are counted based on the date of discharge. In other words, a hospital stay would be counted in the cost reporting year during which the patient was discharged.

Finally, counting section 1115 expansion waiver days in the DSH payment adjustment calculation was discussed in the August 1, 2000 Federal Register (65 FR 47086). This policy became effective for discharges occurring on or after January 20, 2000. Therefore, it is possible that a hospital will qualify for DSH payments as of January 20, 2000, whereas it did not qualify before January 20, 2000, and it should be paid accordingly. In other words, a hospital in that situation would receive Medicare DSH payments beginning January 20, 2000.Start Printed Page 39883

2. Calculation of the DSH Payment Adjustment

Section 211(b) of Public Law 106-554 further amended section 1886(d)(5)(F) to revise the calculation of the DSH payment adjustment for hospitals affected by the revised thresholds as specified in section 211(a) of the Act. In the June 13 interim final rule with comment period, we discussed these adjustments, which are effective for discharges occurring on or after April 1, 2001, as follows:

  • Urban hospitals with fewer than 100 beds and whose DSH patient percentage is equal to or greater than 15 percent and less than 19.3 percent receive the DSH payment adjustment determined using the following formula:

(DSH patient percentage − 15) (.65) + 2.5.

  • Urban hospitals with fewer than 100 beds and whose DSH patient percentage is equal to or greater than 19.3 percent receive a flat add-on of 5.25 percent.
  • Rural hospitals that are both rural referral centers and SCHs receive the DSH payment adjustment determined using the higher of the SCH adjustment or the rural referral center adjustment.
  • Rural hospitals that are SCHs and are not rural referral centers and whose DSH patient percentage is equal to or greater than 15 percent and less than 19.3 percent receive the DSH payment adjustment determined using the following formula:

(DSH patient percentage − 15) (.65) + 2.5.

  • Rural hospitals that are SCHs and are not rural referral centers and whose DSH patient percentage is equal to or greater than 19.3 percent and less than 30 percent receive a flat add-on of 5.25 percent.
  • Rural hospitals that are SCHs and are not rural referral centers and whose DSH patient percentage is equal to or greater than 30 percent receive 10 percent.
  • Rural referral centers whose DSH patient percentage is greater than or equal to 15 percent and less than 19.3 percent receive the DSH payment adjustment determined using the following formula:

(DSH patient percentage − 15) (.65) + 2.5.

  • Rural referral centers whose DSH patient percentage is equal to or greater than 19.3 percent but less than 30 percent receive a flat add-on of 5.25 percent.
  • Rural referral centers whose DSH patient percentage is equal to or greater than 30 percent receive the DSH payment adjustment determined using the following formula:

(DSH patient percentage—30) (.6) + 5.25.

  • Rural hospitals with fewer than 500 beds and whose DSH patient percentage is equal to or greater than 15 percent and less than 19.3 percent receive the DSH payment adjustment using the following formula:

(DSH patient percentage—15) (.65) + 2.5.

  • Rural hospitals with fewer than 500 beds and whose DSH patient percentage is equal to or greater than 19.3 percent receive a flat add-on of 5.25 percent.

If we calcqulate DSH patient percentages to the hundredth place (our current practice), these payment formulas result in an anomaly for some DSH patient percentages just below 19.3 percent (but greater than 19.2 percent). That is, as the percentage values approach 19.3, the DSH payment adjustment resulting from the formula exceeds 5.25 percent. This would result in a higher DSH payment adjustment for DSH patient percentages just below 19.3 than for percentages of 19.3 and above. We stated in the June 13 interim final rule that, because we believe it would be contrary to the Congress' intent for hospitals with a DSH patient percentage of less than 19.3 percent to receive a greater payment than those hospitals of the same class that have a DSH patient percentage of 19.3 or greater, we were implementing this provision so that, for DSH patient percentages below 19.3 for affected hospitals, the DSH payment adjustment will not exceed 5.25 percent.

In the June 13 interim final rule with comment period, we revised § 412.106(d) to reflect the changes in the disproportionate share adjustment.

3. Percentage Reduction to the DSH Payment Adjustment

Section 1886(d)(5)(F)(ix) of the Act, as amended by section 112 of Public Law 106-113, specifies a percentage reduction in the payments a hospital would otherwise receive under the DSH payment adjustment formula. Prior to enactment of section 303 of Public Law 106-554, the reduction percentages were as follows: 3 percent for FY 2001, 4 percent for FY 2002, and 0 percent for FY 2003 and each subsequent fiscal year.

Section 303 of Public Law 106-554 revised the amount of the percent reductions to 2 percent for discharges occurring in FY 2001, and to 3 percent for discharges occurring in FY 2002. The reduction continues to be 0 percent for FY 2003 and each subsequent fiscal year. Section 303 of Public Law 106-554 contains a special rule for FY 2001: For discharges occurring on or after October 1, 2000 and before April 1, 2001, the reduction is to be 3 percent, and for discharges occurring on or after April 1, 2001 and before October 1, 2001, the reduction is to be 1 percent. Changes made by section 303 with respect to FY 2001 discharges were implemented in the June 13, 2001 interim final rule with comment period.

We are adopting as final the revisions to § 412.106(e) to reflect the change in the percentages made by section 303 of Public Law 106-554 that were included in the May 4, 2001 proposed rule and in the June 13, 2001 interim final rule with comment period. We also are making a technical change in the heading of paragraph (e).

E. Medicare-Dependent, Small Rural Hospitals (Section 404 of Public Law 106-113 and section 212 of Public Law 106-554 and 42 CFR 412.90(j) and 412.108)

Section 6003(f) of the Omnibus Budget Reconciliation Act of 1989 (Public Law 101-239) added section 1886(d)(5)(G) to the Act and created the category of Medicare-dependent, small rural hospital (MDH) that are eligible for a special payment adjustment under the hospital inpatient prospective payment system. Section 1886(d)(5)(G) of the Act define an MDH as any hospital that meets all of the following criteria:

  • The hospital is located in a rural area.
  • The hospital has 100 or fewer beds.
  • The hospital is not classified as an SCH (as defined at § 412.92).
  • In the hospital's cost reporting period that began during FY 1987, not less than 60 percent of its inpatient days or discharges were attributable to inpatients entitled to Medicare Part A benefits. If the cost reporting period is for less than 12 months, the hospital's most recent 12-month or longer cost reporting period before the short period is used.

(For a more detailed discussion, see the April 20, 1990 Federal Register (55 FR 15154)).

As provided by the law, MDHs were eligible for a special payment adjustment under the prospective payment system, effective for cost reporting periods beginning on or after April 1, 1990 and ending on or before March 31, 1993. Hospitals classified as MDHs were paid using the same methodology applicable to SCHs, that is, based on whichever of the following rates yielded the greatest aggregate payment for the cost reporting period:

  • The national Federal rate applicable to the hospital.
  • The updated hospital-specific rate using FY 1982 cost per discharge.Start Printed Page 39884
  • The updated hospital-specific rate using FY 1987 cost per discharge.

Section 13501(e)(1) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66) extended the MDH provision through FY 1994 and provided that, after the hospital's first three 12-month cost reporting periods beginning on or after April 1, 1990, the additional payment to an MDH whose applicable hospital-specific rate exceeded the Federal rate was limited to 50 percent of the amount by which the hospital-specific rate exceeded the Federal rate.

Section 4204(a)(3) of Public Law 105-33 reinstated the MDH special payment for discharges occurring on or after October 1, 1997 and before October 1, 2001, but did not revise the qualifying criteria for these hospitals or the payment methodology.

Section 404(a) of Public Law 106-113 extended the MDH provision to discharges occurring on or after October 1, 2002 and before October 1, 2006. In the August 1, 2000 interim final rule with comment period, we revised §§ 412.90(j) and 412.108 to reflect the extension of the MDH program through FY 2006.

As specified in the June 13, 2001 interim final rule with comment period, section 212 of Public Law 106-554 provided that, effective with cost reporting periods beginning on or after April 1, 2001, hospitals have the option to base MDH eligibility on two of the three most recently audited cost reporting periods for which the Secretary has a settled cost report, rather than on the cost reporting period that began during FY 1987. According to section 212, the criteria for at least 60 percent Medicare utilization will be met if in at least “2 of the 3 most recently audited cost reporting periods for which the Secretary has a settled cost report”, at least 60 percent of the hospital's inpatient days or discharges were attributable to individuals receiving Medicare Part A benefits.

Hospitals that qualify under this provision are subject to the other provisions already in place for MDHs, that is, the payment methodology as defined in § 412.108(c) and the volume decrease provision as defined in § 412.108(d).

A hospital must notify its fiscal intermediary to be considered for MDH status under this new provision. Any hospital that believes it meets the criteria to qualify as an MDH, based on at least two of its three most recently settled cost reports, must submit a written request to its intermediary. The hospital's request must be submitted within 180 days from the date of the notice of amount of program reimbursement for the cost reporting period in question. The intermediary will make its determination and notify the hospital within 180 days from the date it receives the hospital's request and all of the required documentation.

In the June 13 interim final rule with comment period, we revised § 412.108(a)(1)(iii) to reflect the additional option provided by section 212 of Public Law 106-554.

We received one comment on the proposed regulation change.

Comment: One commenter representing a state hospital association expressed concern regarding the MDH qualifying process outlined in the interim final rule. The commenter questioned the timing of the process, especially that the hospital would be required to apply within 180 days from the date of the notice of program reimbursement and that the fiscal intermediary would have up to 180 days in which to make its decision. The commenter believed that this would not allow hospitals to qualify by the first cost reporting period beginning on or after the April 1, 2001, effective date of the new provision. The commenter also believed that this process would result in a lengthy period of time, perhaps 2-4 years while the cost report settlement and this process plays out. The commenter also believed the determination of whether or not a hospital meets the requirements to become an MDH under this new provision should be handled in manner consistent with that already in place. That is, fiscal intermediaries should automatically determine, using the cost report information they have, whether or not any additional hospitals would now qualify as an MDH under this new criteria, rather than putting the burden on the hospitals to apply for MDH status. The commenter also stated that the fiscal intermediaries require instruction regarding the calculation of the payment rates in order to determine which would most benefit the MDHs. The commenter also believed that the impact analysis understates the number of newly eligible hospitals under the new MDH provision.

Response: We disagree with the commenter that the process for approval of new MDHs could take as long as 2 to 4 years. We do agree with this commenter that hospitals' requests for consideration under this provision need not be limited to requests submitted within 180 days of the issuance of a notice of amount of program reimbursement, and we are deleting this requirement from § 412.108(b). This will eliminate any unintended delay in the time when hospitals could request MDH status. Therefore, hospitals are free to request MDH status at any time. We also are revising the time provided for fiscal intermediaries to make their determination, from 180 days to 90 days. We believe this will provide sufficient time for review while being responsive to the commenter's concern that the process not be too lengthy. Similar to the approval period for SCHs as described above, MDH status and the associated payment adjustment are effective 30 days after written notification to the MDH.

We believe it is most appropriate, and consistent with procedures for SCH and rural referral center designation, to require hospitals to request consideration as a MDH, rather than placing this requirement with the fiscal intermediaries. We will further clarify the MDH policy and process, including the change noted above, through future Program Memoranda.

With respect to the commenter's concern that our impact analysis underestimates the number of newly eligible hospitals under the new provision, we noted in the June 13, 2001 interim final rule with comment period that our most recent data available were 1998, and we were, therefore, unable to estimate the impacts using more recent data. Therefore, the actual impact of this provision may be different as the fiscal intermediaries evaluated hospitals' requests using more recent data.

F. Reclassification of Certain Urban Hospitals as Rural Hospitals (Sections 401(a) and (b) of Public Law 106-113 and 42 CFR 412.63(b), 412.90(e), 412.102, and 412.103)

1. Permitting Reclassification of Certain Urban Hospitals as Rural Hospitals

Under Medicare law, the location of a hospital can affect its payment methodology as well as whether the facility qualifies for special treatment both for operating and for capital payments. Whether a facility is situated in an urban or a rural area will, for example, affect payments based on the wage index values and Federal standardized amounts specific to the area. Similarly, the percentage increase in payments made to hospitals that treat a disproportionate share of low-income patients is based, in part, on its urban/rural status, as are determinations regarding a hospital's qualification as an SCH, rural referral center, critical access hospital (CAH), or other special category of facility. Section 1886(d)(2)(D) of the Act defines an “urban area” as an area within a MSA as defined by the Office of Management and Budget. The same Start Printed Page 39885provision defines a “large urban area,” with respect to any fiscal year, as an urban area that the Secretary determines (in the publications described in section 1886(e)(5) of the Act before the fiscal year) has a population of more than 1 million as determined based on the most recent available published Census Bureau data. Section 1886(d)(2)(D) of the Act further defines a “rural area” as an area that is outside of a “large” urban area or “other” urban area. Since FY 1995, the average standardized amount for hospitals located in rural areas and “other” urban areas has been equal, as provided for in section 1886(b)(3)(B)(i)(X) of the Act.

Several provisions of the Act provide procedures under which a hospital can apply for reclassification from one geographic area to another. Section 1886(d)(8)(B) of the Act, which provides that if certain conditions are met, the Secretary shall treat a hospital located in a rural county adjacent to one or more urban areas as being located in the urban area to which the greatest number of workers in the county commute. Also, section 1886(d)(10) of the Act established the MGCRB to permit hospitals that are disadvantaged by their geographic classification to obtain a more appropriate classification to the area with which they have the most economic interaction.

In the August 1, 2000 interim final rule with comment period (65 FR 47029), we implemented section 401(a) of Public Law 106-113. Section 401(a) of Public Law 106-113, which amended section 1886(d)(8) by adding a new paragraph (E), directs the Secretary to treat any subsection (d) hospital located in an urban area as being located in the rural area of the State in which the hospital is located if the hospital files an application (in the form and manner determined by the Secretary) and meets one of the following criteria:

  • The hospital is located in a rural census tract of an MSA (as determined under the most recent modification of the Goldsmith Modification, originally published in the Federal Register on February 27, 1992 (57 FR 6725));
  • The hospital is located in an area designated by any law or regulation of the State as a rural area (or is designated by the State as a rural hospital);
  • The hospital would qualify as a rural referral center, or as an SCH if the hospital were located in a rural area; or
  • The hospital meets any other criteria specified by the Secretary.

The statutory effective date of this provision is January 1, 2000.

In the August 1, 2000 interim final rule with comment period, we provided a detailed discussion of the development of the Goldsmith Modifications (65 FR 47029). The Goldsmith Modification evolved from an outreach grant program sponsored by the Office of Rural Health Policy of the Health Resources and Services Administration (HRSA) in order to establish an operational definition of rural populations lacking easy geographic access to health services. Using 1980 census data, Dr. Harold F. Goldsmith and his associates created a methodology for identification of rural census tracts that were located within a large metropolitan county of at least 1,225 miles but were so isolated from the metropolitan core by distance or physical features so as to be more rural than urban in character. We utilize data based on 1990 census data, reflecting the most recent Goldsmith modification.

We also included Appendix A of that interim final rule with comment period a listing of the identified urban counties with census tracts that may qualify as rural under the most recent Goldsmith Modification (January 1, 2000). The amendments made by section 401 of Public Law 106-113 enable a hospital located in one of the areas listed in Appendix A of the August 1, 2000 interim final rule with comment period to be treated as if it were situated in the rural area of the State in which it is located.

Additionally, section 401(a) of Public Law 106-113 includes hospitals “* * * located in an area designated by any law or regulation of such State as a rural area (or is designated by such State as a rural hospital).” Since the concept of State “designation” referred to in the parenthetical clause was not explicit enough to provide a clear-cut rule for purposes of implementation, we required that a hospital's designation as rural be in the form of either State law or regulation if it is the basis for a hospital's request for urban to rural reclassification. We believe this will help ensure that the provision is implemented consistently among States.

Finally, a hospital also may seek to qualify for reclassification premised on the fact that, had it been located in a rural area, it would have qualified as a rural referral center or as an SCH. The hospital would need to satisfy the criteria set forth in section 1886(d)(5)(C) of the Act (as implemented in regulations at § 412.96) as a rural referral center, or the criteria set forth in section 1886(d)(5)(D) of the Act (as implemented in regulations at § 412.92) as an SCH.

Although the statute authorizes the Secretary to specify further qualifying criteria for a section 401 reclassification, we did not believe that additional criteria were warranted at the time the August 1, 2002 interim final rule was published. However, we invited comment specifically on whether the criteria in the interim final rule are sufficient at this time, and if not, what additional criteria should be incorporated.

A hospital that is reclassified as rural under section 1886(d)(8)(E) of the Act, as added by section 401(a) of Public Law 106-113, is treated as rural for all purposes of payment under the Medicare inpatient hospital prospective payment system (section 1886(d) of the Act), including standardized amount (§§ 412.60 et seq.), wage index (§ 412.63), and the DSH payment adjustment calculations (§ 412.106) as of the effective date of the reclassification.

Comment: One commenter addressed policies discussed in the August 1, 2000 interim final rule with comment period. Other commenters addressed our policy to not permit hospitals that are redesignated as rural under section 1886(d)(8)(E) of the Act to be eligible for subsequent reclassifications by the MGCRB.

Response: These policies were addressed in the May 5, 2000 proposed rule (65 FR 26308) and the August 1, 2000 final rule (65 FR 47087) implementing the updates and policy changes to the prospective payment system for FY 2001. We responded to comments on the May 5, 2000 proposed rule in the August 1, 2000 final rule. Because we addressed these concerns in that final rule, we are not readdressing those comments in this final rule.

Comment: An association of physicians commented that the interim final rule with comment period stated that a hospital that is reclassified as rural under this provision must be treated as rural for all purposes of payment under the Medicare inpatient hospital prospective payment system, including standardized amount, wage index, and the DSH payment adjustment. However, the commenter pointed out, graduate medical education is not listed. The commenter urged that these hospitals also be considered rural for purposes of graduate medical education.

Response: Section 1886(d)(8)(E) of the Act provides that affected hospitals are considered rural for purposes of section 1886(d). Therefore, these reclassifications affect payments to a hospital under the IME adjustment, which are made under section 1886(d)(5)(B) of the Act, but not payments for direct GME, which are made under section 1886(h) of the Act.Start Printed Page 39886

2. Conforming Changes under Section 401(b) of Public Law 106-113

Section 401(b) of Public Law 106-113 sets forth conforming statutory changes relating to urban to rural reclassifications under section 401(a) of Public Law 106-113:

  • Section 401(b)(1) provided that if a hospital is being treated as being located in a rural area under section 1886(d)(8)(E) of the Act (for purposes of section 1886(d) of the Act), the hospital will also be treated under section 1833(t) of the Act as being located in a rural area. This provision was addressed in the final rule for the hospital inpatient prospective payment system published in the Federal Register on August 1, 2000 (65 FR 47087).
  • Section 401(b)(2) amended section 1820(c)(2)(B)(i) of the Act by extending the reclassification provisions of section 401(a) to the CAH program. A hospital that otherwise would have fulfilled the requirements for designation as a CAH had it been located in a rural area is now eligible for consideration as a CAH if it is treated as being located in a rural area under section 1886(d)(8)(E) of the Act, as added by section 401(a) of Public Law 106-113. (A list of certain existing hospitals that were identified as being located in Goldsmith areas was included in Appendix B of the August 1, 2000 interim final rule with comment period.) A more detailed discussion of the effect on the CAH program of this provision, as well as additional amendments to section 1820(c)(2)(B)(i) of the Act included in Public Law 106-113, is provided in section VI.B. of this preamble.

3. Application Procedures

The statute provides that a hospital seeking reclassification from urban to rural under section 1886(d)(8)(E) of the Act must submit an application “in a form and manner determined by the Secretary.” In the August 1, 2000 interim final rule with comment period, we set forth procedures and requirements for the application for rural reclassification, including application submittal requirements, the filing and effective dates for the application, the procedures for withdrawal of applications, and cancellation of rural reclassification; and the qualifications through the Goldsmith Modification Criteria, by State designation and qualifications as a rural referral center or as an SCH. (See 65 FR 47030 through 47031 for a full discussion of these procedures and requirements.) As of early July 2001, 19 hospitals had taken advantage of this provision.

4. Changes in the Regulations

In the August 1, 2000 interim final rule with comment period, we added a new § 412.103 to incorporate the provisions on the urban to rural reclassification options set forth in section 1886(d)(8)(E) of the Act, as added by section 401(a) of Public Law 106-113, and the application procedures for requesting reclassification.

A formula for transition payments to hospitals located in an area that has undergone geographic reclassification from urban to rural is set forth in section 1886(d)(8)(A) of the Act and implemented in regulations at §§ 412.90 and 412.102. In the interim final rule with comment period, we revised existing §§ 412.63(b)(1) and 412.90(e) and the title of § 412.102 to clarify the distinction between hospital reclassification from urban to rural and the geographic reclassification (or redesignation) of an urban area to rural.

In addition, we revised § 485.610 by redesignating paragraph (b)(4) as paragraph (b)(5) and adding a new paragraph (b)(4) to reflect the conforming provision of section 401(b)(2) of Public Law 106-113.

We did not receive any comments on these changes in the regulations in the interim final rule with comment period and, therefore, are adopting them as final.

G. Medicare Geographic Classification Review Board (MGCRB) (New § 412.235 and Existing §§ 412.256, 412.273, 412.274(b), and 412.276)

With the creation of the MGCRB, beginning in FY 1991, under section 1886(d)(10) of the Act, hospitals could request reclassification from one geographic location to another for the purpose of using the other area's standardized amount for inpatient operating costs or the wage index value, or both (September 6, 1990 interim final rule with comment period (55 FR 36754), June 4, 1991 final rule with comment period (56 FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). Implementing regulations in Subpart L of Part 412 (§§ 412.230 et seq.) set forth criteria and conditions for redesignations from rural to urban, rural to rural, or from an urban area to another urban area with special rules for SCHs and rural referral centers.

As discussed in section III.F. of this final rule, section 304 of Public Law 106-554 contained several provisions related to the wage index and reclassification decisions made by the MGCRB. In summary, section 304 first establishes that hospital reclassification decisions by the MGCRB for wage index purposes are effective for 3 years, beginning with reclassifications for FY 2001. Second, it provides that the MGCRB must use the 3 most recent years of average hourly wage data in evaluating a hospital's reclassification application for FY 2003 and subsequent years. Third, it provides that an appropriate statewide entity may apply to have all of the geographic areas in a State treated as a single geographic area for purposes of computing and applying the wage index, for reclassifications beginning in FY 2003. In the May 4, 2001 proposed rule, we presented a discussion of how we proposed to implement these three provisions. (Section III.F. of this preamble discusses the application of these policy changes to the development of the final FY 2002 and later wage indexes based on hospital reclassification under the provisions of section 304 of Public Law 106-554.)

1. Three-Year Reclassifications for Wage Index Purposes

Section 304(a) of Public Law 106-554 amended section 1886(d)(10)(D) of the Act by adding clause (v), which provides that, if a hospital is approved for reclassification by the MGCRB for purposes of the wage index, the reclassification is effective for 3 years. The amendment made by section 304(a) is effective for reclassifications for FY 2001 and subsequent years. In addition, the legislation specifies that the Secretary must establish a mechanism under which a hospital may elect to terminate such reclassification during the 3-year period.

Consistent with new section 1886(d)(10)(D)(v) of the Act, in the May 4 proposed rule, we proposed to revise § 412.274(b) to provide under new paragraph (b)(2) that any hospital that is reclassified for a particular fiscal year for purposes of receiving the wage index value of another area would receive that reclassification for 3 years beginning with discharges occurring on the first day (October 1) of the second Federal fiscal year in which a hospital files a complete application. This 3-year reclassification would remain in effect unless the hospital terminates the reclassification under revised procedures that we proposed to establish under new proposed § 412.273(b). The provision would apply to hospitals that are reclassified for purposes of the wage index only, as well as those that are reclassified for both the wage index and the standardized amount. However, in the latter case, only the wage index reclassification would be extended for 2 additional Start Printed Page 39887years beyond the 1 year provided for in the existing regulations (3 years total). Hospitals seeking reclassification for purposes of the standardized amount must continue to reapply to the MGCRB on an annual basis.

a. Special Rule for a Hospital that was Reclassified for FY 2001 and FY 2002 to Different Areas

Because the 3-year effect of the amendment made by section 304(a) of Public Law 106-554 is applicable to reclassifications for FY 2001 (which had already taken place prior to the date of enactment of section 304(a) (December 21, 2000)), and because the application process for reclassifications for FY 2002 had already been completed by the date of enactment, we are establishing special procedures for hospitals that are reclassified for purposes of the wage index to one area for FY 2001, and are reclassified for purposes of the wage index or the standardized amount to another area for FY 2002. We are deeming such a hospital to be reclassified to the area for which it applied for FY 2002, unless the hospital elects to receive the wage index reclassification it was granted for FY 2001. Consistent with our procedures for withdrawing an application for reclassification (§ 412.273), we allowed a hospital that wished to receive the reclassification it was granted for FY 2001 to withdraw its FY 2002 application by making a written request to the MGCRB within 45 days of the publication date of the proposed rule (that is, by June 18, 2001). Again, only the wage index reclassification is extended for 2 additional years (3 years total). Hospitals seeking reclassification for purposes of the standardized amount must continue to reapply to the MGCRB on an annual basis.

(We note that, effective May 21, 2001, the new location and mailing address of the MGCRB and the Provider Reimbursement Review Board (PRRB) is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670. Please specify whether the mail is intended for the MGCRB or the PRRB.)

b. Overlapping Reclassifications Are Not Permitted

Under the broad authority delegated to the Secretary by section 1886(d)(10) of the Act, in the May 4 proposed rule, we proposed that a hospital that is reclassified to an area for purposes of the wage index may not extend the 3-year effect of the reclassification under section 304(a) of Public Law 106-554 by subsequently applying for reclassification to the same area for purposes of the wage index for a fiscal year that would be within the 3-year period. For example, if a hospital is reclassified for purposes of the wage index to Area A for FY 2002, is approved to receive Area A's wage index for 3 years (FYs 2002, 2003, and 2004), and reapplies to be reclassified to Area A for FYs 2003, 2004, and 2005 (3 years) for purposes of the wage index, the hospital would not be permitted to receive Area A's wage index for FY 2005 as a result of the reapplication. Instead, we proposed that if the hospital wishes to extend the FY 2002 3-year reclassification for fiscal years beyond FY 2004, it would have to apply for reclassification for FY 2005.

We believe new section 1886(d)(10)(D)(v) of the Act replaces the current annual wage index reclassification cycle with a 3-year reclassification cycle. We believe this policy was intended to provide consistency and predictability in hospital reclassification and wage index data, as well as to alleviate the year-to-year fluctuations in the ability of some hospitals to qualify for reclassification. We do not believe it was intended to be used to extend reclassifications for which hospitals otherwise would not be eligible (by reapplying during the second year of a 3-year reclassification because a hospital fears it may not be eligible for reclassification after its current 3-year reclassification expires).

c. Withdrawals of Applications and Terminations of Approved Reclassifications

(1) General

Under § 412.273(a), a hospital, or group of hospitals, may withdraw its application for reclassification at any time before the MGCRB issues its decision or, if after the MGCRB issues its decision, within 45 days of publication of our annual notice of proposed rulemaking concerning changes to the inpatient hospital prospective payment system and proposed payment rates for the fiscal year for which the application was filed. In the May 4 proposed rule, we proposed that the withdrawal procedures and the applicable timeframes in the existing regulations would apply to hospitals that would receive 3-year reclassification for wage index purposes. For example, if a hospital applied for reclassification to Area A for purposes of the wage index for FY 2002, but wished to withdraw its application, it must have done so prior to the MGCRB issuing a decision on its application or, if the MGCRB issued such a decision, within 45 days of the publication date of the proposed rule (that is, by June 18, 2001). Such a withdrawal, if effective, means that the hospital would not be reclassified to Area A for purposes of the wage index for FY 2002 (and would not receive continued reclassification for FYs 2003 and 2004), unless the hospital subsequently cancels its withdrawal (as discussed below). In other words, a withdrawal, if accepted, prevents a reclassification from ever becoming effective.

On the other hand, a reclassification decision that is terminated upon the request of the hospital has partial effect. Section 1886(d)(10)(D)(v) of the Act, as added by section 304(a) of Public Law 106-554, provides that a reclassification for purposes of the wage index is effective for 3 years “except that the Secretary shall establish procedures under which a . . . hospital may elect to terminate such reclassification before the end of such period.” Consistent with section 1886(d)(10)(D)(v) of the Act, we proposed to allow a hospital to terminate its approved 3-year reclassification for 1 or 2 years of the 3-year effective period (§ 412.273(b)). This is a separate action from a reclassification withdrawal, which occurs following the initial decision by the MGCRB. A termination would occur during subsequent years. For example, a hospital that has been reclassified for purposes of the wage index for FY 2001 is also reclassified for FYs 2002 and 2003 (3 years). Such a hospital could terminate its approved reclassification so that the reclassification is effective only for FY 2001, or only for FYs 2001 and 2002. Consistent with the prospective nature of reclassifications, we proposed to not permit a hospital to terminate its approved 3-year reclassification for part of a fiscal year. A termination would be effective for the next fiscal year. In order to terminate an approved 3-year reclassification, we would require the hospital to notify the MGCRB in writing within 45 days of the publication date of the annual proposed rule for changes to the inpatient hospital prospective payment system. A termination, unless subsequently cancelled (as discussed below), is effective for the balance of the 3-year period.

We established a special procedural rule for handling FY 2001 reclassifications. As noted above, the amendments made by section 304(a) of Public Law 106-554 are effective for reclassifications for FYs 2001 and beyond, and reclassification decisions for FY 2001 had already been implemented prior to the date of enactment of section 304(a). We deemed those hospitals that were reclassified for Start Printed Page 39888FY 2001 to be reclassified for FYs 2002 and 2003. Therefore, if a deemed hospital that was reclassified for purposes of the wage index for FY 2001 wished to terminate its reclassification for FY 2002 and FY 2003, the hospital had to notify the MGCRB in writing by June 18, 2001 (that is, within 45 days after the publication of the proposed rule).

(2) Cancellation of a Withdrawal of Application or a Termination of an Approved Reclassification

In the May 4 proposed rule, we proposed that if a hospital elects to withdraw its 3-year reclassification application after the MGCRB has issued its decision, it may cancel its withdrawal in a subsequent fiscal year and request the MGCRB to reinstate its reclassification for the remaining fiscal years of the 3-year reclassification period. (This proposal was consistent with our proposal that 3-year reclassification periods may not overlap, as discussed in section IV.G.1.b. of this preamble.) Alternatively, a hospital may apply for reclassification to a different area (that is, an area different from the one to which it was originally reclassified), and if successful, the reclassification effect would be for 3 years.

Similarly, and for the same reasons, we proposed that if a hospital elects to terminate its accepted 3-year reclassification prior to the second or third year of that reclassification, it may cancel that termination and have its original reclassification reinstated for the duration of the original 3-year period. Alternatively, a hospital could apply for reclassification to a different area after terminating a prior 3-year reclassification and receive a new 3-year period of reclassification.

Example 1:

Hospital A files an application and the MGCRB issues a decision to reclassify it to Area B for purposes of wage index for FY 2002 through FY 2004 (3 years). Within 45 days after the publication of the proposed rule, Hospital A withdraws its application. Within the time for applying for a FY 2003 reclassification, Hospital A cancels its withdrawal for classification to Area B. Its reclassification to Area B is reinstated, but only for FYs 2003 and 2004.

Example 2:

Hospital B files an application for reclassification for wage index purposes for FY 2002 through FY 2004 and the MGCRB issues a decision for reclassification to Area C. Within 45 days after publication of the proposed rule, Hospital B withdraws its application. Hospital B does not cancel its withdrawal of the application. Hospital B timely applies and is reclassified to Area D for 3 years, beginning with FY 2003. In this case, the reclassification to Area D would be for FYs 2003 through 2005.

Example 3:

Hospital C is reclassified to Area A for purposes of the wage index for FY 2002, and terminates its 3-year reclassification effective for FYs 2003 and 2004. Within the timeframe for applying for FY 2004 reclassification, Hospital C cancels its termination. Its reclassification to Area A would be reinstated for FY 2004 only.

Example 4:

Hospital D has the same circumstances as Hospital C in Example 3, except that instead of canceling its termination, Hospital D applies and is reclassified to Area B for FY 2004. In this case, the reclassification would be for FYs 2004 through 2006.

d. Special Rules for Group Reclassifications

Section 412.232 discusses situations where all hospitals in a rural county are seeking urban redesignation, and § 412.234 discusses criteria where all hospitals in an urban county are seeking redesignation to another urban county. In these cases, hospitals submit an application as a group, and all hospitals in the county must be a party to the application. The reclassification is effective both for purposes of the wage index and the standardized amount of the area to which the hospitals are reclassified.

Section 304(a) of Public Law 106-554 does not specifically address the group reclassification situations under §§ 412.232 and 412.234. However, we believe that, in the case of hospitals reclassified under these group reclassification procedures, it would be appropriate to extend the 3-year reclassification provision to these situations for the wage index only. In order to be reclassified for the standardized amount during the second and third years of a 3-year reclassification for the wage index, the hospitals located in these counties would have to reapply on an annual basis to the MGCRB either as a group or as individual hospitals and meet the criteria outlined in § 412.232, § 412.234, or § 412.230, as appropriate.

Hospitals that are part of a group reclassification would be able to terminate their 3-year wage index reclassifications in the same manner as described above. If one hospital within the group elects to terminate its 3-year wage index reclassification, the reclassification of other hospitals in the group would be unaffected. The same rules for withdrawing from a group reclassification that are in effect now would continue. That is, all of the hospitals that are party to a group reclassification application must consent for a withdrawal to be approved.

Under section 152(b) of Public Law 106-113, hospitals in certain counties were deemed to be located in specified areas for purposes of payment under the hospital inpatient prospective payment system, for discharges occurring on or after October 1, 2000. For payment purposes, these hospitals are to be treated as though they were reclassified for purposes of both the standardized amount and the wage index. Section 152(b) also requires that these reclassifications be treated for FY 2001 as though they are reclassification decisions by the MGCRB. For purposes of applying the 3-year extension of wage index reclassifications, we proposed to extend section 1886(d)(10)(D)(v) to hospitals reclassified under section 152(b) of Public Law 106-113. These hospitals also would have to apply for the standardized amount on an annual basis to the MGCRB.

e. Administrator Authority to Cancel Inappropriate Reclassification Decisions

In the proposed rule we indicated that, under the provisions of § 412.278(g), the Administrator has the authority to review an inappropriate reclassification decision made by the MGCRB, as discovered by either the hospital or CMS, including 3-year reclassifications in the second and third years. The statement that this authority extended to the second and third years of 3-year reclassification was in error. Under the statute and our regulations, reclassification decisions are unreviewable once they become final. This principle applies to 3-year reclassification decisions. Once such a decision becomes final, it is unreviewable thereafter.

Comment: Several commenters expressed concern that we proposed that a hospital that is reclassified to an area for purposes of the wage index may not extend the 3-year effect of the reclassification under section 304(a) of Public Law 106-554, by subsequently applying for reclassification to the same area for purposes of the wage index for a fiscal year that would be within the 3-year period. These commenters argued that there is nothing in the statutory language that prohibits hospitals that are already approved for 3-year reclassifications from reapplying within that 3-year period to extend their reclassifications into future years. These commenters also pointed out that extending their wage index reclassifications in this way allows them to make budgetary commitments further into the future and fosters a more stable operating environment for their hospitals.

Response: Under section 1886(d)(10) of the Act, the Secretary has broad authority to establish policies and Start Printed Page 39889criteria with respect to the evaluation and approval of applications for reclassification. As indicated in the proposed rule, we believe that new section 1886(d)(10)(D)(v) of the Act, as added by section 304(a) of Public Law 106-554, replaces the annual reclassification cycle with a 3-year reclassification cycle. We believe that, if a hospital is already reclassified to a given geographic area for a 3-year period, it is appropriate to avoid expending resources to evaluate an application for reclassification to that same area for the second and third years of the 3-year period. Thus, if a hospital is already reclassified for a given fiscal year, and submits an application for reclassification to the same area for the same year, that application will not be approved. We are adding language to § 412.230(a)(5)(v) in this final rule to specify that an application for reclassification will not be approved under these circumstances.

Comment: One commenter supported our proposal to reclassify a hospital based on its FY 2002 approval unless the hospital notified the MGCRB otherwise by June 18, 2001. This commenter questioned whether or not hospitals would have this same option in future years. In other words, if a hospital successfully sought reclassification to a different area for FY 2003 and then withdrew that reclassification, would that hospital have the option to fall back on the FY 2002 reclassification, or would it then not be reclassified.

Response: We appreciate the commenter's support of our proposal on this issue. This was specifically put in place because the new 3-year reclassification policy was not enacted until well after the reclassification process for FY 2002 was underway. Therefore, some hospitals may have sought reclassification to a different area or for a different purpose than they did for FY 2001, and the option to carry forward a FY 2001 wage index reclassification for 3 years may have changed their decisions.

This policy applies in future years as well. For example, a hospital that successfully seeks reclassification for the wage index for FY 2004 to Area A, then successfully seeks reclassification for FY 2005 for the wage index to Area B, has the option to withdraw its FY 2005 decision, thereby reinstating its FY 2004 decision. However, if the hospital successfully withdraws its FY 2005 decision, the hospital cannot return to its FY 2005 decision without reapplying at a later date.

Comment: Several commenters expressed uncertainty about the timing of the extension of the wage index reclassification for 3 years. Some hospitals had successfully applied for FY 2001 as well as FY 2002 to the same area for the wage index, and it was not clear to these hospitals whether their wage index reclassifications were effective through FY 2003 or through FY 2004.

Response: As noted above, section 304(a) provides for 3-year wage index reclassifications effective with FY 2001 reclassifications. In the case of hospitals reclassified to the same area for both FY 2001 and FY 2002, because hospitals had already submitted their FY 2002 applications prior to enactment of Public Law 106-554, and the MGCRB had already issued its decision on these applications prior to publication of the May 4 proposed rule, we will consider FY 2002 to be the first year of the 3-year reclassification for these hospitals. Therefore, the reclassification period will extend through FY 2004. If a hospital was approved for FY 2001 for a wage index reclassification, but was unsuccessful in seeking a wage index reclassification for FY 2002, then its wage index reclassification would be effective for FY 2001, FY 2002, and FY 2003, and the hospital would have to reapply to seek reclassification for FY 2004.

Comment: One commenter supported our proposal that a hospital could cancel its withdrawal of an approved reclassification for the wage index in a future year in order to reinstate its original MGCRB approval.

Response: We appreciate the commenter's support of our proposal that hospitals reclassified for the wage index that then withdraw that approval have the ability to cancel the withdrawal, in effect reinstating the hospital's original reclassification approval for the wage index. We provided this option so that a hospital that later discovers that the withdrawal of its approved wage index reclassification was disadvantageous would have the ability to reinstate its MGCRB approval for the wage index for the remaining years in the 3-year term. However, a hospital is eligible to revert to its most recent MGCRB approval only.

In addition, the same process applies to cancellations of a withdrawal or termination as applies to requests for withdrawals and terminations. A hospital must request a cancellation of its withdrawal or termination within the 45-day period after the proposed rule is published, and that cancellation will become effective for the following Federal fiscal year.

Comment: Several commenters supported our proposal to extend the 3-year reclassification provision for the wage index to those hospitals that were reclassified for FY 2001 under section 152(b) of Public Law 106-113. While these hospitals did not successfully apply for reclassification through the MGCRB, they were effectively “reclassified” by this legislation, and the commenters believed that it would be correct to extend the 3-year wage index reclassification to this group of hospitals.

Response: We appreciate the commenters' support of our proposal. Section 152(b) of Public Law 106-113 required that the assignment of these hospitals to alternative geographic areas should be treated as if they were decisions of the MGCRB. As a result, these hospitals will be reclassified for the wage index to their designated areas for FY 2002 and FY 2003. They will be required to apply for reclassification to the MGCRB for FY 2004 if they wish to retain this reclassification for subsequent years.

2. Three-Year Average Hourly Wages

Section 304(a) of Public Law 106-554 amended section 1886(d)(10)(D) of the Act by adding clause (vi) which provides that the MGCRB must use the average of the 3 most recent years of hourly wage data for the hospital when evaluating a hospital's request for reclassification. Specifically, the MGCRB must base its evaluation on an average of the average hourly wage for the most recent years for the hospital seeking reclassification and the area to which the hospital seeks to reclassify. This provision is effective for reclassifications for FY 2003 and subsequent years. (Section III.F. of this preamble discusses the development and application of the hospital's 3-year average hourly wage data (Table 2 in the Addendum to this final rule) that the MGCRB will use to evaluate hospitals' applications for reclassifications for FY 2003; and the MSA and statewide rural 3-year average hourly wage data (Tables 3A and 3B in the Addendum to this final rule) for hospital reclassification applications for FY 2003.)

In the May 4, 2001 proposed rule, we proposed to revise §§ 412.230(e)(2) and 412.232(d)(2) to incorporate the provisions of section 1886(d)(10)(D)(vi) of the Act as added by section 304(a) of Public Law 106-554. Specifically, we provided that, for redesignations effective beginning FY 2003, for hospital-specific data, the hospital must provide a 3-year average of its average hourly wages using data from our hospital wage survey used to construct Start Printed Page 39890the wage index in effect for prospective payment purposes. For data for other hospitals, we proposed to require hospitals to provide a 3-year average of the average hourly wage in the area in which the hospital is located and a 3-year average of the average hourly wage in the area to which the hospital seeks reclassification. The wage data would be taken from the CMS hospital wage survey used to construct the wage index for prospective payment purposes, as published in Tables 2, 3A, and 3B of this final rule (unless those data are subsequently changed by CMS). The 3-year averages are calculated by dividing the sum of the dollars (adjusted to a common reporting period using the method described in section III. of this final rule) across all 3 years, by the sum of the hours.

Comment: Several commenters responded positively to our proposal to use a 3-year average of the most recent 3 years of average hourly wages based on data from our hospital wage survey used to construct the wage index when evaluating a hospital's request for reclassification. Under the proposal, if data does not exist for all 3 years, the available data within the 3-year period will be used to construct the average.

While it was clear to these commenters that these data will be used to construct the average hourly wage for a hospital applying for reclassification, they noted it was not clear to them whether the 3-year average would also be used for the area in which that hospital is physically located as well as the area to which that hospital seeks reclassification.

Response: We appreciate the commenters' support of our proposal to calculate the 3-year average hourly wage based on the data available during the applicable 3-year period, even if a hospital does not have data in all 3 years.

As noted above, the MGCRB will evaluate applications using the 3-year average hourly wages for hospitals and geographic areas as published in Tables 2, 3A, and 3B of this final rule (unless those data are subsequently changed by CMS).

Comment: One commenter requested that in cases of a change in ownership, a hospital be permitted the option of excluding prior years' wage data submitted by a previous owner for the purpose of calculating the average of the average hourly wages in order to qualify for reclassification. As a result, the average of the average hourly wages would be based on current and prior year data submitted by the new owner only.

Response: We believe we should treat these cases in a manner consistent with how we treat hospitals whose ownership has changed for other Medicare payment purposes. That is, where a hospital has simply changed ownership and the new owners have acquired the assets and liabilities of the previous owners, all of the applicable wage data associated with that hospital are included in the calculation of its 3-year average hourly wage. On the other hand, in the case of a new hospital, where there is no legal obligation to the operations of a predecessor hospital, the wage data associated with the previous hospital's provider number would not be used in calculating the new hospital's 3-year average hourly wage.

3. Statewide Wage Index

As stated earlier, section 304(b) of Public Law 106-554 provides for a process under which an appropriate statewide entity may apply to have all the geographic areas in the State treated as a single geographic area for purposes of computing and applying the area wage index for reclassifications beginning in FY 2003.

Section 304 does not indicate the duration of the application of these statewide wage indexes. However, it should be noted that the statutory language does refer to these applications as reclassifications. In the May 4, 2001 proposed rule, we proposed that these statewide wage index applications be processed similar to MGCRB applications, with the same effective dates of the decisions and the withdrawal and termination process. Therefore, similar to wage index reclassification decisions under section 1886(d)(10)(D)(v) of the Act as added by section 304(a) of Public Law 106-554, the statewide wage index reclassification would be effective for a total of 3 years. The same deadlines and timetable applicable to MGCRB reclassification applications would apply for statewide wage index applications.

We proposed to establish a new § 412.235 to include the requirements for statewide wage indexes. We proposed to apply the following criteria to determine whether hospitals would be approved for a statewide geographic wage index reclassification (§ 412.235(a)):

  • There must be unanimous support for a statewide wage index among hospitals in the State in which the statewide wage index would be applied. We would require a signed affidavit on behalf of all the hospitals in the State of this support as part of the application for reclassification.
  • All hospitals in the State must apply through a signed single application for the statewide wage index in order for the application to be considered by the MGCRB. We believe this is necessary to ensure that every hospital in the State is included in the application, since the payment of every hospital would be affected by the statewide wage index.
  • There must be unanimous support for the termination or withdrawal of a statewide wage index among hospitals in the State in which the statewide wage index would be applied. We would require a signed affidavit for this agreement.
  • All hospitals in the State waive their rights to any wage index that they would otherwise receive absent the statewide wage index, including a wage index that any of the hospitals might have received through individual or group geographic reclassification under § 412.273(a).

An individual hospital within the State may receive a wage index that could be higher or lower under the statewide wage index reclassification in comparison to its wage index otherwise (§ 412.235(b)). Specifically, hospitals must be aware that there may be a reduction in the wage index as a result of participation on a statewide basis.

In addition, we proposed to consider statewide wage index applications under the same process we use for hospital reclassification applications, including the effective dates of the MGCRB decision and the withdrawal and termination process (§ 412.235(c)). We proposed that applications for the statewide wage index would be effective for 3 years beginning with discharges occurring on the first day (October 1) of the second Federal fiscal year following the Federal fiscal year in which the hospitals file a complete application unless all of the participating hospitals withdraw their application or terminate their approved statewide wage index reclassification earlier, as discussed below. Once approved by the MGCRB, an application for a statewide wage index can only be withdrawn or terminated as a result of a signed affidavit on behalf of all the hospitals in the State indicating their request that the statewide reclassification be withdrawn or terminated. A request for withdrawal or termination must be submitted within 45 days of the publication of the annual proposed rule for the inpatient hospital prospective payment system announcing the reclassification. New hospitals that open prior to the September 1 deadline for submitting an application for a statewide wage index, but after a group Start Printed Page 39891application has been submitted, would be required to agree to the statewide wage index in order for the group application to remain viable. New hospitals that open after the deadline for submitting an application would receive the statewide wage index. The agreement of new hospitals would also be required in order to withdraw or terminate a statewide wage index reclassification. The rules discussed under section IV.G.1.c. of this preamble for withdrawals of applications and terminations of approved 3-year wage index reclassification decisions would apply to decisions regarding statewide wage index reclassifications.

Comment: Several commenters believed that Washington, DC should be recognized as a State for purposes of this statewide wage index reclassification policy. However, they were concerned that, while such a recognition may benefit hospitals located in Washington, DC, it may not benefit hospitals that are currently located outside of Washington, DC but within the Washington, D.C.-MD-VA-WV MSA. As a result, while these commenters believed that Washington, DC should be recognized as a State for this purpose, they also requested guidance about how the remainder of the hospitals in the current MSA would be treated.

One commenter did not believe that Washington, DC should be considered a State for this purpose. However, this commenter also stated that, should we decide that Washington, DC could be considered a State for this purpose, we should configure the criteria such that none of the hospitals that are currently located in the Washington, D.C.-MD-VA-WV MSA would be harmed.

Response: Section 304(b) of Public Law 106-554 directs the Secretary to establish a process “under which an appropriate statewide entity may apply to have all the geographic areas in a State treated as a single geographic area for purposes of computing and applying the area wage index under section 1886(d)(3)(E) of [the Social Security] Act. * * *” Most States encompass multiple labor market areas (urban MSAs and rural areas) with differing wage indexes, and we believe that the intent of section 304(b) is to offer hospitals within a State the opportunity to eliminate the disparate wage indexes resulting from separate urban and rural labor market areas within the State. However, hospitals in Washington, DC are not subject to disparate wage indexes. Washington, DC is part of a larger labor market area where all the hospitals receive the wage index for that labor market area (subject to MGCRB reclassifications). Put another way, Washington, DC is already “treated as a single geographic area” for purposes of the hospital wage index.

If we treated Washington, DC as a separate distinct labor market area and applied the usual wage index methodology, Washington, DC hospitals might reap a significant windfall and the hospitals remaining in the MSA might be disadvantaged. Given the intended purpose of section 304(b), we believe that such results would be inappropriate. We believe that Congress did not intend for section 304(b) to address the type of situation presented by Washington, DC.

As indicated above, section 304(b) permits a State to be treated as a single geographic area “for purposes of computing and applying the area wage index under section 1886(d)(3)(E) of [the] Act.” Section 304(b) does not specify how to compute and apply the wage index for statewide geographic areas. Under section 1886(d)(3)(E) of the Act, the Secretary has broad authority to develop and apply the methodology for determining the wage index for labor market areas, and section 304(b) did not limit the agency's authority. Thus, even if Washington, DC is a State for purposes of section 304(b), the Secretary has broad authority under section 1886(d)(3)(E) to determine the wage index for all affected hospitals. Given the purpose of section 304, and to avoid conferring an inappropriate and unintended windfall (or disadvantage) to hospitals, we are providing (pursuant to our broad authority under section 1886(d)(3)(E) of the Act) that, even if Washington, DC is a State for purposes of section 304(b) of Public Law 106-554, the wage index applicable to the Washington, DC “statewide” geographic area would be the same wage index that would apply to the Washington, DC-MD-VA-WV MSA as a whole (which would be calculated by including Washington, DC hospitals, in accordance with all applicable rules).

H. Payment for Direct Costs of Graduate Medical Education (§ 413.86)

1. Background

Under section 1886(h) of the Act, Medicare pays hospitals for the direct costs of graduate medical education (GME). The payments are based in part on the number of residents trained by the hospital. Section 1886(h) of the Act, as amended by section 4623 of Public Law 105-33, caps the number of residents that hospitals may count for direct GME.

Section 1886(h)(2) of the Act, as amended by section 9202 of the Consolidated Omnibus Reconciliation Act (COBRA) of 1985 (Public Law 99-272), and implemented in regulations at § 413.86(e), establishes a methodology for determining payments to hospitals for the costs of approved GME programs. Section 1886(h)(2) of the Act, as amended by COBRA, sets forth a payment methodology for the determination of a hospital-specific, base-period per resident amount (PRA) that is calculated by dividing a hospital's allowable costs of GME for a base period by its number of residents in the base period. The base period is, for most hospitals, the hospital's cost reporting period beginning in FY 1984 (that is, the period of October 1, 1983 through September 30, 1984). The PRA is multiplied by the number of FTE residents working in all areas of the hospital complex (or nonhospital sites, when applicable), and the hospital's Medicare share of total inpatient days to determine Medicare's direct GME payments. In addition, as specified in section 1886(h)(2)(D)(ii) of the Act, for cost reporting periods beginning on or after October 1, 1993, through September 30, 1995, each hospital's PRA for the previous cost reporting period is not updated for inflation for any FTE residents who are not either a primary care or an obstetrics and gynecology resident. As a result, hospitals with both primary care and obstetrics and gynecology residents and nonprimary care residents have two separate PRAs beginning in FY 1994: one for primary care and obstetrics and gynecology and one for nonprimary care.

Section 1886(h)(2) of the Act was further amended by section 311 of Public Law 106-113 to establish a methodology for the use of a national average PRA in computing direct GME payments for cost reporting periods beginning on or after October 1, 2000, and on or before September 30, 2005. Generally, section 1886(h)(2) of the Act establishes a “floor” and a “ceiling” based on a locality-adjusted, updated, weighted average PRA. Each hospital's PRA is compared to the floor and ceiling to determine whether its PRA should be revised. PRAs that are below the floor, that is, 70 percent of the locality-adjusted, updated, weighted average PRA, would be revised to equal 70 percent of the locality-adjusted, updated, weighted average PRA. PRAs that exceed the ceiling, that is, 140 percent of the locality-adjusted, updated, weighted average PRA, would, depending on the fiscal year, either be frozen and not increased for inflation, or increased by a reduced inflation factor. Start Printed Page 39892We implemented section 311 of Public Law 106-113 in the hospital inpatient prospective payment system final rule published on August 1, 2000 (65 FR 47090). In that final rule, we set forth the methodology for calculating the weighted average PRA and outlined the steps for determining whether a hospital's PRA would be revised.

2. Amendments Made by Section 511 of Public Law 106-554 (§ 413.86(e)(4)(ii)(C) and (e)(5)(iv))

Section 511 of Public Law 106-554 amended section 1886(h)(2)(D)(iii) of the Act by increasing the floor to 85 percent of the locality-adjusted national average PRA. In general, section 511 provides that, effective for cost reporting periods beginning on or after October 1, 2001, and before October 1, 2002, PRAs that are below 85 percent of the respective locality-adjusted national average PRA would be increased to equal 85 percent of that locality-adjusted national average PRA. Accordingly, we proposed to implement section 511 by revising § 413.86(e)(4)(ii)(C)(1) to incorporate this change and by outlining the methodology for determining whether a hospital's PRA(s) will be adjusted in FY 2002 relative to the increased floor of the locality-adjusted national average PRA.

In the August 1, 2000 final rule (65 FR 47091 and 47092), as implemented at § 413.86(e)(4), we determined, in accordance with section 311 of Public Law 106-113, that the weighted average PRA for cost reporting periods ending during FY 1997 is $68,464. We described the procedures for updating the weighted average PRA of $68,464 for inflation to FY 2001 and for adjusting this average for the locality of each individual hospital. We then outlined the steps for comparing each hospital's PRA(s) to the locality-adjusted national average PRA to determine if, for cost reporting periods beginning on or after October 1, 2000, and before October 1, 2001, the PRAs should be revised to equal the 70-percent floor.

In accordance with section 511 of Public Law 106-554, in the May 4 proposed rule, we proposed that, for cost reporting periods beginning during FY 2002, the FY 2002 PRAs of hospitals that are below 85 percent of the respective locality-adjusted national average PRA for FY 2002 be increased to equal 85 percent of that locality-adjusted national average PRA. Specifically, to determine which PRAs (primary care and nonprimary care separately) for each hospital are below the 85-percent floor, each hospital's locality-adjusted national average PRA for FY 2002 is multiplied by 85 percent. This resulting number is then compared to each hospital's PRA that is updated for inflation to FY 2002. If the hospital's PRA would be less than 85 percent of the locality-adjusted national average PRA, the individual PRA is replaced with 85 percent of the locality-adjusted national average PRA for that cost reporting period, and in future years the new PRA would be updated for inflation by the Consumer Price Index for All Urban Consumers (CPI-U) as compiled by the Bureau of Labor Statistics.

There may be some hospitals with both primary care and nonprimary care PRAs that are below the floor, and both PRAs are, therefore, replaced with 85 percent of the locality-adjusted national average PRA. In these situations, the hospitals would receive a single PRA; a distinction between PRAs would no longer be made based on the different inflation adjustments (under § 413.86(e)(3)(ii)). On the other hand, hospitals may have primary care PRAs that are above the floor, and nonprimary care PRAs that are below the floor. In these situations, only the nonprimary care PRAs would be revised to equal 85 percent of the locality adjusted national average PRA, and the prior year primary care PRAs would be updated for inflation by the CPI-U. An example of application of this provision appeared in the preamble of the May 4, 2001 proposed rule (66 FR 33697).

We note that section 511 of Public Law 106-554 only affects hospitals with PRAs below the 85-percent floor, and does not affect hospitals with PRAs that are either between the floor and ceiling or exceed the ceiling. Thus, with the exception of the change in the floor as provided by section 511, the policy regarding the use of a national average PRA for making direct GME payments remains as implemented in the regulations at § 413.86(e)(4).

We proposed to amend § 413.86(e)(4)(ii)(C)(1) to add the rules implementing section 1886(h)(2)(D)(iii) of the Act as amended by section 511 of Public Law 106-554.

We also proposed to amend § 413.86(e)(5) regarding the determination of base year PRAs for new teaching hospitals for cost reporting periods beginning during FYs 2001 through 2005. In the August 1, 2000 final rule, we made a conforming change to § 413.86(e)(5) to account for situations in which hospitals do not have a 1984 base year PRA and establish a PRA in a cost reporting period after the 1984 base year. Existing § 413.86(e)(5)(iv) specifies that the new base year PRAs of such hospitals are subject to the regulations regarding the floor and the ceiling of the locality-adjusted national average PRA. Although the determination of new base year PRAs is subject to the national average methodology, it is not necessary to include this provision in the regulations. Therefore, we proposed to remove § 413.86(e)(5)(iv).

In the proposed rule, we clarified that, for purposes of calculating a base year PRA for a new teaching hospital, when calculating the weighted mean value of PRAs of hospitals located in the same geographic area or the weighted mean value of the PRAs in the hospital's census region (as defined in § 412.62(f)(1)(i)), the PRAs used in the weighted average calculation must not be less than the floors for cost reporting periods beginning during FY 2001 or FY 2002, or if they exceed the ceiling, they must either be frozen for FYs 2001 and 2002 or updated with the CPI-U minus 2 percent for FYs 2003 through 2005. In addition, existing § 413.86(e)(5) provides that the PRA for a new teaching hospital is based on the lower of the hospital's actual costs incurred in connection with the GME program or the weighted mean value of PRAs. If a hospital's actual costs of the GME program during its cost reporting period beginning during FY 2001 or FY 2002 are less than the floors, the hospital's PRA would not be based on the actual costs. Instead, it would be equal to 70 percent in FY 2001, or 85 percent during FY 2002, of the locality-adjusted national average PRA. The floor applies to hospitals with existing PRAs in FYs 2001 and 2002, or to hospitals that are establishing new base year PRAs in FYs 2001 and 2002. We proposed to clarify that if a hospital establishes a new base year PRA in a cost reporting period beginning after FY 2002, its PRA would not be increased to equal the floor if it is less than the floor. Similarly, the ceiling applies to hospitals with existing PRAS in FYs 2001 through 2005, or to hospitals that are establishing new base year PRAs in FYs 2001 through 2005.

Comment: One commenter believed that the provision to increase the PRA floor to 85 percent of the locality-adjusted national average will address many concerns about the fairness of GME payments. One commenter asked if the provisions of the proposed rule to increase PRAs that are less than 85 percent of the locality-adjusted national average PRA to equal 85 percent of the locality-adjusted national average PRA would provide relief to hospitals who do not have base year PRAs established in the 1984 base year and could not increase their PRAs because the appeal period has elapsed.Start Printed Page 39893

Response: Section 511 of the Public Law 106-554 amended section 1886(h)(2)(D)(iii) of the Act by increasing the floor to 85 percent of the locality adjusted national average PRA. Effective for cost reporting periods beginning on or after October 1, 2001 and before October 1, 2002, any PRAs that are below 85 percent of the respective locality-adjusted national average PRA would be increased to equal 85 percent of that locality-adjusted national average PRA. Accordingly, hospitals with PRAs (primary care and/or nonprimary care) that are less than 85 percent of the respective locality-adjusted national average PRA for the hospital's cost reporting period beginning on or after October 1, 2001 and before October 1, 2002, will have those PRAs increased to equal 85 percent of that locality-adjusted national average PRA. This provision sets the floor on per resident amounts for cost reporting periods beginning during FY 2002, regardless of the base year used to establish the hospital's PRA.

Comment: One commenter requested that we clarify the references in the preamble stating that the national average PRA methodology is applicable for “cost reporting periods beginning on or after October 1, 2000 and on or before September 30, 2005.” The commenter believed that the PRA changes authorized in the law were meant to be permanent, and therefore, did not understand the basis for the September 30, 2005 endpoint.

Response: The changes made to a hospital's PRA as a result of section 311 of Public Law 106-113 and section 511 of Public Law 106-554 are permanent. However, this new methodology for determining whether or not a hospital's PRA is revised, as described in the statute, is only effective for cost reporting periods beginning on or after October 1, 2000 and on or before September 30, 2005. For cost reporting periods beginning on or after October 1, 2005, a hospital's PRA, whether or not it was revised by the new methodology, is updated with the full CPI-U, using the procedures in place prior to October 1, 2000. If a hospital's PRAs are below the floors, they will be revised accordingly in FYs 2001 or 2002, or both. After FY 2002, that hospital's revised PRA will be updated for inflation as usual, that is, using the procedures in place for all PRAs prior to October 1, 2000. If a hospital's PRAs exceed the ceiling, the PRAs would be frozen in FYs 2001 and 2002, and updated with a reduced inflation factor in FYs 2003, 2004, and 2005. Thus, after September 30, 2005, although any changes made to a hospital's PRAs as a result of the new methodology would remain in place, the procedure for updating PRAs reverts back to the procedure in place prior to October 1, 2000, that is, updating for inflation with the full CPI-U.

Comment: One commenter requested that we publish in the final rule the CPI-U factors that must be used to update the 1997 national average PRA to the midpoint of a hospital's cost reporting period beginning in FY 2001.

Response: As the commenter requested, we are including below the CPI-U factors. For cost reporting periods beginning on or after October 1, 2000 and before October 1, 2001, the following update factors should be used when implementing section 311 of Public Law 106-113. Specific instructions for applying these factors can be found in the hospital inpatient prospective payment system final rule published on August 1, 2000 (65 FR 47091). (Refer to the bottom of the middle column and the right column on page 47091 for “Step 1: Update the weighted average PRA for inflation”.)

GME Update Factors for Midpoint of Periods Ending in FY 1997 to Cost Reporting Periods Beginning in FY 2001 Using the CPI (U)—All Items

Update weighted average PRA from:To midpoint of cost reporting period beginning:Use update factor of: \*\
October 1, 1996October 1, 20001.11200
October 1, 1996November 1, 20001.11389
October 1, 1996December 1, 20001.11579
October 1, 1996January 1, 20011.11800
October 1, 1996February 1, 20011.12053
October 1, 1996March 1, 20011.12307
October 1, 1996April 1, 20011.12465
October 1, 1996May 1, 20011.12528
October 1, 1996June 1, 20011.12591
October 1, 1996July 1, 20011.12780
October 1, 1996August 1, 20011.13097
October 1, 1996September 1, 20011.13414
* Source: Forecast by Standard and Poor's DRI; Historical Data through August 2000.

3. Determining the 3-Year Rolling Average for Direct GME Payments (§ 413.86(g)(4) and (g)(5))

Section 1886(h)(4)(G)(iii) of the Act, as added by section 4623 of Public Law 106-33, provides that for the hospital's first cost reporting period beginning on or after October 1, 1997, the hospital's weighted FTE count for direct GME payment purposes equals the average of the weighted FTE count for that cost reporting period and the preceding cost reporting period. For cost reporting periods beginning on or after October 1, 1998, section 1886(h)(4)(G) of the Act requires that hospitals' direct medical education weighted FTE count for payment purposes equal the average of the actual weighted FTE count for the payment year cost reporting period and the preceding two cost reporting periods (rolling average). This provision phases in the associated reduction in payment over a 3-year period for hospitals that are reducing their number of residents.

In the August 29, 1997 final rule with comment period (62 FR 46004), we revised § 413.86(g)(5) accordingly, and outlined the methodology for determining a hospital's direct GME payment. Based on what we explained in the 1997 final rule, for cost reporting periods beginning on or after October 1, 1997, we would determine a hospital's direct GME payment as follows:

Step 1. Determine the average of the weighted FTE counts for the payment year cost reporting period and the prior two immediately preceding cost reporting periods (with exception of the hospital's first cost reporting period beginning on or after October 1, 1997, which will be based on the average of the weighted average for that cost Start Printed Page 39894reporting period and the immediately preceding cost reporting period).

Step 2. Determine the hospital's direct GME amount without regard to the FTE cap (before determining Medicare's share). That is, take the sum of (a) the product of the primary care PRA and the primary care weighted FTE count in the current payment year, and (b) the product of the nonprimary care PRA and the nonprimary care weighted FTE count in the current payment year.

Step 3. Divide the hospital's direct GME amount by the total number of FTE residents (including the effect of weighting factors) for the cost reporting period to determine the weighted average PRA (this amount reflects the FTE weighted average of the primary and nonprimary care PRAs) for the cost reporting period.

Step 4. Multiply the weighted average PRA for the cost reporting period by the 3-year average weighted count to determine the hospital's allowable direct GME costs. This product is then multiplied by the hospital's Medicare patient load for the cost reporting period to determine Medicare's direct GME payment to the hospital.

Steps 2 and 3 above describe the methodology for combining a hospital's primary care PRA and nonprimary care PRA to determine the hospital's single weighted average PRA for the payment year cost reporting period. (This step accounts for hospitals that were training residents in both primary care and nonprimary care residency programs in FYs 1994 and 1995, when, as described in § 413.86(e)(3)(ii), each hospital's PRA for the previous cost reporting period was not adjusted for any resident FTEs who were not either a primary care resident or an obstetrics and a gynecology resident. As a result, such hospitals have two PRAs for direct GME payment; one for primary care and obstetrics and gynecology residents, and one for all other, or nonprimary care, residents. Hospitals that train either only primary care (including obstetrics and gynecology) residents or only nonprimary care residents follow the methodology described above, with the exception of combining two PRAs. Step 4 then dictates that the resulting average PRA is multiplied by the 3-year rolling average, which, in turn, is multiplied by the hospital's Medicare patient load in the current year to determine Medicare's direct GME payment to the hospital for that cost reporting period.

In implementing this provision in the August 29, 1997 final rule with comment period, we believed that the methodology described above was appropriate because it was consistent with the methodology described under section 1886(h)(3)(B) of the Act. This section specifies that, in order to arrive at the average PRA, or “aggregate approved amount,” the Secretary must multiply a hospital's PRA by the “weighted average number of [FTE] residents * * * in the hospital's approved medical residency training programs in that period” (emphasis added).

We also believed the methodology outlined above and in the August 29, 1997 rule was appropriate because it was consistent with the intent of the statute that, after October 1, 1997, direct GME payments should be based on a rolling average. Specifically, section 4623 of Public Law 106-33 provides that, “For cost reporting periods beginning on or after October 1, 1997 * * * the total number of full-time equivalent residents for determining a hospital's graduate medical education payment shall equal the average of the actual full-time equivalent resident counts for the cost reporting period and the preceding two cost reporting periods' (emphasis added). Thus, while the statute does not include a specific methodology for computing the direct GME payments, it clearly indicates that the payment should be based on a 3-year average of the weighted number of residents, not the weighted number of residents in the current payment year cost reporting period.

As stated above, Congress provided that the direct GME payments should be made based on a 3-year average of the weighted number of residents in order to phase in the associated reduction in payment over a 3-year period for hospitals that are reducing the number of residents they are training. However, in steps 2 and 3 above, when combining a hospital's primary care PRA and nonprimary care PRA, we weight the respective PRAs by current year residents. This introduces the number of residents that a hospital is training in the current cost reporting period into the payment formula. A payment formula that incorporates the number of current year residents “dilutes” the effect of the rolling average as related to direct GME payments. After further consideration, we believe that, consistent with the statute, the formula should be based on rolling average counts of residents. We proposed an alternative methodology which would replace the current methodology in which the direct GME payment would be the sum of (a) the product of the primary care PRA and the primary care and obstetrics and gynecology rolling average, and (b) the product of the nonprimary care PRA and the nonprimary care rolling average. (This sum would then be multiplied by the Medicare patient load.) The new methodology would only be used for determining direct GME payments because there is no distinction between primary care and nonprimary care residents for IME payment purposes.

The new methodology is effective for cost reporting periods beginning on or after October 1, 2001. The methodology for determining a hospital's direct GME payment is as follows:

Step 1. Determine that the hospital's total unweighted FTE counts in the payment year cost reporting period and the prior two immediately preceding cost reporting periods for all residents in allopathic and osteopathic medicine do not exceed the hospital's FTE cap for these residents in accordance with § 413.86(g)(4). If the hospital's total unweighted FTE count in a cost reporting period exceeds its cap, the hospital's weighted FTE count, for primary care and obstetrics and gynecology residents and nonprimary care residents, respectively, will be reduced in the same proportion that the number of these FTE residents for that cost reporting period exceeds the unweighted FTE count in the cap. The proportional reduction is calculated for primary care and obstetrics and gynecology residents and nonprimary care residents separately in the following manner:

(FTE cap/unweighted total FTEs in the cost reporting period) × (weighted primary care and obstetrics and gynecology FTEs in the cost reporting period)

  plus

(FTE cap/unweighted total FTEs in the cost reporting period) × (weighted nonprimary care FTEs in the cost reporting period).

Add the two products to determine the hospital's reduced cap.

Step 2. Determine the 3-year average of the weighted FTE count for primary care and obstetrics and gynecology residents in the payment year cost reporting period and the two immediately preceding cost reporting periods. Determine the 3-year average of the weighted FTE count for nonprimary care residents in the payment year cost reporting period and the two immediately preceding cost reporting periods.

Step 3. Determine the product of the primary care PRA and the primary care and obstetrics and gynecology 3-year average from step 2. Determine the product of the nonprimary care PRA and the nonprimary care 3-year average from step 2.

Step 4. Sum the products of step 3.

Step 5. Multiply the sum from step 4 by the hospital's Medicare patient load Start Printed Page 39895for the cost reporting period to determine Medicare's direct GME payment to the hospital.

Existing § 413.86(g)(5) specifies that residents in new programs are excluded from the rolling average calculation for a period of years equal to the minimum accredited length for the type of program, and are added to the payment formula after applying the averaging rules. Accordingly, for hospitals that qualify for an adjustment to their FTE caps for residents training in new programs under § 413.86(g)(6), primary care and obstetrics and gynecology residents in new programs would be added to the quotient of the primary care and obstetrics and gynecology 3-year average, and nonprimary care residents in new programs would be added to the quotient of the nonprimary care 3-year average. The sums of the respective 3-year averages and new residents would then be multiplied by the respective PRAs.

The following example illustrates the determination of direct GME payment under the proposed rolling average methodology for an existing teaching hospital with no new programs:

Example:

Assume a hospital with a cost reporting period ending September 30, 1996 (beginning October 1, 1995) had 100 unweighted FTE residents and 90 weighted FTE residents. The hospital's FTE cap is 100 unweighted residents.

Step 1. In its cost reporting period beginning in FY 2000, it had 100 unweighted residents and 90 weighted residents (50 primary care and 40 nonprimary care).

  • The hospital had 90 unweighted residents and 85 weighted residents (50 primary care and 35 nonprimary care) for its cost reporting period beginning in FY 2001.
  • In its cost reporting period beginning in FY 2002, the hospital had 80 unweighted residents and 80 weighted residents (50 primary care and 30 nonprimary care).

Step 2. The 3-year average of weighted primary care and obstetrics and gynecology residents is (50 +50 + 50)/3 = 50. The 3-year average of weighted nonprimary care residents is (40 + 35 + 30)/3 = 35.

Step 3. Primary care: $80,000 PRA × 50 weighted primary care and obstetrics and gynecology FTEs = $4,000,000. Nonprimary care: $78,000 × 35 weighted nonprimary care FTEs = $2,730,000.

Step 4. $4,000,000 + $2,730,000 = $6,730,000.

Step 5. If the hospital's Medicare patient load for the payment cost reporting period is .20, Medicare's direct GME payment would be $6,730,000 × .20 = $1,346,000.

Whether the proposed methodology results in a payment difference for a hospital is dependent upon whether or not the number and mix (primary care and nonprimary care) of FTEs changes in a 3-year period. If the number and mix of FTEs does not change in a 3-year period, there would be no difference in a direct GME payment amount derived using the proposed methodology versus the existing methodology. For example, if a hospital has 90 weighted FTEs (50 primary care and 40 nonprimary care) in the current year and the 2 previous years (using the PRAs and the Medicare patient load from the example above), the payment amounts derived from the existing methodology and the proposed methodology would be equal.

If the number and mix of FTEs varies from year to year, there will be a difference in the results of the two methodologies. In some instances the existing methodology would result in a higher payment, and in other instances the proposed methodology would result in a higher payment. In the example above, the hospital has reduced its number of weighted residents by 5 FTEs in FYs 2001 and 2002. Calculating this hospital's direct GME payment amount using the existing methodology (using the PRAs and the Medicare patient load from the example) would result in a payment of $1,347,250, which is $1,250 more than $1,346,000, the amount calculated in the example using the proposed methodology.

In a scenario where a hospital makes larger reductions to the number of FTEs, the proposed methodology may be more beneficial. For example, using the PRAs and the Medicare patient load from the example above, assume a hospital has 90 weighted FTEs (50 primary care and 40 nonprimary care) in FY 2000, 85 weighted FTEs (50 primary care and 35 nonprimary care) in FY 2001, and 70 weighted FTEs (35 primary care and 35 nonprimary care) in FY 2002. If the proposed methodology is used, the payment amount of $1,292,050 would be calculated, which is $1,666 more than $1,290,386, the amount calculated if the existing methodology is used.

We proposed to revise § 413.86(g)(4) to specify that, effective for cost reporting periods beginning on or after October 1, 2001, if the hospital's total unweighted FTE count in a cost reporting period exceeds its cap, the hospital's weighted FTE count, for primary care and obstetrics and gynecology residents and nonprimary care residents, respectively, will be reduced in the same proportion that the number of these FTE residents for that cost reporting period exceeds the unweighted FTE count in the cap. We also proposed to revise § 413.86(g)(5) to specify that, effective for cost reporting periods beginning on or after October 1, 2001, the direct GME payment will be calculated using two separate rolling averages, one for primary care and obstetrics and gynecology residents and one for nonprimary care residents.

Comment: Two commenters asked whether or not the proposed new methodology for calculating direct GME payment using two separate rolling averages for primary care and nonprimary care residents is truly an “alternative,” or, if finalized, would it replace the present methodology.

Response: The proposed new methodology would replace the existing rolling average methodology effective for cost reporting periods beginning on or after October 1, 2001 (the effective date of this final rule). Hospitals training both primary care and nonprimary care residents would determine two separate rolling average counts; one for primary care and one for nonprimary residents.

Comment: One commenter stated: “although the new rolling average methodology is difficult and complex, its impact on GME programs is far from clear.” The commenter asked how much change in resident number and mix is necessary before this new methodology has an effect on payment, and stated that more examples would be helpful in determining this effect. The commenter also expressed hope that, if this change is finalized, we will revisit this issue after implementation and fully examine and analyze its impact on teaching program payment.

Response: As we explained in the proposed rule, whether the new methodology results in a payment difference for a hospital is dependent upon whether or not the ratio of primary care to nonprimary care FTEs changes in a 3-year period. If the ratio of the FTEs does not change over the 3-year period, there would be no difference in a direct GME payment amount derived using the new methodology versus the existing methodology. In particular, there would be an increase in direct GME payment under the revised methodology, where a hospital's proportion of primary care residents to nonprimary care residents over the last 3 years is higher than the hospital's proportion of primary care residents to nonprimary care residents in the current year. As this new rolling average methodology is implemented, we intend to evaluate hospitals' direct GME payments to further analyze the impact of using this methodology.

Comment: One commenter asked how many hospitals would still be “at risk” Start Printed Page 39896for changes in payment because they retain different primary care and nonprimary care PRAs, given the implementation of the 85 percent floor.

Response: As described in the impact section of this final rule in Appendix A, we estimated that, of 1,231 teaching hospitals included in the analysis, approximately 562 hospitals have PRAs that will be increased to equal 85 percent of the national average PRA. This leaves 669 hospitals with PRAs that exceed the 85 percent floor. However, not all of these hospitals will be using the new methodology because not all of them have both primary care and nonprimary care PRAs.

Comment: One commenter noted that, in order to implement the new rolling average methodology, significant changes must be made to Worksheet E, Part A, the worksheet on the Medicare cost report used for calculating a hospital's IME adjustment. The commenter also stated that past cost reports using the current cost reporting forms would have to be reopened.

Response: As we explained in the preamble to the proposed rule and above in this final rule, we have decided to institute a separate rolling average for primary care and nonprimary care residents due to an issue with respect to the current payment methodology for direct GME only. That is, when combining a hospital's primary care PRA and nonprimary care PRA on Worksheet E-3, Part IV of the Medicare cost report, we currently weight the respective PRAs by current year residents. As a result, although Congress provided that the direct GME payments should be made based on a 3-year rolling average count of weighted residents, the current methodology introduces the number of residents that a hospital is training in the current cost reporting period into the payment formula. A payment formula that incorporates the number of current year residents “dilutes” the effect of the rolling average as related to direct GME payments. However, in regard to the IME payments, we also noted that, although they are also based on a rolling average, no change in the existing methodology is needed because there is no distinction between primary care and nonprimary care residents for IME payment purposes. Therefore, while two separate rolling averages will be used for direct GME payments (one for primary care and one for nonprimary care), a single rolling average will continue to be used for IME payments under the existing methodology. We will make the necessary changes to the Medicare cost report on Worksheet E-3, Part IV, which is used for calculating a hospital's direct GME payment, to accommodate two separate rolling average calculations.

The commenter also stated that affected cost reports in which the current rolling average methodology was used would need to be reopened. However, the effective date of this change in the methodology is prospective, and will only affect cost reporting periods beginning on or after October 1, 2001. We will not be reopening past cost reports to change direct GME payment because of the new methodology.

Comment: One commenter indicated that the separation of the 3-year rolling average between primary care and nonprimary care FTEs will be difficult because the prior year FTEs were not separated into primary care and nonprimary care FTEs. The commenter asked how a provider could obtain the information from prior years if the same methodology was not used.

Response: We do not believe it will be difficult for a hospital to obtain the weighted FTE counts of its primary care and nonprimary care residents separately. This is because, in fact, although the rolling average was computed based on total residents, there are lines on Worksheet E-3, Part IV (lines 3.07 and 3.08) in which the current year weighted count of primary care and nonprimary care residents are reported separately. Therefore, the hospital and the fiscal intermediary can easily refer to these lines on prior year cost reports to determine a 3-year average for primary care and nonprimary care residents, respectively.

4. Counting Research Time as Direct and Indirect GME Costs (§§ 412.105 and 413.86)

It has come to our attention that there appears to be some confusion in the provider community as to whether the time that residents spend performing research is countable for the purposes of direct and indirect GME reimbursement. Although we did not propose to make any policy changes in the May 4 proposed rule, we did reiterate our longstanding policy regarding time that residents spend in research and proposed to incorporate this policy in the IME regulations.

Section 413.86(f) specifies that, for the purposes of determining the total number of FTE residents for the direct GME payment, residents in an approved program working in all areas of the hospital complex may be counted. Accordingly, the time the residents spend performing research as part of an approved program anywhere in the hospital complex may be counted for direct GME payment purposes. If the requirements listed at §§ 413.86(f)(3) and (f)(4) are met, a hospital may also count the time residents spend doing research in nonhospital settings for direct GME payment.

For purposes of determining the IME payment, § 412.105(f)(1)(ii) specifies that the time residents spend training in parts of the hospital that are subject to the inpatient prospective payment system, in the outpatient departments, or (effective on or after October 1, 1997, in accordance with § 413.86(f)(3) or (f)(4), as applicable) in nonhospital settings, may be counted. Section 2405.3.F.2. of the Provider Reimbursement Manual (PRM) further states that a resident must not be counted for the IME adjustment if the resident is engaged exclusively in research. Resident time spent “exclusively” in research means that the research is not associated with the treatment or diagnosis of a particular patient of the hospital. Therefore, although the research component may be part of an approved program, the time that residents devote specifically to performing research that is not related to delivering patient care, whether it occurs in the hospital complex or in non-hospital settings, may not be counted for IME payment purposes. “Exclusively research” time is not allowable for IME purposes irrespective of whether the resident is engaged only in research or spends only part of his or her time on research. Accordingly, time spent exclusively in research over the course of a program year should be subtracted from the total FTE count for that year. For example, if a resident is required to spend 3 months in a particular program year engaged in research activities unrelated to delivering patient care, that amount of time should be subtracted from the total FTE count, whether or not the research time is fulfilled in one block of time, or is distributed throughout the training year.

We note that in order to count residents for both direct GME and IME payment purposes, the residents' training must be part of an approved program. This applies whether or not the residents are doing work that is clinical in nature. There are situations where residents have completed their residency program requirements but remain for an additional period of time to continue their training (that is, to conduct research or other activities) outside the context of a formally organized approved program. As we explained in the September 29, 1989 final rule (54 FR 40306), these residents are not countable for direct GME or IME Start Printed Page 39897reimbursement. Rather, patient care services provided by these residents should be paid as Part B services.

We proposed to amend § 412.105(f)(1)(iii) to add a paragraph (B) to incorporate language that reflects this policy.

We received several comments disagreeing with our clarification to longstanding policy on whether the time that residents spend performing research may be included in the FTE count for the purpose of determining direct and indirect GME reimbursement.

Comment: One commenter stated that the proposed revised IME regulations at § 412.105 do not mention any requirement that residents counted for purposes of the IME adjustment and assigned to a hospital's inpatient prospective payment system or outpatient area be involved in “patient care activities.” Instead, that requirement is only mentioned with reference to residents assigned to nonprovider settings. Therefore, the commenter believed that a patient care requirement in reference to counting residents in nonprovider settings implies the exclusion of the same requirement when counting residents in the hospital (specifically as it applies to counting research time for IME purposes).

Response: The clarification in the proposed rule addresses our longstanding interpretation of existing regulations and reflects longstanding general Medicare reimbursement principles. Under general Medicare reimbursement principles, as reflected in § 413.9, costs incurred by a hospital generally must be related to patient care in order to be reimbursed by Medicare.

The purpose of the IME payments is to address the additional costs that hospitals incur in treating patients. In our May 6, 1986 interim final rule (51 FR 16775), we stated: “Section 1886(d)(5)(B) of the Act provides that prospective payment hospitals receive an additional payment for the indirect costs of medical education computed in the same manner as the adjustments for those costs under regulations in effect as of January 1, 1983. Under those regulations, we provided that the indirect costs of medical education incurred by teaching hospitals are the increased operating costs (that is, patient care costs) that are associated with approved intern and resident programs” (emphasis added). In addition, in our September 29, 1989 final rule (54 FR 40286), we specifically state: “As used in section 1886(d)(5)(B) of the Act, ‘indirect medical education' means those additional costs (that is, patient care costs) incurred by hospitals with graduate medical education programs. The indirect costs of medical education might, for example, include added costs resulting from an increased number of tests ordered by residents as compared to the number of tests normally ordered by more experienced physicians” (emphasis added).

Thus, payments for IME address the additional operating costs that teaching hospitals incur in furnishing patient care. Accordingly, consistent with the purpose of IME payments and general Medicare reimbursement principles, in determining the FTE count with respect to the IME adjustment, it has been our longstanding policy that we do not include residents to the extent that the residents are not involved in furnishing patient care but are instead engaged exclusively in research.

Comment: One commenter disagreed with our use of the Provider Reimbursement Manual (PRM), section 2405.3.F.2, in support of our policy on excluding residents from the IME count if the resident is “engaged exclusively in research.” The commenter stated that the reference to exclusion from the resident count for residents engaged “exclusively in research” must be read in the context of the Manual provision, and not in a regulatory vacuum. The commenter believed that PRM section 2405.3.F.2 is addressing situations outside of the traditional residency program—where the resident time at issue is not part of an approved medical education program. The commenter believed that the phrase “engaged exclusively in research” refers to persons who are research scientists and not engaged in research as part of a clinical residency program.

In addition, this commenter stated that our interpretation of the word “exclusively” in this context is not reasonable and is contrary to the clear meaning of the term. The commenter argued that our interpretation practically eliminates the word “exclusively,” effectively saying that a resident is “exclusively engaged in research” if that resident participates in any research at all.

Response: Section 2405.3.F.2 of the PRM (published in August 1988) was written to address “Questionable situations” for the IME FTE count. Indeed, in the introductory paragraph in this section we state: “It is recognized that situations arise in which it may be unclear whether an individual is counted as an intern or resident in an approved program for the purposes of the indirect medical education adjustment.” Thus, the point of section 2405.3.F.2 of the PRM was to clarify situations for counting resident FTEs in approved programs for IME purposes. As the commenter suggested, some of the situations listed under this section address situations where the resident FTE time at issue is not part of the approved medical education program (for example, that a resident must not be counted for the IME adjustment if “the individual's services in provider settings are payable as physician services (situations in which it is clear that the otherwise eligible resident is ‘moonlighting')”.) (Section 2405.3.F.2. of the PRM). However, this section in the PRM was written to clarify counting rules for IME purposes in various situations. In addition to clarifying situations where resident time is spent in an unapproved program, this section in the PRM certainly also clarifies the rules for determining resident time spent in an approved program—such as time the resident is “engaged exclusively in research” (as cited in the proposed rule) and that “any portion of the individual's salary is subject to reasonable compensation equivalency limits.” (Section 2405.3.F.2. of the PRM)

Therefore, we do not agree with the commenter that we have read this manual provision in a “regulatory vacuum”. The phrase “engaged exclusively in research” is not meant only to refer to persons who are research scientists and not engaged in research as part of an approved clinical residency program, since as explained above, there is nothing in the manual provision that limits the research provision to research performed outside of an approved program.

In the proposed rule, we stated that resident time spent “exclusively” in research “means that the research is not associated with the treatment or diagnosis of a particular patient of the hospital.” (66 FR 22700). The commenter argued that this interpretation of the word “exclusively” in the context of the manual provision is unreasonable and contrary to the clear meaning of the term, that under our policy, a resident would be “engaged exclusively in research” if that resident participates in any research at all. We do not agree.

Resident time spent “engaged exclusively in research” means time not associated with the care of a particular patient (see proposed § 412.105(f)(1)(iii)(B)); thus, any research time that is associated with the treatment or diagnosis of a particular hospital patient or, effective on or after October 1, 1997, of patients in nonhospital settings, that is, usual patient care, is countable for IME payment purposes. We note that this distinction between activities that are Start Printed Page 39898“usual patient care” and research activities is, again, longstanding Medicare policy. In April 1975, at section 500 of the PRM, we stated the principle that “Costs incurred for research purposes, over and above usual patient care, are not included as allowable costs.” Indeed, since the inception of Medicare, we have distinguished between activities that are “usual patient care” and activities that are outside this scope, such as research activities.

Comment: One commenter stated that “by its very nature as a regression analysis, or statistical measure, the IME formula is not intended to be dependent on ‘the treatment or diagnosis of a particular patient of the hospital.' ” Another commenter stated: “our understanding of the development of the adjustment is that statistical analyses showed that the use of an intern/resident-to-bed ratio (IRB) was (and continues to be) the best proxy for the patient care cost differences between teaching and non-teaching hospitals. Given that the IRB is only a proxy, the relevance of a requirement that residents themselves must be engaged in activities related to patient care in order for their training time to be counted in the IRB is unclear.”

Response: Generally, the statistical analyses used in the development of the statutory IME adjustment measured the differences between teaching and nonteaching hospitals with respect to the additional costs associated with patient care. Inpatient hospital care that involves the use of residents is costlier than inpatient hospital care that does not involve the use of residents. As the comments and the statute reflect, the hospital's ratio of interns and residents to beds is one factor in measuring the additional costs that a hospital incurs due to the use of residents in furnishing patient care. While a resident is engaged exclusively in research, the hospital is not incurring additional patient care costs due to that resident. Accordingly, we believe that the measure of additional patient care costs is more accurate if it excludes residents engaged exclusively in research.

Suppose, for example, that a teaching hospital has a total of 20 FTE residents training in prospective payment system sections of the hospital who are all involved in furnishing patient care. The amount of the IME payment to the hospital would reflect 20 FTE residents, reflecting the additional operating costs arising from the use of 20 FTE residents in furnishing patient care. Now suppose that the same hospital has the same 20 residents involved in furnishing patient care but it also has 4 additional FTE residents engaged exclusively in research. The 4 residents engaged exclusively in research do not contribute to higher operating costs and, therefore, as our longstanding policy reflects, we believe it is appropriate not to count them for purposes of the IME adjustment. Thus, in both situations, the hospital's FTE count for purposes of IME is 20. If we did make higher payments in the second situation, then the hospital would receive higher payments even though the hospital did not incur higher patient care costs.

Comment: One commenter stated that our regulations at § 413.86(e)(1)(i)(B) clearly allow research time to be counted for direct GME purposes. This commenter asserted that “it cannot be reasonably argued that research time should be counted differently for IME than direct GME based on a new, very specific definition of patient care that applies solely to IME”. Another commenter stated the proposed rule is “unduly burdensome” by requiring hospitals to maintain different counts for direct GME and IME based on research activity or rotations. A third commenter stated that there is an alternative to distinguishing between direct GME and IME as it relates to research—“lawyers, often when faced with conflicting sections of the law, attempt to reconcile a common policy out of these conflicts, rather than further complicating things. You could do the same here.”

Response: As we have stated above and in the proposed rule, the clarification we made concerning the counting of FTEs for research time related to the diagnosis and treatment of a particular patient for IME purposes is longstanding Medicare reimbursement policy. We were not proposing a change in Medicare policy.

We are not introducing unnecessary complexity to the direct and indirect medical education counts, since it has always been Medicare policy to require the hospital to distinguish between time spent by residents involved exclusively in research and time spent on patient care. Further, the IME and direct GME FTE counts have and will continue to differ for several reasons. Hospitals have always been able to count residents in all areas of the hospital complex for direct GME but cannot count residents working in units exempt from the prospective payment system for IME. In addition, each resident included in the hospital's direct GME FTE count is counted as 0.5 FTE if they have trained beyond the number of years required to become eligible in the specialty in which they first began training. These same residents are counted as 1.0 FTE in the hospital's IME FTE count. We reiterate that we are not making a change in policy, but merely clarifying our policy with respect to counting residents involved in GME.

With respect to research, our policies for direct GME payment are consistent with our policies for IME payment. In both contexts, we do not pay for the costs of time spent by residents engaged exclusively in research. In making payments for IME and direct GME for a given year, it is true that we treat research time differently for purposes of the IME FTE count and the direct GME FTE count, but, as explained below, this difference arises from the direct GME base year methodology and does not mean that we pay for research costs in the direct GME payment.

In the September 29, 1989 final rule implementing the direct GME base year payment methodology, we described the calculation of the per resident amounts (PRAs). Each hospital's PRA is determined by taking the hospital's total allowable graduate medical education costs (which do not include costs allocated to the nursery cost center, research, and other nonreimbursable cost centers) in a base year and dividing the costs by the number of FTE residents working in all areas of the hospital complex in the base year. (§ 413.86(e)(1)(i)) In the case of research and other nonreimbursable cost centers, costs were excluded from the PRA calculation because they were nonreimbursable in the base year, consistent with longstanding Medicare policy on Medicare cost reimbursement to teaching hospitals. Ideally, residents engaged exclusively in research would also have been excluded from the base year FTE count used in the PRA calculation. However, for a number of hospitals, the FTE count for the base year did include residents engaged exclusively in research because the 1984 base year information available when the PRAs were determined in 1990 did not distinguish between residents involved in furnishing patient care services and residents exclusively engaged in research.

In order to avoid disadvantaging these hospitals, in making direct GME payments for a given year, we have included and continue to include residents exclusively engaged in research in the direct GME FTE count both in the base year PRA calculation and in the FTE count in subsequent payment year calculations. Doing so “offsets” the effects of the inclusion of such residents in the direct GME base year FTE count (no such “offset” is necessary in the context of IME). However, because the costs were Start Printed Page 39899excluded in calculating the PRA, the end result is that the direct GME payment does not encompass the costs of residents engaged exclusively in research. Therefore, as with the IME payment, Medicare is not and has not been reimbursing teaching hospitals under direct GME for costs the hospital incurs associated with resident time spent in research unrelated to usual patient care.

Comment: One commenter stated that our policy on counting research time is well stated and clear. However, this commenter stated that there is much research that is done outside any funding source, but is an essential part of the resident's training. The commenter further stated that the hospital does assume these costs, and they are not part of the direct GME component, and so represent valid hospital expenditures due to the presence of residents.

Response: We certainly acknowledge that hospitals incur research costs associated with the training of interns and residents. We understand that many specialties require a research component to be completed as part of the specialties' board eligibility requirements. The question as far as IME payments are concerned is whether or not the research is associated with the diagnosis and treatment of a particular patient. As explained above, teaching hospitals receive Medicare IME payments to pay hospitals for Medicare's share of the additional costs these hospitals incur associated with patient care costs; if the research is not associated with usual patient care costs, then the resident research time is not reimbursable.

Comment: Two commenters stated that they are concerned that clarifications on the exclusion of resident FTEs from the IME payment for trainees engaged in activities that are purely research would be extended to include those individuals in an approved program that requires research activities at the same time as the delivery of patient care.

Response: As stated above, where the residents are engaged exclusively in research, it is appropriate to exclude that time from the IME payment calculation. However, consistent with longstanding policy, in the situation where residents are in an approved program participating in research activities that are associated with the diagnosis and treatment of a particular patient, we believe it is appropriate to include that time in the IME payment calculation.

5. Temporary Adjustments to FTE Cap to Reflect Residents Affected by Residency Program Closure

In the July 30, 1999 hospital inpatient prospective payment system final rule (64 FR 41522), we indicated that we would allow a temporary adjustment to a hospital's FTE resident cap under limited circumstances and if certain criteria are met when a hospital assumes the training of additional residents because of another hospital's closure. We made this change because hospitals had indicated a reluctance to accept additional residents from a closed hospital without a temporary adjustment to their caps. When we proposed this change 2 years ago, we received several comments suggesting that we include lost accreditation of a program (that is, a program's closure) in the temporary adjustment policy. We explained in our response to these comments (64 FR 41522) that we did not believe it was appropriate to expand our policy to cover any acts other than a hospital's closure. We made this decision because, unless the hospital terminates its Medicare agreement, the hospital would retain its statutory FTE cap and could affiliate with other hospitals to enable the residents to finish their training.

It has come to our attention that, despite a hospital's ability to affiliate with other hospitals when it shuts down a residency program, some hospitals for various reasons do not affiliate before their programs close, particularly when the program closes abruptly towards the end of the program year (the deadline to submit Medicare affiliation agreements is July 1 of the upcoming program year). Therefore, in the May 4 proposed rule, we proposed that if a hospital that closes its residency training program agrees to temporarily reduce its FTE cap, another hospital(s) may receive a temporary adjustment to its FTE cap to reflect residents added because of the closure of the former hospital's residency training program. For purposes of this policy on closed programs, we proposed to define “closure of a hospital residency training program” as when the hospital ceases to offer training for residents in a particular approved medical residency training program (proposed § 413.86(g)(8)(i)(B)). The methodology for adjusting the caps for the “receiving hospital” and the “hospital that closed its program” is described below.

a. Receiving hospital. We proposed that a hospital(s) may receive a temporary adjustment to its (or their) FTE cap to reflect residents added because of the closure of another hospital's residency training program if—

  • The hospital is training additional residents from the residency training program of a hospital that closed its program; and
  • No later that 60 days after the hospital begins to train the residents, the hospital submits to its fiscal intermediary a request for a temporary adjustment to its FTE cap, documents that the hospital is eligible for this temporary adjustment by identifying the residents who have come from another hospital's closed program and have caused the hospital to exceed its cap, specifies the length of time the adjustment is needed, and submits to its fiscal intermediary a copy of the FTE cap reduction statement by the hospital closing the program, as specified in paragraph (g)(8)(iii)(B)(2).

In general, the proposed temporary adjustment criteria are reflective of the temporary adjustment criteria for taking on the training of displaced residents from closed hospitals. We note that we proposed that more than one hospital would be eligible to apply for the temporary adjustment, because residents from one closed program may go to different hospitals, or they may finish their training at more than one hospital. We also noted that only to the extent a hospital would exceed its FTE cap by training displaced residents would it be eligible for the temporary adjustment.

Finally, we proposed that hospitals that meet the proposed criteria would be eligible to receive temporary adjustments (for cost reporting periods beginning on or after October 1, 2001, for direct GME and with discharges beginning on or after October 1, 2001 for IME) for training the displaced residents from programs that closed even before the effective date of this policy. We mentioned this because hospitals may have closed programs in the recent past and the residents from the closed programs may not have completed their training as of the effective date of this policy. For instance, if a 5-year residency program, such as surgery, closed on July 1, 1997, the 5th program year residents may still be training during this residency year (2001). We proposed that if both the receiving hospital(s) and the hospital that closed the program in this example follow the criteria described in this preamble, the receiving hospital may receive a temporary adjustment to its FTE cap for 9 months (October 1, 2001 through June 30, 2002) to accommodate the 5th year surgery residents. However, we noted that hospitals would not be eligible to receive a temporary adjustment for Start Printed Page 39900training the residents until the effective date of this rule (that is, October 1, 2001).

b. Hospital that closed its program(s). We proposed that a hospital that agrees to train residents who have been displaced by the closure of another hospital's program may receive a temporary FTE cap adjustment only if the hospital with the closed program(s)—

  • Temporarily reduces its FTE cap by the number of FTE residents in each program year training in the program at the time of the program s closure. The yearly reduction would be determined by deducting the number of those residents who would have been training in the program year during each year had the program not closed; and
  • No later than 60 days after the residents who were in the closed program begin training at another hospital, submits to its fiscal intermediary a statement signed and dated by its representative that specifies that it agrees to the temporary reduction in its FTE cap to allow the hospital training the displaced residents to obtain a temporary adjustment to its cap; identifies the residents who were training at the time of the program's closure; identifies the hospitals to which the residents are transferring once the program closes; and specifies the reduction for the applicable program years.

Unlike the closed hospital policy at § 413.86(g)(8), we proposed under this closed program policy (which we proposed to amend § 413.86(g)(8) to include), that in order for the receiving hospital(s) to qualify for a temporary adjustment to its FTE cap, the hospitals that are closing their programs would need to reduce their FTE cap for the duration of time the displaced residents would need to finish their training. We proposed this change because, as explained below, the hospital that closes the program still has the FTE slots in its cap, even if the hospital chooses not to fill the slots with residents. We believe it is inappropriate to allow an increase to the receiving hospital's cap without an attendant temporary decrease to the cap of the hospital with the closed program, even if the increase is only temporary. We noted that even under the proposed closed program policy, the hospital that closes its program may choose instead to affiliate with another hospital by July 1 of the next residency year so that the residents can more easily finish their training.

We proposed that the cap reduction for the hospital with the closed program would be based on the number of FTE residents in each program year who were in the program at the program's closure, and who began training at another hospital, rather than the count of residents each year at the hospital(s) receiving the temporary adjustment(s). We believe it would be too burdensome administratively to require the hospital closing the program to keep track of the status of the residents when they are training at other hospitals. For instance, Joe Smith, a resident who is a PGY 1 when Hospital X closes its pathology residency program, may then finish his training at Hospital Y. The resident trains for one year at Hospital Y as a PGY 2, but decides to drop out of the program before finishing. It would be burdensome to require Hospital X to keep track of Joe Smith's status while he is training at Hospital Y for purposes of the reduction in Hospital X's cap. Therefore, we proposed to “freeze” the basis for the reduction of the FTE cap of the hospital that closed the program based on the count and status of the residents when the hospital closes the program.

Example: Hospital A, which has a direct GME FTE cap of 20 FTEs and an IME FTE cap of 18 FTEs, is experiencing financial difficulties and decides to close down its internal medicine residency training program effective June 30, 2002. As of June 30, 2002, Hospital A is training 2 PGY 1s, 4 PGY 2s, and 6 PGY 3s in its internal medicine program. Hospitals B, C, and D take on the training of the displaced residents. These hospitals are eligible to receive temporary adjustments to their FTE caps if they follow the proposed criteria stated above. In order for Hospitals B, C, and D to receive the temporary adjustments, however, Hospital A must agree to reduce its FTE cap. According to the proposed criteria stated above, Hospital A's reduction would be:

July 1, 2002 through June 30, 2003

Direct GME FTE cap: 14 FTEs, (20 FTEs cap—2 PGY 2s-4 PGY 3s)

IME FTE cap: 12 FTEs (18 FTEs-2 PGY 2s-4 PGY 3s)

We note that no downward adjustment for the 6 PGY 3s for either cap is necessary since these residents will have completed their training in that program by the July 1, 2000 through June 30, 2003 program year.

July 1, 2003 through June 30, 2004

Direct GME FTE cap: 18 FTEs (20 FTEs cap—2 PGY 3s)

IME FTE cap: 16 FTEs (18 FTEs cap—2 PGY 3s)

July 1, 2004 through June 30, 2005

Direct GME FTE cap: 20 FTEs

IME FTE cap: 18 FTEs

We also proposed to revise § 412.105(f)(1)(ix) to make the provision relating to the adjustment to FTE caps to reflect residents affected by closure of hospitals' medical residency training programs applicable to determining the IME payment.

Comment: Several commenters commended us for extending payment of IME and direct GME to situations of program closure, explaining that this change will help stabilize the GME system and ensure that residents can continue their training without imposing financial hardship on the institutions that accept them into their programs. One commenter also noted that the tradeoff in the FTE resident cap between a hospital closing its residency program and the hospital receiving the displaced residents seems reasonable. Another commenter stated that while the proposed rule more than adequately described the requirements and procedures for allowing a hospital to receive a temporary adjustment to its FTE caps to reflect residents added because of the closure of another hospital's program, the receiving hospital is penalized because the 3-year rolling average applies to these residents. The commenter noted that, in the first and second year, the receiving hospital will be paid one third and two thirds of the costs of these displaced FTE residents because of the rolling average, although the receiving hospital is paying for these FTE residents at full cost. The commenter suggested that a temporary exception should be granted to receiving hospitals from the 3-year rolling average in the same manner as residents in new programs under § 413.86(g)(5) are excluded from the rolling average. The commenter also asked that temporary relief should be granted in the IME adjustment with regard to the application of the resident-to-bed ratio cap, wherein the relief from this cap should be an adjustment to the prior year's resident FTEs equal to the increase in the current year's FTEs which is attributable to the transferred residents.

Response: We understand the commenter's concern regarding the inclusion of the resident FTEs displaced by the closure of another hospital's program in the receiving hospital's rolling average count of residents, for both direct GME and IME purposes. In addition, we believe that a similar concern also exists in regard to the inclusion of residents in the receiving hospital's rolling average calculation for residents displaced by the closure of another hospital. Therefore, we are revising proposed § 412.105(f)(1)(v) for IME and adding a paragraph (vi) to proposed § 413.86(g)(5) for direct GME to specify that FTE residents that are displaced by the closure of either another hospital or another hospital's program are added after the calculation of the rolling average for the receiving Start Printed Page 39901hospital for the duration of time that those displaced FTE residents are training at the receiving hospital.

In regard to providing temporary relief to the receiving hospital's IME resident-to-bed ratio cap for the displaced residents, while we understand the commenter's concern about this issue as well, at this time we have decided not to allow the exclusion of these displaced residents in applying the resident-to-bed ratio cap. Under existing IME policy, the receiving hospital may be held to a lower cap in the first year of training the displaced residents. However, the receiving hospital may benefit from the higher cap in the year following the final year of the displaced residents' training. Effective in the first year that the receiving hospital takes on the displaced residents, it will be capped by the prior year's lower resident-to-bed ratio because the displaced residents will not be included in the prior year FTE count. However, an increase in the current year's ratio will establish a higher cap for the following year. Furthermore, in the last year that the receiving hospital is training the displaced residents, a higher cap will be established for the following year in which all the displaced residents will have left the hospital since they have completed their training. Therefore, we believe it is unnecessary to exclude displaced residents in applying the resident-to-bed ratio cap. While we are not making any changes to address this issue at this time, we will consider suggestions for possible changes in the future, if warranted.

Comment: One commenter stated that it is unclear at what rate the payments for IME and direct GME will be made for the hospital receiving the displaced residents. The commenter asked if Medicare would pay that hospital at the same rate that the hospital with the closed program was paid for its residents, or would the receiving hospital receive Medicare payment at the same rate it currently is paid.

Response: The receiving hospital will receive payment for the displaced residents using its own rates—that is, the same rates as those used for residents in its own programs. The receiving hospital will use its own bed count for IME payment purposes, and its own PRA and Medicare patient load for direct GME payment purposes.

Comment: One commenter stated that, although the commenter supports the proposal for allowing temporary adjustments for residents coming from a closed program, the commenter believed that a mechanism should be established to “permanently preserve resident positions, as opposed to individual residents,” so long as there is no increase in the total number of FTE residents for which Medicare payment is made.

Response: In proposing § 413.86(g)(8)(iii), which allows a hospital to receive a temporary adjustment to its FTE caps to reflect residents added because of the closure of another hospital's program, we have attempted to make these regulations consistent with the existing regulations at § 413.86(g)(8). These existing regulations allow a hospital to receive a temporary adjustment to its FTE caps to reflect residents added because of the closure of another hospital. Therefore, because the regulations only allow for a temporary cap adjustment in situations involving hospital closure, we believe that it is appropriate to only allow for a temporary adjustment in situations involving program closure, as well.

6. Conforming Change to Regulations Governing Payment to Federally Qualified Health Centers (§ 405.2468(f))

We have discovered a technical error in the regulations at § 405.2468(f) regarding payment to federally qualified health centers (FQHCs) and rural health centers (RHCs) for the costs of graduate medical education. Specifically, § 405.2468(f)(6)(ii)(D) provides that “The costs associated with activities described in § 413.85(d) of this chapter” are not allowable graduate medical education costs. We recently amended § 413.85 in a final rule (66 FR 3358, January 12, 2001) regarding Medicare pass-through payment for approved nursing and allied health education programs. However, we inadvertently did not make a conforming change to § 405.2468(f)(6)(ii)(D). Section 405.2468(f)(6)(ii)(D) should read “The costs associated with activities described in § 413.85(h) of this chapter.” We proposed to revise § 405.2468(f)(6)(ii)(D) to reflect this change.

7. Provisions of the August 1, 2000 Interim Final Rule With Comment Period

The following provisions were included in the August 1, 2000 interim final rule with comment period. We are presenting a discussion of these provisions here in order to respond to the public comments received on the provisions and to finalize the rule.

Section 1886(h) of the Act, as revised by Public Law 105-33, caps the number of residents a hospital may count for direct GME and IME. In general, the total number of residents in the fields of allopathic or osteopathic medicine in a hospital may not exceed the number of such FTE residents in the hospital with respect to the hospital's most recent cost reporting period ending on or before December 31, 1996. In the regulations we published on August 29, 1997 (62 FR 46003), May 12, 1998 (63 FR 26327), July 31, 1998 (63 FR 40986), and July 30, 1999 (64 FR 41517), we established special rules for adjusting the FTE resident caps for indirect and direct GME for new medical residency programs. Public Law 106-113 further revised sections 1886(d) and 1886(h) of the Act to allow a hospital's caps to be adjusted if certain additional criteria are met.

a. Counting Primary Care Residents on Certain Approved Leaves of Absence in Base-Year FTE Count (Section 407(a)(1) of Public Law 106-113 and New 42 CFR 412.105(f)(1)(xi) and 413.86(g)(9))

The limit that was placed on the number of residents that a hospital may count for purposes of direct GME and IME is based on the number of residents in the hospital's most recent cost reporting period ending on or before December 31, 1996. In the situation where a primary care resident was previously training in a hospital's residency program, but was on an approved leave of absence during the hospital's most recent cost reporting period ending on or before December 31, 1996, the hospital's FTE cap may be lower than it would have been had the resident not been on an approved leave of absence. Section 407(a) of Public Law 106-113 amended section 1886(h)(4)(F) of the Act to direct the Secretary to count an individual for purposes of determining a hospital's FTE cap, to the extent that the individual would have been counted as a primary care resident for purposes of the FTE cap but for the fact that the individual was on maternity or disability leave or a similar approved leave of absence.

The statute allows a hospital to receive an adjustment for those residents to its individual FTE cap of up to three additional FTE residents. We provided that, in order for a hospital to receive this adjustment, the leave of absence must have been approved by the residency program director to allow the residents to be absent from the program and return to the program after the absence. We required that no later than 6 months after the date of publication of this interim final rule, the hospital must submit a request to the fiscal intermediary for an adjustment to its FTE cap and must provide contemporaneous documentation of the approval of the leave of absence by the residency program director, specific to Start Printed Page 39902each additional resident that is to be counted for purposes of the adjustment. For example, a letter to the resident by the residency program director before the resident takes the leave would be sufficient documentation of prior approval of the leave of absence.

Under section 407(a)(3) of Public Law 106-113, this provision is effective for direct GME FTE counts with cost reporting periods beginning on or after November 29, 1999, and for IME FTE counts, with discharges occurring in cost reporting periods beginning on or after November 29, 1999.

We added §§ 412.105(f)(1)(xi) and 413.86(g)(9) to our regulations to incorporate the provisions of section 407(a) of Public Law 106-113.

We received one comment concerning section 407(a)(1) of Public Law 106-113, as implemented at §§ 412.105(f)(1)(xi) and 413.86(g)(9), concerning the counting of primary care residents in certain approved leaves of absence in base-year FTE counts.

Comment: One commenter asked us to consider allowing hospitals to count FTE residents for residents who had been training in an approved residency program at a hospital but then left the hospital during the 1996 base-year and never returned. The commenter stated that the FTE slot in which the “abandoning” resident vacated sometime in 1996 was filled by another resident in 1997 and thereafter, but the hospital has never received any direct or indirect GME payment for this FTE slot.

Response: Section 407(a) of Public Law 106-113 amended section 1886(h)(4)(F) of the Act to direct the Secretary to count an individual for purposes of determining a hospital's FTE cap to the extent that the individual would have been counted as a primary care resident for purposes of the FTE cap but for the fact that the individual “was on maternity or disability leave or a similar approved leave of absence.” We believe that this provision was not intended to apply to residents who leave the program in the base-year and never return. The statutory language is quite clear that in order for a hospital to count residents in this provision, the resident must have been on an “approved leave of absence.” A “leave of absence” necessarily translates to a resident being away and then returning to the hospital at which the resident had been training.

b. Adjustments to the FTE Cap for Rural Hospitals (Section 407(b)(1) of Public Law 106-113 and 42 CFR 412.105(f)(l)(iv) and 413.86(g)(4))

Public Law 105-33 included several provisions with the intent of encouraging physician training and practice in rural areas. Section 1886(h)(4)(H)(i) of the Act, as added by section 4623 of Public Law 105-33, directed the Secretary, in promulgating rules for the purpose of the FTE cap, to give special consideration to facilities that meet the needs of underserved rural areas. Consistent with the intent of this provision, section 407(b) of Public Law 106-113 provides a 30-percent expansion of a rural hospital's direct and indirect FTE count for purposes of establishing the hospital's individual FTE cap. Specifically, section 407(b) provided that, effective for direct GME with cost reporting periods beginning on or after April 1, 2000, and for IME, with discharges occurring on or after April 1, 2000, the FTE count may equal 130 percent of the number of unweighted residents the rural hospital counted in its most recent cost reporting period ending on or before December 31, 1996.

For example, if a hospital located in a rural area had 10 unweighted FTEs for its count for both direct GME and IME in its most recent cost reporting period ending on or before December 31, 1996, under this new provision the hospital would have a FTE cap of 13 unweighted FTEs, instead of 10 unweighted FTEs, because the hospital is located in a rural area. The revised FTE cap is equal to 130 percent of the number of unweighted residents in its most recent cost reporting period ending on or before December 31, 1996. The rural hospital's new FTE cap, effective April 1, 2000, is now 13 FTEs. However, if a hospital located in a rural area had zero unweighted FTEs for its count for both direct GME and IME in its most recent cost reporting period ending on or before December 31, 1996, under this new provision, this hospital would receive no adjustment to its FTE cap (130 percent of zero is zero FTEs).

We incorporated the provision of section 407(b) of Public Law 106-113 in §§ 412.105(f)(1)(iv) and 413.86(g)(4). We did not receive any comments on this provision.

c. Rural Track FTE Limitation for Purposes of GME and IME for Urban Hospitals that Establish Separately Accredited Approved Medical Programs in a Rural Area (Section 407(c) of Public Law 106-113 and new 42 CFR 412.105(f)(1)(x) and 413.86(g)(11))

In order to encourage the training of physicians in rural areas, section 407(c) of Public Law 106-113 amended section 1886(h)(4)(H) of the Act to add a provision that in the case of a hospital that is not located in a rural area but establishes separately accredited approved medical residency training programs (or rural tracks) in a rural area or has an accredited training program with an integrated rural track, an adjustment may be made to the hospital's cap on the number of residents. For direct GME, the amendment applies to payments to hospitals for cost reporting periods beginning on or after April 1, 2000; for IME, the amendment applies to discharges occurring on or after April l, 2000.

Section 407(c) of Public Law 106-113 did not define “rural tracks” or an “integrated rural track,” nor are these terms defined elsewhere in the Social Security Act or in any applicable Federal regulations. Currently, there are a number of accredited residency programs, particularly 3-year primary care residency programs, in which residents train for 1 year of the program at an urban hospital and are then rotated for training for the other 2 years of the 3-year program to a rural facility. These separately accredited “rural track” programs are identified by the Accreditation Council of Graduate Medical Education (ACGME) as “1-2” rural track programs. Accordingly, we implemented section 407(c) to address these “1-2” programs. In addition, we implemented section 407(c) to account for other programs that are not “1-2” programs but which include rural training portions.

As stated above, since there is no existing definition of “rural track” or “integrated rural track,” we defined at § 413.86(b) a “rural track” and an “integrated rural track” as an approved medical residency training program established by an urban hospital in which residents train for a portion of the program at the urban hospital and then rotate for a portion of the program to a rural hospital(s) or to a rural nonhospital site(s). We noted that “rural track” and “integrated rural track,” for purposes of this definition, are synonymous.

We amended § 413.86 to add paragraph (g)(11) (and amended § 412.105 to add paragraph (f)(1)(x)) to specify that, for direct GME, for cost reporting periods beginning on or after April 1, 2000, (or, for IME, for discharges occurring on or after April 1, 2000), an urban hospital that establishes a new residency program, or has an existing residency program, with a rural track (or an integrated rural track) may include in its FTE count residents in those rural tracks, in addition to the residents subject to the FTE cap at § 413.86(g)(4). An urban hospital may count the residents in the rural track up to a “rural track FTE limitation” for that Start Printed Page 39903hospital. We defined this rural track FTE limitation at § 413.86(b) as the maximum number of residents training in a rural track residency program that an urban hospital may include in its FTE count, that is in addition to the number of FTE residents already included in the hospital's FTE cap.

Generally, the rural track policy is divided into two categories: Rural track programs in which residents are rotated to a rural area for at least two-thirds of the duration of the program; and rural track programs in which residents are rotated to a rural area for less than two-thirds of the duration of the program. These two categories are then subdivided according to where the residents are training in the rural area; the residents may be trained in a rural hospital or the residents may be trained in a rural nonhospital site. To account for rural track residency programs with rural rotations that have program lengths greater than or less than 3 years, or that are not “1-2” programs, we specified “two-thirds of the length of the program,” instead of “2 out of 3 program years,” as a qualification to count FTEs in the rural track.

In the interim final rule with comment period, we specified that urban hospitals that wish to count FTE residents in rural tracks, up to a rural track FTE limitation, must comply with the conditions discussed below:

(1) Rotating Residents for at Least Two-Thirds of the Program to a Rural Hospital(s)

In the August 1, 2000 interim final rule with comment period, we specified at § 413.86(g)(11)(i) that if an urban hospital rotates residents in the rural track program to a rural hospital(s) for at least two-thirds of the duration of the program, the urban hospital may include those residents in its FTE count for the time the rural track residents spend at the urban hospital. The urban hospital may include in its FTE count those residents in the rural track training at the urban hospital, not to exceed its rural track FTE limitation, determined as follows:

  • For the first 3 years of the rural track's existence, the rural track FTE limitation for each urban hospital will be the actual number of FTE residents training in the rural track at the urban hospital.
  • Beginning with the fourth year of the rural track's existence, the rural track FTE limitation is equal to the product of: (1) The highest number of residents in any program year who, during the third year of the rural track's existence, are training in the rural track at the urban hospital or the rural hospital(s) and are designated at the beginning of their training to be rotated to the rural hospital(s) for at least two-thirds of the duration of the program; and (2) the number of years those residents are training at the urban hospital.

We utilized the term “designated” at § 413.86(g)(11)(i) (as well as at §§ 413.86(g)(11)(ii) and (iv)) to refer to the calculation of the rural track FTE limitation. “Designated” means that the residents must actually have enrolled in that rural track program to rotate for a portion of the rural track program to a rural area (either rural hospital(s) or rural nonhospital site(s)). To be counted as an FTE in this first scenario, these enrolled residents must actually rotate for at least two-thirds of the duration of the program to a rural hospital(s). If a resident, at the beginning of his or her training, intends to train in the rural area for at least two-thirds of the duration of the program, but ultimately never does so, this resident would be proportionately excluded from the urban hospital's rural track FTE limitation.

We noted that if the residents in the rural track are rotating to a rural hospital(s), the rural hospital(s) may be eligible to count the residents as part of its FTE count. If the rural track residency program is a new residency program as specified in redesignated § 413.86(g)(12), the rural hospital may be eligible to receive an FTE cap adjustment for those residents training in the rural track for the time those residents are training at the rural hospital(s), in accordance with the provisions of existing § 413.86(g)(6)(iii). If the rural track residency program is an existing residency program, a rural hospital may be eligible to count the FTE residents training in the rural track at the rural hospital(s), in accordance with the provisions of § 413.86(g)(4), as amended in the interim final rule with comment period to implement section 407(b)(1) of Public Law 106-113.

(2) Rotating Residents for at Least Two-Thirds of the Program to a Rural Nonhospital Site

In the August 1, 2000 interim final rule with comment period, we specified at § 413.86(g)(11)(ii) that if an urban hospital rotates residents in the rural track program to a rural nonhospital site(s) for at least two-thirds of the duration of the program, the urban hospital may include those residents in its FTE count, subject to the requirements under existing § 413.86(f)(4). The urban hospital may include in its FTE count those residents in the rural track, not to exceed its rural track FTE limitation, determined as follows:

  • For the first 3 years of the rural track's existence, the rural track FTE limitation for each urban hospital will be the actual number of FTE residents training in the rural track at the urban hospital and the rural nonhospital site.
  • Beginning with the fourth year of the rural track's existence, the rural track FTE limitation is equal to the product of: (1) The highest number of residents in any program year who, during the third year of the rural track's existence, are training in the rural track at the urban hospital and are designated at the beginning of their training to be rotated to a rural nonhospital site(s) for at least two-thirds of the duration of the program and the rural nonhospital site(s); and,(2) the number of years in which the residents are expected to complete each program based on the minimum accredited length for the type of program.

We note that we specified at § 413.86(g)(11)(ii) that an urban hospital may include in its FTE count those residents in the rural track rotating to a rural nonhospital site, subject to the requirements under existing § 413.86(f)(4). Section 413.86(f)(4) provides, in part, that a hospital that incurs “all or substantially all” of the costs of training residents in a nonhospital site may include those residents in determining the number of FTE residents (not to exceed the FTE cap) for that hospital. Under this rural track policy, where the urban hospital rotates residents for at least two-thirds of the residency program to a rural nonhospital site, the urban hospital would be eligible to include in its FTE count residents training in the rural track up to its rural track FTE limitation, but the urban hospital must still reimburse the rural nonhospital site for the costs of training those residents, as specified under § 413.86(f)(4). In the August 1, 2000 interim final rule with comment period (66 FR 47034), we included an example of application of this policy.

(3) Rotating Residents for Less Than Two-Thirds of the Program to a Rural Hospital(s)

In the August 1, 2000 interim final rule with comment period, we specified at § 413.86(g)(11)(iii) that if an urban hospital rotates residents in the rural track program to a rural hospital(s) for periods of time that are less than two-thirds of the duration of the program, the urban hospital may not include those residents in its FTE count, nor may the urban hospital include those residents as part of its rural track FTE Start Printed Page 39904limitation. However, we noted that, in this scenario, if the rural track residency program is a new residency program as specified in redesignated § 413.86(g)(12), the rural hospital may be eligible to receive an FTE cap adjustment for those residents training in the rural track, in accordance with the provisions of existing § 413.86(g)(6)(iii). If the rural track residency program is an existing residency program, a rural hospital may count the FTE residents training in the rural track at the rural hospital(s), in accordance with the provisions of § 413.86(g)(4), as amended, to incorporate the provisions of section 407(b)(1) of Public Law 106-113.

We are not permitting an urban hospital to count the time of residents training at the urban hospital in a rural track rotating to a rural hospital(s) for less than two-thirds the duration of the program (either as part of the urban hospital's FTE count or as part of its rural track FTE limitation), because to do so would inappropriately allow the urban hospital to circumvent the FTE caps by creating a new program with minimal training in a rural track. However, in this situation, like the other three provisions that concern the training of residents in rural areas, we indicated that we will allow Medicare payment for the rural portion of the training to the rural hospital.

(4) Rotating Residents for Less Than Two-Thirds of the Program to a Rural Nonhospital Site

In the August 1, 2000 interim final rule with comment period, we specified at § 413.86(g)(11)(iv) that if an urban hospital rotates residents in the rural track program to a rural nonhospital site(s) for periods of time that are less than two-thirds of the duration of the program, the urban hospital may include those residents in its FTE count, subject to the requirements under existing § 413.86(f)(4). The urban hospital may include in its FTE count those residents in the rural track, not to exceed its rural track FTE limitation, determined as follows:

  • For the first 3 years of the rural track's existence, the rural track FTE limitation for the urban hospital will be the actual number of FTE residents training in the rural track at the rural nonhospital site.
  • Beginning with the fourth year of the rural track's existence, the rural track FTE limitation is equal to the product of: (a) The highest number of residents in any program year who, during the third year of the rural track's existence, are training in the rural track at the rural nonhospital site(s); and (b) the length of time in which the residents are being trained at the rural nonhospital site(s).

We noted that, in this situation, an urban hospital would not be able to count the FTE for the rural track resident while the resident is training at the urban hospital. The rural track FTE count and the rural track FTE limitation for the urban hospital would be limited to account for the residents training at the rural nonhospital site.

As in the second scenario at § 413.86(g)(11)(ii), we specified at § 413.86(g)(11)(iv) that an urban hospital may include in its FTE count those residents in the rural track rotating to a rural nonhospital site, subject to the requirements under § 413.86(f)(4). Under the rural track policy, where the urban hospital rotates residents for less than two-thirds of the residency program to a rural nonhospital site, the urban hospital would be eligible to include in its FTE count residents training in the rural track up to its rural track FTE limitation, but the urban hospital must still reimburse the rural nonhospital site for the costs of training those residents, as specified under § 413.86(f)(4).

We noted that, in this last scenario, we are allowing the urban hospital to receive a rural track FTE limitation even in situations where it is rotating residents to a rural area for a minimal period of time (less than two-thirds the duration of the program). However, we believe that this last scenario can be distinguished from the third scenario in which the urban hospital is again rotating residents to a rural area for a minimal portion of the program but to a rural hospital instead of a rural nonhospital site. In the third scenario, we allow Medicare payment to go to the rural hospital for the portion of the urban hospital program that involves rural training (but not to the urban hospital, if the rural hospital is receiving an FTE cap adjustment for that training). However, in the last scenario, we allow the urban hospital to include the rural track residents in its FTE count (and as part of its rural track FTE limitation), based on how long it rotates the residents to the rural nonhospital site (and also incurs all or substantially all of the training costs). We do not believe that the urban hospital can circumvent its FTE cap in this last scenario because it will only count the rural track residents based on the portion of training in the rural nonhospital site. In the interim final rule with comment period (66 FR 47035), we included an example of the last scenario.

(5) Conditions That Apply to All Urban Hospitals

In the August 1, 2000 interim final rule with comment period, we specified that all urban hospitals that wish to count FTE residents in rural tracks, not to exceed their respective rural track FTE limitations, must also comply with each of the following conditions, as stated at §§ 413.86(g)(11)(v) and (vi):

  • A hospital may not include in its FTE count residents who are training in a rural track residency program that were already included as part of the hospital's FTE cap (if the rural track program was in existence during the hospital's most recent cost reporting period ending on or before FY 1996).
  • A hospital must base its count of residents in a rural track on written contemporaneous documentation that each resident enrolled in a rural track program at the urban hospital intends to rotate for a portion of the residency program to a rural area. For example, written contemporaneous documentation might be a letter of intent signed and dated by the rural track residency program director and the resident at the time of the resident's entrance into the rural track program as a PGY 1.
  • All residents who are included by the hospital as part of its FTE count (not to exceed its rural track FTE limitation) must ultimately train in the rural area.
  • If we find that residents who are included by the urban hospital as part of its FTE count did not actually complete the training in the rural area, we will reopen the urban hospital's cost report within the 3-year reopening period (as specified in § 405.1885) and adjust the hospital's Medicare GME payments (and, where applicable, the hospital's rural track FTE limitation).

We received several comments regarding the provisions of section 407 of Public Law 106-113 implemented in the August 1, 2000 interim final rule with comment period.

Comment: One commenter cited studies that found that more than half of residents with as little as 3 months of rural training became rural physicians, and, therefore, to best serve the intent of the legislation and significantly increase the number of rural physicians, we should fully fund FTEs with less than two-thirds total training in rural areas.

Response: Section 1886(h)(4)(H)(iv) of the Act, as added by section 407(c) of Public Law 106-113, provides for adjustments to the FTE cap “[i]n the case of a hospital that is not located in a rural area but establishes separately accredited approved medical residency training programs (or rural tracks) in a[] Start Printed Page 39905rural area * * *.” Thus, in order for a hospital to receive an adjustment under this provision, the training program must be separately accredited. The ACGME has established criteria to separately accredit programs that involve training in rural areas; under these criteria, a training program may be separately accredited if residents in the program train for at least 2 years of the 3-year program at a rural facility. Currently, the ACGME does not separately accredit a program as a rural track program or a program in a rural area unless it meets this “1-2” condition. We make an adjustment to the FTE cap under the rural track provision only if a program is separately accredited, and in order to be separately accredited, the program must meet ACGME's “1-2” criteria. We are amending the regulations at § 413.86 by adding paragraph (g)(11) to reflect this policy .

Furthermore, we believe that incorporating the ACGME's criteria reasonably identifies the situations in which an adjustment to the FTE cap under the rural track provision is warranted. We believe that it is important to limit adjustments under this provision to situations in which residents receive a significant amount of training in rural areas. While we certainly agree that post-residency physician retention in rural areas is important, we believe that it is also important to prevent hospitals from receiving adjustments to the FTE cap in situations when an adjustment is not warranted. We believe that, if an urban hospital could receive an adjustment to its FTE cap by providing only a nominal amount of training in a rural area, then hospitals might be able to inappropriately circumvent the FTE caps. Thus, our policy reflects the requirements of the statute as well as a balancing of considerations (permitting adjustments for hospitals that establish programs that provide a significant amount of training in rural areas, and preventing adjustments for hospitals that do not warrant an adjustment).

Comment: One commenter noted that, for cost reporting periods beginning on or after April 1, 2000, section 407 of Public Law 106-113 allows rural hospitals to increase their FTE resident caps by 30 percent and urban hospitals with rural training tracks to count those residents in rural tracks. The commenter had two concerns: (1) What happens to rural track programs that were in existence between January 1, 1997 and April 1, 2000; and (2) if the intent of the rural track provision is to encourage training in rural areas, then rural track programs in existence between January 1, 1997 and April 1, 2000 should also be permitted to expand by 30 percent.

Response: Section 1886(h)(4)(F) of the Act, as added by section 407(b) of Public Law 106-113, and as implemented at §§ 413.86(g)(4) and 412.105(f)(1)(iv), provides for a 30-percent expansion to a rural hospital's direct and indirect FTE counts for purposes of establishing the hospital's individual FTE cap. Section 407(c) provides for an adjustment to the FTE cap of urban hospitals for training residents in rural areas. Section 407(b) clearly only applies to rural hospitals, and not to urban hospitals, regardless of whether or not the urban hospitals train residents in rural areas. Therefore, while the general intent of the provisions at section 407 is to encourage training in rural areas, only those rural hospitals that have a FTE resident cap based on the count of residents in the hospital's cost reporting period ending on or before December 31, 1996, may qualify for a 30-percent increase to that FTE cap under the amendments made by section 407(b).

To address the commenter's uncertainty concerning what happens to rural track programs that were in existence between January 1, 1997 and April 1, 2000, we point to our language at §§ 413.86(g)(11) and 412.105(f)(1)(x) which states that for cost reporting periods beginning on or after April 1, 2000, “an urban hospital that establishes a new residency program, or has an existing residency program, with a rural track (or an integrated rural track) may include in its FTE count residents in those tracks * * *” (emphasis added). Thus, urban hospitals with rural tracks that were in existence between January 1, 1997 and April 1, 2000, and continue to be in existence after April 1, 2000, may be eligible for Medicare payment under this provision. We note that urban hospitals with rural tracks that were established before January 1, 1997, and continued to exist after April 1, 2000, may be eligible for payment under this rural track provision, as well.

We note that we have received questions from the provider industry regarding the application of the rural track FTE limitation and rural track FTE count to hospitals with rural track programs that have already been in existence before April 1, 2000. Generally, the methodology at § 413.86(g)(11) states that the actual count of residents for the first 3 years of the rural track's existence is to be used as the hospital's rural track FTE limitation, and beginning with the fourth year, the rural track FTE limitation is determined based on the number of residents training in the rural track in the third year of the program's existence. However, if a rural track program has been in existence for at least 3 years prior to April 1, 2000, the provision regarding using the actual count of residents in the first 3 years of the program would not apply. Rather, for such a program, the rural track FTE limitation would take effect immediately on April 1, 2000. The limitation would be based on the highest number of residents in any program year training in the rural track in the third year of the program, depending on the amount of time the residents spent in the rural area, subject to the regulations at § 413.85(g)(11)(i) through (iv). It would be the responsibility of the hospital to provide the necessary information regarding the third year of the program to the fiscal intermediary. For example, if the third year of the rural track's existence is July 1, 1997 to June 30, 1998, the rural track FTE limitation would be based on the highest number of residents in any program year in 1997-1998 training year. The urban hospital may begin to count the additional FTEs up to its rural track FTE limitation in its cost reporting period beginning on or after April 1, 2000 for direct GME, and for discharges occurring on or after April 1, 2000 for IME.

Comment: One commenter noted that the interim final rule with comment period states that “all residents that are included by the hospital as part of its FTE count must ultimately train in the rural area.” The commenter expressed concern that we are requiring hospitals to designate specific individuals, rather than FTEs, and that basing payment on individuals rather than FTEs would set a poor precedent. The commenter further stated that, while specific individuals may not remain in a program, hospitals should be permitted to fill these slots with FTEs and receive payment.

Response: The commenter is concerned with the provision at § 413.86(g)(11)(v)(C), which states that all residents that are included by the hospital as part of its FTE count under this provision must ultimately train in the rural area. As the commenter correctly assesses, this particular provision would link the rural track policy to specific individual residents, rather than FTEs. We made this link to individuals rather than FTEs because we believe the additional provision at § 413.86(g)(11)(v)(C) (as well as the provision at §§ 413.86(g)(11)(v)(B)) was necessary in order to ensure that urban hospitals did not count additional FTE Start Printed Page 39906residents who did not actually rotate at any time to a rural area.

However, we understand the commenter's concern about permitting hospitals to fill slots with FTEs that are open because individuals did not remain in the program. We agree that where a hospital fills a vacated FTE slot in a rural 1-2 program with another resident, it would be consistent with the intent of the rural track provision to allow the urban hospital to count the time of the resident who left the training program. Accordingly, we are amending the regulations at § 413.86(g)(11)(v)(C) to allow for the counting of the resident's time at the urban hospital where, for example, a resident who just completed her PGY1 year at the urban hospital decides to drop out of the program, and then the urban hospital fills the vacated FTE slot with another PGY2 resident who then continues and completes the rural portion of the rural track program. We note that we would not allow for the counting of the time at the urban hospital for the first year of training for that resident who left the program where the urban hospital fills the vacated FTE slot with another PGY1 resident who first begins to train in the urban hospital, since, in effect, this would result in double counting one FTE at the urban hospital without the required amount of training occurring in the rural area.

Comment: One commenter expressed concern with the provision at § 413.86(g)(11)(v)(A) that states “an urban hospital may not include in its rural track FTE limitation or FTE count residents who are training in a rural track residency program that were already included as part of the hospital's FTE cap.” The commenter stated that this provision fails to account for the fact that many hospitals may have “backed out” residents training time in rural sites from their base year FTE cost reports. The commenter stated further that this provision may be interpreted by cost report accountants to mean that appeals to include FTEs that were excluded by Public Law 105-33 are prohibited.

Response: We believe the commenter is confusing the provision at § 413.86(g)(11)(v)(A), that an urban hospital may not include in its rural track FTE limitation or rural track FTE count residents who are training in a rural track residency program that were already included as part of the hospital's FTE cap, and the policy contained in section 4623 of Public Law 105-33, as implemented at §§ 412.105(f)(1)(iv) and 413.86(g)(4), which places a limit on the count of residents, or hospitals' FTE caps. The intent of the provision at § 413.86(g)(11)(v)(A) is to encourage more residency training in rural areas by providing for Medicare payment to an urban hospital for FTE residents who are training in a rural area and are not already included as part of the hospital's FTE cap. Whether or not there are many hospitals that have “backed out” resident training time in rural sites from their base year FTE cost reports is irrelevant to this rural track requirement. The possible mistaken exclusion of the count of resident FTEs spent in rural settings is an issue relevant to the determination of a hospital's initial FTE cap as provided for at §§ 412.105(f)(1)(iv) and 413.86(g)(4). The rural track requirement at § 413.86(g)(11)(v)(A) was not intended to provide for adjustments to reflect FTEs that were excluded from the FTE cap.

With regard to rural training, generally, and the determination of a hospital's FTE cap under §§ 412.105(f)(1)(iv) and 413.86(g)(4), a FTE resident should not have been included in the hospital's FTE cap to the extent that, in that cost reporting year, the resident was rotating to another rural hospital, or if the resident was rotating to a rural nonhospital to which the urban hospital was not paying all or substantially all of the costs of training (see § 413.86(f)(3)).

To clarify the intent of the requirement that “an urban hospital may not include in its rural track FTE limitation or FTE count residents who are training in a rural track residency program that were already included as part of the hospital's FTE cap,” we are providing the following example:

  • Assume there are 10 unweighted FTE residents training at an urban Hospital A in the hospital's most recent cost reporting period ending on or before December 31, 1996, thereby establishing Hospital A's FTE cap at 10.
  • In July 2002, Hospital A starts a rural training track program. In addition to devoting 2 out of its 10 FTE slots to the rural track, Hospital A recruits an additional 2 FTEs to participate in the rural track, for a total of 12 FTEs to be trained in that cost reporting year.
  • These 4 FTEs will complete 1 year of training at Hospital A and 2 years of training at a rural nonhospital site. This type of program is modeled after the scenario outlined at § 413.86(g)(11)(ii), where the urban hospital may include in its FTE count the FTEs in the rural track at the urban hospital and at the rural nonhospital site. (Hospital A is complying with the requirements at § 413.86(f)(4) regarding the counting of residents in nonhospital sites).

However, when calculating the rural track FTE limitation in the fourth year of the rural track's existence, Hospital A may not include in its rural track FTE limitation those FTEs that were already included as part of the hospital's initial FTE cap. Two of the hospital's four FTEs training in the rural track were already included in the hospital's FTE cap. Therefore, beginning July 2002, only two FTEs may be included to determine the hospital's rural track FTE limitation, as well as its rural track FTE count. Since it is the two FTEs that Hospital A added when it started the rural track that have caused the hospital to exceed its FTE cap, only two FTEs may be counted above the FTE cap for the hospital's rural track FTE count and limitation. However, we note that the other two FTEs training in the rural track that were not included as part of the hospital's rural FTE count and limitation because they had already been included as part of the hospital's FTE cap, may still be counted by the hospital in its general FTE count, according to §§ 412.105(f) and 413.86(f).

Comment: One commenter requested that, since rural hospitals often do not have the resources or infrastructure to claim their GME costs on a Medicare cost report, we should revise the regulations to allow urban hospitals to claim the resident FTEs training at the rural hospitals, as long as the urban hospitals are providing “adequate funding” to the rural hospital, similar to our Medicare policy on nonhospital settings.

Response: In regard to the request to allow urban hospitals to claim the FTEs training in rural hospitals, while we understand that it is not uncommon for urban hospitals to incur the costs of training residents in rural hospitals because the rural hospitals cannot incur the costs themselves, there is longstanding policy that prohibits one hospital from claiming the training time of FTEs training at another hospital. First, section 1886(h)(4)(B) of the Act states that the rules governing the direct GME computation of count of the number of FTE residents “shall take into account individuals who serve as residents for only a portion of a period with a hospital or simultaneously with more than one hospital.” Accordingly, the September 4, 1990 Federal Register (55 FR 36065) states that “* * * the other hospital is required to include the portion of time the resident spent at its facility in its FTE count consistent with § 413.86(f).” Further, the regulations at § 413.86(f)(2) state that “No individual may be counted as more than one FTE * * *. [I]f a resident spends time in more than one hospital * * * the Start Printed Page 39907resident counts as partial FTE based on the proportion of time worked at the hospital to the total time worked * * *.” Therefore, even though the urban hospital incurs the training costs and the rural hospital does not claim the FTEs for Medicare direct GME and IME payment purposes, the urban hospital is precluded from claiming any FTEs training at the rural hospital (or any other hospital, for that matter). The commenter is correct in stating that a hospital may count the time residents spend in nonhospital settings if they comply with the criteria at § 413.86(f)(4). However, this regulation implements statutory provisions (sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) of the Act), which specifically provide for Medicare direct GME and IME payment to be made to hospitals for training residents in nonhospital settings.

Comment: One commenter objected to the policy in the interim final rule with comment period that the terms “rural track” and “integrated rural track” are synonymous. The commenter (a hospital) believed that we have the authority to develop a new definition for “integrated rural track” based on our interpretations of congressional intent, and we should not wait for further clarification from Congress at the expense of the commenter's particular allopathic family practice residency program. The commenter described this program as one in which the residents train in the rural setting for approximately 7 months out of a 3-year program, and for the remainder of the program when the residents spend training in the urban setting, the residents treat rural patients. The commenter proposed the following new definition for integrated rural track: “Accredited Training Program with an Integrated Rural Track—refers to an accredited program that provides at least 6 months of training at a rural location in addition to 2 years of rural training at an urban location. The 6 months of rural training should be conducted as part of all 3 years of training. The program should also establish a continuity of care with patients in a rural area for at least one program year.”

Response: When we implemented this provision on August 1, 2000, we did so based on discussions with the Accreditation Council for Graduate Medical Education (ACGME), which accredits rural track programs. The ACGME specifically identifies and separately accredits programs with 1 year of training in an urban hospital and 2 years of training in a rural facility as “rural tracks.” However, the ACGME explained that it did not have a separate definition of “integrated rural track” and, in particular, did not separately classify programs with portions of rural training of less than 2 years as “integrated rural tracks”. In response to questions raised on this provision, we have followed up with the ACGME to confirm whether a definition of, or criteria for identifying programs with, “integrated rural tracks” had been established. We were informed that the term “integrated rural track” is not, and never was, a term that is used by the ACGME in accrediting its programs. Other than the 1-2 programs that specifically incorporate 2 years of rural training, the ACGME does not grant unique accreditation to programs with a rural focus, nor do any of the other accreditation organizations listed at § 415.152.

In addition, we do not believe it is administratively feasible for us to review documentation and confirm that the training at the urban hospital, as suggested by the commenter, is rural in nature, based on the patient load treated by the residents at the urban hospital. We currently do not have a way of tying patient data to the residents that treat them. Accordingly, for purposes of this policy, until we believe we can appropriately categorize and define rural tracks and integrated rural tracks separately, we will continue to define these terms synonymously. We remain open to adopting another definition of a separately accredited training program, and we welcome suggestions for definitions that would be administratively feasible to apply.

Comment: One commenter suggested that we add a fifth scenario to those already described at § 413.86(g)(11). The commenter proposed the following regulation text:

Rotating Residents of an Accredited Training Program with an Integrated Rural Track to a Rural Nonhospital Site—If an urban hospital rotates residents in an accredited training program with an integrated rural track to a rural nonhospital site throughout all 3 years of training, the urban hospital may include those residents in its FTE count, subject to the requirements under existing § 413.86(g)(4). The urban hospital may include in its FTE count those residents in the rural track, not to exceed its rural track FTE limitation, determined as follows:

(A) For the first 3 years of the integrated rural track's existence, the rural track FTE limitation for each urban hospital will be the actual number of FTE residents training in the rural track at the urban hospital and the rural nonhospital site.

(B) Beginning with the fourth year of the integrated rural track's existence, the rural track FTE limitation is equal to the product of:

(1) The highest number of residents in any program year who, during the third year of the integrated rural track's existence, are training in the integrated rural track at the urban hospital and are designated at the beginning of their training to be rotated to a rural nonhospital site throughout all 3 years of training, and

(2) The number of years in which the residents are expected to complete each program based on the minimum accredited length for the type of program.

(C) This would apply to accredited training programs with integrated rural tracks that were in existence prior to 1997.

The commenter explained that this language is designed to address the unique program at the commenter's hospital, and it also is date sensitive so that newer programs would be required to comply with the existing criteria in the existing regulations.

Response: We have concerns about the commenter's proposal. First, the commenter assumes a separate definition of “integrated rural track,” which, as explained above, we currently do not have. Even if we were to adopt such a change in policy, the cut-off date of 1997 in paragraph (C) of the commenter's proposed changes seems arbitrary; there is nothing in the statute that would serve as a basis to simply grandfather existing “integrated rural track” programs and not provide for new ones post-1997. Accordingly, we are not adopting such a change in our rural track policy as the one described by the commenter.

Comment: One commenter thought that if a hospital's rural track program has been in existence since 1993, then the 4th program year is 1997. The commenter explained that when the FTE cap went into effect, the hospital was capped at 15 FTEs. The hospital subsequently added another three residents at its own expense. The commenter stated that it interprets § 413.86(g)(11)(v)(A) to mean that the hospital would only be able to count the additional three FTE residents for the rural track count. The commenter urged us to reconsider this language as it relates to hospitals with only one residency program, because the commenter was unsure whether or not all the residents in the program count toward the rural track FTE count. The commenter believed that for hospitals with only one residency program that existed prior to 1996, all rural track residents included in the original hospital FTE cap should be counted toward the rural FTE count.

Response: The commenter correctly interprets the intent of the regulation at § 413.86(g)(11)(v)(A), which states that only those FTEs in the rural track that were not already counted as part of the Start Printed Page 39908hospital's FTE cap may be considered when calculating the hospital's rural track FTE limitation and count. In the scenario the commenter outlined above, if the first program year of the rural track program began on July 1, 1993, then the fourth program year would begin on July 1, 1996, not in 1997. Because 15 FTEs were already included in the hospital's FTE cap, assuming the urban hospital qualifies to count the FTEs, only 3 out of the 18 FTE residents training in the program may be considered in determining the hospital's rural track FTE limitation and counts (the specific rural FTE limitation and count are dependent upon which scenario the hospital's program fits under § 413.86(g)(11)).

We do not believe it is necessary to revise this policy for hospitals whose only GME program is the rural track program that was in existence prior to 1996, as the commenter suggested. Hospitals that had rural track programs in existence in 1996 were able to count those residents training at the urban hospital at that time as part of their initial FTE caps. Our existing policy on rural tracks at § 413.86(g)(11) provides additional assistance to these hospitals by allowing them to count separately in their rural track FTE limitations, FTE residents not included in the FTE cap but participating in a rural track.

Accordingly, we are adopting the provisions in the August 1, 2000 interim final rule with comment period implementing section 407(c) of Public Law 106-113 as final.

In addition, we are making a technical correction. The regulations at § 413.86(g)(6) currently state, “If a hospital established a new medical residency training program as defined in paragraph (g)(9) of this section * * *.” When we revised the regulations at § 413.86(g)(9) to redesignate the paragraph as § 413.86(g)(12) in the August 1, interim final rule with comment period, we inadvertently did not make a corresponding revision at § 413.86(g)(6). Therefore, we are revising § 413.86(g)(6) to read “If a hospital established a new medical residency training program as defined in paragraph (g)(12) of this section * * *” We are making the same revision to the regulations for IME at § 412.105(f)(vii).

d. Not Counting Against Numerical Limitation Certain Residents Transferred from a Department of Veterans Affairs Hospital's Residency Program That Loses Accreditation(Section 407(d) of Public Law 106-113 and new 42 CFR 412.105(f)(1)(xii) and 413.86(g)(10))

Section 407(d) of Public Law 106-113 addressed the situation where residents were training in a residency training program at a Veterans Affairs (VA) hospital and then were transferred on or after January 1, 1997, and before July 31, 1998, to a non-VA hospital because the program in which the residents were training would lose its accreditation by the ACGME if the residents continued to train at the VA hospital. In this situation, the non-VA hospital may receive a temporary adjustment to its FTE cap to reflect those residents who were transferred to the non-VA hospital for the duration that those transferred residents were training at the non-VA hospital. In the August 1, 2000 interim final rule with comment period, we specified that, in order to receive this adjustment, the non-VA hospital must submit a request to its fiscal intermediary for a temporary adjustment to its FTE cap, document that the hospital is eligible for this temporary adjustment by identifying the residents who have come from the VA hospital, and specify the length of time the adjustment is needed.

We noted that section 407(d) of Public Law 106-113 only refers to programs that would lose their accreditation by the ACGME. This provision does not apply to accreditation by the American Osteopathy Association (AOA), the American Podiatry Association (APA), or the American Dental Association (ADA).

Under section 407(d)(3) of Public Law 106-113, this policy is effective as if included in the enactment of Public Law 105-33, that is, for direct GME, with cost reporting periods beginning on or after October 1, 1997, and for IME, discharges occurring on or after October 1, 1997. If a hospital is owed payments as a result of this provision, payments must be made immediately.

We added §§ 412.105(f)(1)(xii) and 413.86(g)(10) to incorporate the provisions of section 407(d) of Public Law 106-113.

We did not receive any comments on this provision and are adopting it as final.

e. Initial Residency Period for Child Neurology Residency Programs (Section 312 of Public Law 106-113 and 42 CFR 413.86(g)(1))

Generally, section 1886(h)(5)(F) of the Act defines the term “initial residency period” to mean the “period of board eligibility.” The period of board eligibility is defined in section 1886(h)(5)(G) of the Act as the period recognized by ACGME as specified in the Graduate Medical Education Directory which is published by the American Medical Association. The initial residency period limitation was designed to limit full Medicare payment for direct GME to the time required to train in a single specialty. Therefore, the initial residency period is determined based on the minimum time required for a resident to become board eligible in a specialty and the published periods included in the Graduate Medical Education Directory. During the initial residency period, the residents are weighted at 1.0 FTE for purposes of Medicare payment. Residents seeking additional specialty or subspecialty training are weighted at 0.5 FTE.

In order to become board eligible in child neurology, residents must complete training in more than one specialty. Thus, for example, before the effective date of section 312 of Public Law 106-113, if a resident enrolled in a child neurology residency program by first completing 2 years of training in pediatrics (which is associated with a 3-year initial residency period), followed by 3 years of training in child neurology, the resident would be limited by the initial residency period of pediatrics. Section 312 of Public Law 106-113 amended section 1886(h)(5) of the Act by adding at the end a clause (v) which states that “in the case of a resident enrolled in a child neurology residency training program, the period of board eligibility and the initial residency period shall be the period of board eligibility for pediatrics plus 2 years.” (The initial residency period for pediatrics is currently 3 years). The policy under section 312(b) of Public Law 106-113 applies to future child neurology residents and to child neurology residents who have already begun their training (for whom an initial residency period was already established). However, it does not apply to residents who have completed their child neurology training before July 1, 2000.

In the August 1, 2000 interim final rule with comment period, we revised § 413.86(g)(1) to reflect that, effective on or after July 1, 2000, for residency programs that began before, on, or after Start Printed Page 39909November 29, 1999, the period of board eligibility and the initial residency period for child neurology is now the period of board eligibility for pediatrics plus 2 years. We noted that the initial residency period is the same for all child neurology residents, regardless of whether or not the resident completes the first year of training in pediatrics or neurology.

We did not receive any comments on this provision and are adopting it as final.

f. Technical Amendment

In the August 1, 2000 interim final rule with comment period, we indicated that it had come to our attention that the first sentence of the then existing § 413.86(g)(1) contains a technical error. The first sentence of this paragraph reads “For purposes of this section, an initial residency period is the number of years necessary to satisfy the minimum requirements for certification in a specialty or subspecialty, plus one year.” This section of the regulation was revised as a result of section 13563(b) of Public Law 103-66, and was effective only until June 30, 1995. Generally, effective July 1, 1995, an initial residency period is defined as the minimum number of years required for board eligibility. Therefore, we revised the first sentence of paragraph (g)(1) of § 413.86 accordingly. The remainder of paragraph (g)(1) of § 413.86 was unchanged.

We did not receive any comments on this provision and are adopting it as final.

I. Additional Payment to Hospitals that Operate Approved Nursing and Allied Health Education Programs

Under sections 1861(v) and 1886(a) of the Act, hospitals that operate approved nursing or allied health education programs may be eligible for the reimbursement of their reasonable costs of operating such programs. Section 1886(h) of the Act establishes the methodology for determining payments to hospitals for the direct costs of GME programs. Section 1886(h) of the Act, as implemented in regulations at 42 CFR 413.86, specifies that Medicare payments for direct costs of GME are based on a prospectively determined per resident amount (PRA). The PRA is multiplied by the number of full-time equivalent residents working in all areas of the hospital complex (and nonhospital sites, where applicable), and the product is then multiplied by the hospital's Medicare share of total inpatient days to determine Medicare's direct GME payment.

Section 1886(h)(3)(D) of the Act, as added by section 4624 of Public Law 105-33, provides a 5-year phase-in of payments to teaching hospitals for direct costs of GME associated with services to Medicare+Choice (managed care) enrollees for portions of cost reporting periods occurring on or after January 1, 1998. The amount of payment for direct GME is calculated by (1) multiplying the aggregate approved amount (that is, the product of the PRA and the number of FTE residents working in all areas of the hospital (and nonhospital sites, if applicable)), by the ratio of the number of inpatient bed days that are attributable to Medicare+Choice enrollees to total inpatient bed days, and (2) multiplying the result by an applicable percentage.

The applicable percentages are 20 percent for portions of cost reporting periods occurring in calendar year 1998, 40 percent in calendar year 1999, 60 percent in calendar year 2000, 80 percent in calendar year 2001, and 100 percent in calendar year 2002 and subsequent years. (Section 1886(d)(11) of the Act, as added by section 4622 of Public Law 105-33, provides a 5-year phase-in of payments to teaching hospitals for IME associated with services to Medicare+Choice enrollees for portions of cost reporting periods occurring on or after January 1, 1998, as well. However, the Medicare+Choice IME payments are irrelevant for the purposes of this section of the interim final rule with comment period, because although section 541 of Public Law 106-113 affects the payments for Medicare+Choice direct GME, it in no way affects the payments for Medicare+Choice IME.)

1. Provisions of the August 1, 2000 Interim Final Rule with Comment Period (Section 541 of Public Law 106-113 and 42 CFR 413.86(d) and 413.87)

Section 541 of Public Law 106-113 further amended section 1886 of the Act by adding subsection (l) and amending section 1886(h)(3)(D) to provide for additional payments to hospitals for nursing and allied health education programs associated with services to Medicare+Choice enrollees. Hospitals that operate approved nursing or allied health education programs, as defined under the regulations at 42 CFR 413.85, and receive Medicare reasonable cost reimbursement for these programs, would receive additional payments. This provision is effective for portions of cost reporting periods occurring in a calendar year, beginning with calendar year 2000.

Section 1886(l) of the Act, as added by section 541 of Public Law 106-113, specifies the methodology to be used to calculate these additional payments and places a limitation, that is, $60 million, on the total amount that is projected to be expended in any calendar year. We refer to the total amount of $60 million or less as the payment “pool.” We emphasize that we use the term “pool” solely for ease of reference; the term reflects an estimated dollar figure, a number that is plugged into a formula to calculate the amount of additional payments. The term “pool” does not refer to a discrete fund of money that is set aside in order to make the additional payments (thus, for example, if the estimated “pool” is $50 million, we use the number $50 million to calculate the amount of additional payments, but this does not mean that we set aside $50 million in a separate fund from which we make the additional payments). The total amount of additional payments is based on the ratio of estimated total direct GME payments for Medicare+Choice enrollees to estimated total Medicare direct GME payments, multiplied by the total Medicare nursing and allied health education payments. Under section 541 of Public Law 106-113, a hospital would receive its share of these additional payments in proportion to the amount of Medicare nursing and allied health education payments received in the cost reporting period that ended in the fiscal year that is 2 years prior to the current calendar year, to the total amount of nursing and allied health payments made to all hospitals in that cost reporting period. Section 541(b) of Public Law 106-113 amended section 1886(h)(3) of the Act to provide that direct GME payments for Medicare+Choice utilization will be reduced to account for the additional payments that are made for nursing and allied health education programs under the provisions of section 1886(l) of the Act.

In the August 1, 2000 interim final rule with comment period, we implemented section 541 by establishing regulations at 42 CFR 413.87 to incorporate the provisions of section 1886(l) of the Act. We specified the rules for a hospital's eligibility to receive the additional payment under section 1886(l), the requirements for determining the additional payment to each eligible hospital, and the methodologies for calculating each additional payment and for calculating the payment “pool.” The preamble language regarding § 413.87 can be found in the August 1, 2000 interim final rule with comment period (65 FR 47036 through 47039).

We also made a conforming change to §§ 413.86(d)(4) through (d)(6) to account Start Printed Page 39910for the revised methodology in determining a hospital's Medicare+Choice direct GME payments.

2. Provisions of the June 13, 2001 Interim Final Rule with Comment Period

a. Additional Payment to Hospitals That Operate Approved Nursing and Allied Health Programs (Section 512 of Public Law 106-554 and 42 CFR 413.87)

Public Law 106-554 further amended section 1886(l)(2)(C) of the Act. Specifically, section 512 of Public Law 106-554 changed the formula for determining the additional amounts to be paid to hospitals for Medicare+Choice nursing and allied health costs. Under Public Law 106-113, as described above, the additional payment amount was determined based on the proportion of each individual hospital's nursing and allied health education payments to total nursing and allied health education payments made across all hospitals. This formula does not account for a hospital's specific Medicare+Choice utilization. Section 512 of Public Law 106-554 revised this payment formula to specifically account for each hospital's Medicare+Choice utilization. Accordingly, we made conforming changes at § 413.87 to reflect this change. The changes are effective for portions of cost reporting periods occurring on or after January 1, 2001. We refer the reader to the preamble of the June 13 interim final rule with comment period for a detailed description of the revised methodology for calculating the additional payments (66 FR 32178).

We revised § 413.87 to incorporate the provisions of section 512 of Public Law 106-554.

b. Technical Amendment

In the June 13, 2001 interim final rule with comment period, we indicated that it had come to our attention that the regulations at § 413.86(d)(4) and § 413.87(d) contained errors. The regulations at § 413.86(d)(4) had read, “Effective for cost reporting periods beginning on or after January 1, 2000, the product derived from step three is reduced in accordance with the provisions of § 413.87(f).” Consistent with the statutory effective date and to clarify the intent of the reference to § 413.87(f), we revised § 413.86(d)(4) to state that, “Effective for portions of cost reporting periods occurring on or after January 1, 2000, the product derived from step three is reduced by a percentage equal to the ratio of the Medicare+Choice nursing and allied health payment “pool” for the current calendar year as described at § 413.87(f), to the projected total Medicare+Choice direct GME payments made to all hospitals for the current calendar year.” We also made a conforming change to § 413.87(d), which had read, “Subject to the provisions of paragraph (f) of this section * * *.” Instead, we revised this language to state, “Subject to the provisions of § 413.86(d)(4) * * *.”

J. Payment for Bad Debts (Section 541 of Public Law 106-554 and 42 CFR 413.80)

Section 4451 of Public Law 105-33 required that allowable bad debt reimbursement for hospitals be reduced by 25 percent for cost reporting periods beginning during FY 1998, by 40 percent for cost reporting periods beginning during FY 1999, and by 45 percent for cost reporting periods beginning during a subsequent fiscal year.

In the June 13, 2001 interim final rule with comment period (66 FR 32183), we implemented section 541 of Public Law 106-554. Section 541 amended section 1861(v)(1)(T) of the Act, thereby modifying the reduction in payment for Medicare beneficiary bad debt for hospitals made by section 4451 of Public Law 105-33. Specifically, this provision reduced the amount of bad debts otherwise treated as allowable reductions in revenue, attributable to the deductibles and coinsurance amounts, by 30 percent for cost reporting periods beginning during FY 2001 and later. Therefore, for cost reporting periods beginning during the year 2001 and later, hospital bad debt amounts otherwise allowable will be reimbursed at 70 percent of the total allowable amount. In the June 13 interim final rule with comment period, we revised § 413.80 to implement this change.

We did not receive any comments on this provision and, therefore, are adopting the proposed revision to § 413.80 as final.

V. Changes to the Prospective Payment System for Capital-Related Costs

A. End of the Transition Period

Federal fiscal year (FY) 2001 is the last year of the 10-year transition period established to phase in the prospective payment system for hospital capital-related costs. For the readers' benefit, we are providing a summary of the statutory basis for the system, the development and evolution of the system, the methodology used to determine capital-related payments to hospitals, and the policy for providing exceptions payments during the transition period.

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.” Under the statute, the Secretary has broad authority in establishing and implementing the capital prospective payment system. We initially implemented the capital prospective payment system in the August 30, 1991 final rule (56 FR 43409), in which we established a 10-year transition period to change the payment methodology for Medicare inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology (based fully on the Federal rate).

The 10-year transition period established to phase-in the prospective payment system for capital-related costs is effective for cost reporting periods beginning on or after October 1, 1991 (FY 1992) and before October 1, 2001 (FY 2002). Beginning in FY 2001, the last year of the 10-year transition period for the prospective payment system for hospital capital-related costs, capital prospective payment system payments are based solely on the Federal rate for the vast majority of hospitals. Since FY 2001 is the final year of the capital transition period, we will no longer determine a hospital-specific rate for FY 2002 in section III. of the Addendum of this final rule. For cost reporting periods beginning on or after October 1, 2001, payment for capital-related costs for all hospitals, except those defined as new hospitals under § 412.324(b), will be determined based solely on the capital standard Federal rate.

Generally, during the transition period, inpatient capital-related costs are paid on a per discharge basis, and the amount of payment depends on the relationship between the hospital-specific rate and the Federal rate during the hospital's base year. A hospital with a base year hospital-specific rate lower than the Federal rate is paid under the fully prospective payment methodology during the transition period. This method is based on a dynamic blend percentage of the hospital's hospital-specific rate and the applicable Federal rate for each year during the transition period. A hospital with a base period hospital-specific rate greater than the Federal rate is paid under the hold-harmless payment methodology during the transition period.

During the transition period, a hospital paid under the hold-harmless payment methodology receives the higher of (1) a blended payment of 85 percent of reasonable cost for old capital plus an amount for new capital based on Start Printed Page 39911a portion of the Federal rate; or (2) a payment based on 100 percent of the adjusted Federal rate. The amount recognized as old capital is generally limited to the allowable Medicare capital-related costs that were in use for patient care as of December 31, 1990. Under limited circumstances, capital-related costs for assets obligated as of December 31, 1990, but put in use for patient care after December 31, 1990, also may be recognized as old capital if certain conditions were met. These costs are known as obligated capital costs. New capital costs are generally defined as allowable Medicare capital-related costs for assets put in use for patient care after December 31, 1990.

Hospitals that are defined as “new” for the purposes of capital payments during the transition period (see § 412.300(b)) will continue to be paid according to the applicable payment methodology outlined in § 412.324. During the transition period, new hospitals are exempt from the prospective payment system for capital-related costs for their first 2 years of operation and are paid 85 percent of their reasonable capital-related costs during that period. The hospital's first 12-month cost reporting period (or combination of cost reporting periods covering at least 12 months), beginning at least 1 year after the hospital accepts its first patient, serves as the hospital's base period. Those base year costs qualify as old capital and are used to establish its hospital-specific rate used to determine its payment methodology under the capital prospective payment system. Effective with the third year of operation and through the remainder of the transition period, the hospital will be paid under either the fully prospective methodology or the hold-harmless methodology. If the fully prospective methodology is applicable, the hospital is paid using the appropriate transition blend of its hospital-specific rate and the Federal rate for that fiscal year until the conclusion of the transition period, at which time the hospital will be paid based on 100 percent of the Federal rate. If the hold-harmless methodology is applicable, the hospital will receive hold-harmless payment for assets in use during the base period for 8 years, which may extend beyond the 10-year transition period.

The basic methodology for determining capital prospective payments based on the Federal rate is set forth in § 412.312. For the purpose of calculating payments for each discharge, the standard Federal rate is adjusted as follows:

(Standard Federal Rate) × (DRG Weight) × (GAF) × (Large Urban Add-on, if applicable) × (COLA Adjustment for Hospitals Located in Alaska and Hawaii) × (1 + DSH Adjustment Factor + IME Adjustment Factor)

Hospitals may also receive outlier payments for those cases that qualify under the thresholds established for each fiscal year. Section 412.312(c) provides for a single set of thresholds to identify outlier cases for both inpatient operating and inpatient capital-related payments.

In accordance with section 1886(d)(9)(A) of the Act, under the prospective payment system for inpatient operating costs, hospitals located in Puerto Rico are paid for operating costs under a special payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a blended rate that consisted of 75 percent of the applicable standardized amount specific to Puerto Rico hospitals and 25 percent of the applicable national average standardized amount. However, effective October 1, 1997, under amendments to the Act enacted by section 4406 of Public Law 105-33, operating payments to hospitals in Puerto Rico are based on a blend of 50 percent of the applicable standardized amount specific to Puerto Rico hospitals and 50 percent of the applicable national average standardized amount. In conjunction with this change to the operating blend percentage, effective with discharges on or after October 1, 1997, we compute capital payments to hospitals in Puerto Rico based on a blend of 50 percent of the Puerto Rico rate and 50 percent of the Federal rate as specified in the regulations at § 412.374. For capital-related costs, we compute a separate payment rate specific to Puerto Rico hospitals using the same methodology used to compute the national Federal rate for capital-related costs.

In the August 30, 1991 final rule (56 FR 43409), we established a capital exceptions policy, which provided for exceptions payments during the transition period (§ 412.348). Section 412.348 provides that during the transition period, a hospital may receive additional payment under the exceptions process when its regular payments are less than a minimum percentage, established by class of hospital, of the hospital's reasonable capital-related costs. The amount of the exceptions payment is the difference between the hospital's minimum payment level and the payments the hospital would have received under the capital prospective payment system in the absence of an exceptions payment. The comparison is made on a cumulative basis for all cost reporting periods during which the hospital has been subject to the capital prospective payment transition rules. The minimum payment percentages throughout the transition period for regular capital exceptions payments by class of hospitals are:

  • For sole community hospitals, 90 percent;
  • For urban hospitals with at least 100 beds that have a disproportionate share patient percentage of at least 20.2 percent or that received more than 30 percent of their net inpatient care revenues from State or local governments for indigent care, 80 percent;
  • For all other hospitals, 70 percent of the hospital's reasonable inpatient capital-related costs.

The provision for “regular” exceptions payments expires at the end of the transition period, that is, for cost reporting periods beginning after September 30, 2001. Capital prospective payment system payments are no longer adjusted to reflect regular exceptions payments at § 412.348 after that date. Accordingly, for cost reporting periods beginning on or after October 1, 2001, all hospitals other than those defined as “new” under § 412.324(b) will receive only the per discharge payment based on the Federal rate for capital costs (plus any applicable DSH or IME and outlier adjustments) unless a hospital qualifies for a special exceptions payment under § 412.348(g).

B. Special Exceptions Process

In the August 30, 1991 final rule (56 FR 43409), we established a capital exceptions policy at § 412.348, which provided for regular exception payments during the transition period. In the September 1, 1994 final rule (59 FR 45385), we added the special exceptions process, describing it as “* * * narrowly defined, focusing on a small group of hospitals who found themselves in a disadvantaged position. The target hospitals were those who had an immediate and imperative need to begin major renovations or replacements just after the beginning of the capital prospective payment system. These hospitals would not be eligible for protection under the old capital and obligated capital provisions, and would not have been allowed any time to accrue excess capital prospective payments to fund these projects.”

Under the special exceptions provisions at § 412.348(g), an additional payment may be made through the 10th year beyond the end of the capital Start Printed Page 39912prospective payment system transition period for eligible hospitals that meet (1) a project need requirement as described at § 412.348(g)(2), which, in the case of certain urban hospitals, includes an excess capacity test; and (2) a project size requirement as described at § 412.348(g)(5). Eligible hospitals include sole community hospitals, urban hospitals with at least 100 beds that have a disproportionate share patient percentage of at least 20.2 percent, and hospitals with a combined Medicare and Medicaid inpatient utilization of at least 70 percent.

When we established the special exceptions process, we selected the hospital's cost reporting period beginning before October 1, 2001, as the project completion date in order to limit cost-based exceptions payments to a period of not more than 10 years beyond the end of the 10-year transition to the fully Federal capital prospective payment system. Therefore, hospitals are eligible to receive special exceptions payments for the 10 years after the cost reporting year in which they complete their project. Generally, if a project is completed in the hospital cost reporting period ending September 29, 2002, exceptions payments would continue through September 29, 2012. In addition, we believe that, for projects completed after the deadline, hospitals would have had the opportunity to reserve their prior years' capital prospective payment system payments for financing projects. We note that the August 1, 2000 final rule (65 FR 47095) incorrectly stated that special exceptions payments could extend through September 30, 2011; the date should have been September 29, 2012.

For each cost reporting period, the amount of the special exceptions payment is determined by comparing the cumulative payments made to the hospital under the capital payment system to the cumulative minimum payment levels applicable to the hospital for each cost reporting period subject to the prospective payment system. This comparison is offset or reduced by (1) any amount by which the hospital's cumulative payments exceed its cumulative minimum payments under the regular exceptions process for all cost reporting periods during which the hospital has been subject to the capital prospective payment system; and (2) any amount by which the hospital's current year Medicare inpatient operating and capital prospective payment system payments (excluding 75 percent of its operating DSH payments) exceed its Medicare inpatient operating and capital costs (or its Medicare inpatient margin). During the capital prospective payment system transition period, the minimum payment level under the regular exceptions process varied by class of hospital as set forth in § 412.348(c) and described in section V.A. of this preamble. After the transition period and for the duration of the special exceptions provision, the minimum payment level is 70 percent as set forth in § 412.348(g)(6).

As we indicated in the July 30, 1999 final rule (64 FR 41526), we have little information about the number of hospitals that may qualify for special exceptions payments or the projected dollar amount of special exception payments, because no hospitals are currently being paid under the special exceptions process. Until FY 2002, the special exceptions provision pays either the same as the regular exceptions process or less for high DSH and sole community hospitals. In accordance with § 412.348(g)(7), a qualifying hospital may receive additional payments for up to 10 years from the year in which it completes a project that meets the project need and project size requirements of the special exception provision in §§ 412.348(g)(2) through (g)(5). Because a qualifying project under the special exceptions provision at § 412.348(g) must be completed (put into use for patient care) by the end of the hospital's last cost reporting period beginning before the end of the transition period (September 30, 2001), a hospital may receive special exception payments for 10 years through September 30, 2012. For example, an eligible hospital that completes a qualifying project in October 1993 (FY 1994) will be eligible to receive special exception payments up through FY 2003 (September 30, 2003).

In order to assist our fiscal intermediaries in determining the end of the 10-year period in which an eligible hospital will no longer be entitled to receive special exception payments, in the May 4, 2001 proposed rule, we proposed to add a new § 412.348(g)(9) to require that hospitals eligible for special exception payments under § 412.348(g) submit documentation to the intermediary indicating the completion date of their project (the date the project was put in use for patient care) that meets the project need and project size requirements outlined in §§ 412.348(g)(2) through (g)(5). We proposed that, in order for an eligible hospital to receive special exception payments, this documentation would have to be submitted in writing to the intermediary by the later of October 1, 2001, or within 3 months of the end of the hospital's last cost reporting period beginning before October 1, 2001, during which a qualifying project was completed. For example, if a hospital completed a qualifying project in March 1995, it would be required to submit documentation to the intermediary by October 1, 2001. If a hospital with a 12-month cost reporting period beginning on July 1 completed a qualifying project in November 2001, it would be required to submit documentation to the intermediary no later than September 30, 2002, which is 3 months after the end of its 12-month cost reporting period that began on July 1, 2001.

We did not receive any comments on our proposed revision to § 412.348 to add paragraph (g)(9). Accordingly, we are adopting the proposed revision as final without change.

C. Exceptions Minimum Payment Level

Section 412.348(h) limits the estimated aggregate amount of exceptions payments under both the regular exceptions and special exceptions process to no more than 10 percent of the total estimated capital prospective payment system payments in a given fiscal year. Consistent with the requirements for regular exceptions at § 412.348(c), in the May 4, 2001 proposed rule, we proposed that if we estimate that special exception payments would exceed 10 percent of total capital prospective payment system payments for a given fiscal year, we will adjust the minimum payment level of 70 percent by one percentage point increments until the estimated payments are within the 10-percent limit. For example, we could set the minimum payment level at 69 percent to ensure that estimated aggregate special exceptions payments do not exceed 10 percent of estimated total capital prospective payment system payments. If the estimate of aggregate special exceptions payments were still projected to exceed 10 percent of total capital prospective payment system payments, we would continue reducing the minimum payment level by one percentage point increments until the requirements in § 412.348(h) were satisfied. We proposed to revise § 412.348(g)(6) accordingly to reflect this policy.

We received no comments on this proposed change. Thus, we are revising § 412.348(g)(6) accordingly.

D. Exceptions Adjustment Factor

Section 412.308(c)(3) requires that the standard capital Federal rate be reduced by an adjustment factor equal to the estimated proportion of additional payments for both regular exceptions and special exceptions under § 412.348 Start Printed Page 39913relative to total capital prospective payment system payments. In estimating the proportion of regular exceptions payments to total capital prospective payment system payments during the transition period, we used the model originally developed for determining budget neutrality (described in Appendix B of this final rule) to determine the exception adjustment factor, which was applied to both the Federal and hospital-specific rates. In the May 4, 2001 proposed rule, we described our proposed methodology for determining the special exceptions adjustment used in establishing the Federal capital rate as follows:

Under the special exceptions provision specified at § 412.348(g)(1), eligible hospitals include SCHs, urban hospitals with at least 100 beds that have a disproportionate share patient percentage of at least 20.2 percent or qualify for DSH payments under § 412.106(c)(2), and hospitals with a combined Medicare and Medicaid inpatient utilization of at least 70 percent. An eligible hospital may receive special exception payments if it meets (1) a project need requirement as described at § 412.348(g)(2), which, in the case of certain urban hospitals, includes an excess capacity test; (2) an age of assets test as described at § 412.348(g)(3); and (3) a project size requirement as described at § 412.348(g)(5).

In order to determine the estimated proportion of special exceptions payments to total capital payments, we attempted to identify the universe of eligible hospitals that may potentially qualify for special exception payments. First, we identified hospitals that met the eligibility requirements at § 412.348(g)(1). Then we determined each hospital's average fixed asset age in the earliest available cost report starting in FY 1992 and later. For each of those hospitals, we calculated the average fixed asset age by dividing the accumulated depreciation by the current year's depreciation. In accordance with § 412.348(g)(3), a hospital must have an average age of buildings and fixed assets above the 75th percentile of all hospitals in the first year of capital prospective payment system. In the September 1, 1994 final rule (59 FR 45385), we stated that, based on the June 1994 update of the cost report files in HCRIS, the 75th percentile for buildings and fixed assets for FY 1992 was 16.4 years. However, we noted that we would make a final determination of that value on the basis of more complete cost report information at a later date. In the August 29, 1997 final rule (62 FR 46012), based on the December 1996 update of HCRIS and the removal of outliers, we finalized the 75th percentile for buildings and fixed assets for FY 1992 as 15.4 years. Thus, for the proposed rule, we eliminated any hospitals from the potential universe of hospitals that may qualify for special exception payments if its average age of fixed assets did not exceed 15.4 years.

For the hospitals remaining in the potential universe, we proposed to estimate the project-size by using the fixed capital acquisitions shown on Worksheet A7 from the following HCRIS cost reports updated through December 2000.

PPS YearCost reports periods beginning in . . .
IXFY 1992
XFY 1993
XIFY 1994
XIIFY 1995
XIIIFY 1996
XIVFY 1997
XVFY 1998
XVIFY 1999

Because the project phase-in may overlap 2 cost reporting years, we proposed to add together the fixed acquisitions from sequential pairs of cost reports to determine project size. Under § 412.348(g)(5), the project-size must meet the following requirements: (1) $200 million; or (2) 100 percent of its operating cost during the first 12-month cost reporting period beginning on or after October 1, 1991. We proposed to calculate the operating costs from the earliest available cost report starting in FY 1992 and later by subtracting inpatient capital costs from inpatient costs (for all payers). We proposed not to subtract the direct medical education costs as those costs are not available on every update of the HCRIS minimum data set. If the hospital met the project size requirement, we assumed that it also met the project need requirements at § 412.348(g)(2) and the excess capacity test for urban hospitals at § 412.348(g)(4).

Because we estimate that so few hospitals will qualify for special exceptions, projecting costs, payments, and margins would result in high statistical variance. Consequently, we modeled the effects of special exceptions using historical data based on hospitals' actual cost experiences. If we determined that a hospital may qualify for special exceptions, we modeled special exceptions payments from the project start date through the last available cost report (FY 1999). For purposes of modeling, we used the cost and payment data on the cost reports from HCRIS assuming that special exceptions would begin at the start of the qualifying project. In other words, when modeling costs and payment data we proposed to ignore any regular exception payments that these hospitals may otherwise have received as if there had not been regular exceptions during the transition period. In projecting an eligible hospital's special exception payments, we applied the 70-percent minimum payment level, the cumulative comparison of current year capital prospective payment system payments and costs, and the cumulative operating margin offset (excluding 75 percent of operating DSH payments).

Because hospitals may receive regular exceptions payments up through the end of their last cost reporting period beginning before October 1, 2001, hospitals with cost reporting periods beginning on a day other than October 1 will continue to receive regular exception payments until the end of their FY 2002 cost reporting period. Therefore, these hospitals will only receive special exception payments for the remainder of Federal FY 2002. Consequently, the special exceptions payments made in FY 2002 will be less than for subsequent years since they are only being paid a special exception payment for a portion of FY 2002.

Based on more recent data and HCRIS cost reports updated through March 2001, our modeling of special exception payments produced the following results:Start Printed Page 39914

Cost reportNumber of hospitals eligible for special exceptionsSpecial exceptions as a fraction of capital payments to all hospitalsSpecial exceptions as a fraction of capital payments to all hospitals weighted by portion of FY 2002 for which special exceptions are paid
PPS IX
PPS X
PPS XI3
PPS XII60.00010.0001
PPS XIII70.00010.0000
PPS XIV140.00020.0001
PPX XV170.00090.0002
PPS XVI230.00090.0007

Currently, the PPS XVI cost reports in HCRIS are incomplete because there is a 2-year lag time between the end of a hospital's cost reporting period and the submission and processing of the cost reports for HCRIS. In particular, we have not received all the cost reports for hospitals whose cost reporting periods begin in July. We expect that more hospitals may qualify for special exceptions once data from later HCRIS updates are available. In addition, hospitals still have two more cost reporting periods (PPS XVII and PPS XVIII) to complete their projects in order to be eligible for special exceptions.

In the May 4, 2001 proposed rule (66 FR 22705), we estimated that about 30 additional hospitals could qualify for special exceptions. Based on more recent data, we still estimate that about 30 additional hospitals could qualify for special exceptions. Thus, we project that special exception payments as a fraction of capital payments to all hospitals is approximately 0.0025. However, after weighting this amount to account for the FY 2002 phase-in of special exception payments, we project that this factor is approximately 0.0012. These projections have not changed since the publication of the May 4, 2001 proposed rule (66 FR 22706). We received no comments on our proposed methodology for determining the special exceptions adjustment used in establishing the capital Federal rate. Because special exceptions are budget neutral, we will offset the Federal capital rate by 0.12 percent for special exceptions for FY 2002. Therefore, the final special exceptions adjustment factor is equal to 0.9988 (1-0.0012) to account for special exception payments in FY 2002.

E. Provisions Relating to Capital Prospective Payments in the June 13, 2001 Interim Final Rule With Comment Period

In the June 13, 2001 interim final rule with comment period, we implemented section 301(b) of Public Law 106-554 (66 FR 32176). Section 301(b) provides for a special rule for payment for the operating standardized amounts for hospitals other than SCHs for FY 2001. For discharges occurring on or after April 1, 2001, and before October 1, 2001, the update to the operating standardized amounts for hospitals other than SCHs is equal to the market basket percentage increase plus 1.1 percentage points. This provision amends the prior statutory 1.1 percent reduction to the update to the FY 2001 operating standardized amounts for hospitals other than SCHs as provided by section 4401(a)(1) of Public Law 105-33 and 406 of Public Law 106-113.

Section 1886(d)(3)(B) of the Act directs the Secretary to adjust the inpatient operating national standardized amounts to account for the estimated proportion of operating DRG payments made to payments in outlier cases. Accordingly, as a result of this change to the update to the operating standardized amounts for discharges occurring on or after April 1, 2001 and before October 1, 2001, we revised the fixed-loss outlier threshold. The regulations at § 412.312(c) establish a unified outlier methodology for inpatient operating and inpatient capital-related costs, which utilizes a single set of thresholds to identify outlier cases for both inpatient operating and inpatient capital prospective payment system payments.

Because operating DRG payments increased as a result of implementing section 301 of Public Law 106-554, the fixed-loss outlier threshold decreased, which resulted in an increase in estimated outlier payments. Thus, the capital national outlier adjustment factor was revised. Since the revision to the fixed-loss outlier threshold also affected total capital payments, the exceptions adjustment factor was also revised in order to maintain budget neutrality. The exceptions adjustment factor is determined based on an estimate of the ratio of exception payments to total capital payments. The GAF/DRG budget neutrality factor was also revised. We discuss the impact of changes to the rates and payments under the capital prospective payment system that result from implementation of section 301 of Public Law 106-554 in further detail in the Addendum of this final rule.

We did not receive any comments on the revised FY 2001 capital Federal rate for discharges occurring on or after April 1, 2001 and before October 1, 2001 as a result of implementing section 301(b) of Public Law 106-554.

VI. Changes for Hospitals and Hospital Units Excluded From the Prospective Payment System

A. Limits on and Adjustments to the Target Amounts for Excluded Hospitals and Units (§§ 413.40(b)(4) and (g))

1. Updated Caps for Existing Hospitals and Uni