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AGENCY:

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

ACTION:

Final rule.

SUMMARY:

This final rule sets forth an update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health agencies. This final rule is the first update of the home health prospective payment system (HH PPS) rates that uses the revised area labor market Metropolitan Statistical Area designations for calendar year 2006. In implementing the new area labor market designations, we are allowing for a one-year transition period. This transition consists of a blend of 50 percent of the new area labor market designations' wage index and 50 percent of the previous area labor market designations' wage index. In addition, we are revising the fixed dollar loss ratio, which is used in the calculation of outlier payments.

EFFECTIVE DATE:

These regulations are effective on January 1, 2006.

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FOR FURTHER INFORMATION CONTACT:

Randy Throndset, (410) 786-0131. Sharon Ventura, (410) 786-1985.

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SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Background

The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), enacted on August 5, 1997, significantly changed the way Medicare pays for Medicare home health services. Until the implementation of a home health prospective payment system (HH PPS) on October 1, 2000, home health agencies (HHAs) received payment under a cost-based reimbursement system. Section 4603 of the BBA governed the development of the HH PPS.

Section 4603(a) of the BBA provides the authority for the development of a PPS for all Medicare-covered home health services provided under a plan of care that were paid on a reasonable cost basis by adding section 1895, entitled “Prospective Payment For Home Health Services,” to the Social Security Act (the Act).

Section 1895(b)(1) of the Act requires the Secretary to establish a PPS for all costs of home health services paid under Medicare.

Section 1895(b)(3)(A) of the Act requires that (1) the computation of a standard prospective payment amount include all costs of home health services covered and paid for on a reasonable cost basis and be initially based on the most recent audited cost report data available to the Secretary, and (2) the prospective payment amounts be standardized to eliminate the effects of case-mix and wage levels among HHAs.

Section 1895(b)(3)(B) of the Act addresses the annual update to the standard prospective payment amounts by the home health applicable increase percentage as specified in the statute.

Section 1895(b)(4) of the Act governs the payment computation. Sections 1895(b)(4)(A)(i) and (b)(4)(A)(ii) of the Act require the standard prospective payment amount to be adjusted for case-mix and geographic differences in wage levels. Section 1895(b)(4)(B) of the Act requires the establishment of an appropriate case-mix adjustment factor that explains a significant amount of the variation in cost among different units of services. Similarly, section 1895(b)(4)(C) of the Act requires the establishment of wage adjustment factors that reflect the relative level of wages and wage-related costs applicable to the furnishing of home health services in a geographic area compared to the national average applicable level. These wage-adjustment factors may be the factors used by the Secretary for the different area wage levels for purposes of section 1886(d)(3)(E) of the Act.

Section 1895(b)(5) of the Act gives the Secretary the option to grant additions or adjustments to the payment amount otherwise made in the case of outliers because of unusual variations in the type or amount of medically necessary care. Estimated total outlier payments in a given year cannot exceed 5 percent of total payments projected or estimated.

On December 8, 2003, the Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 (Pub. L. 108-173). This legislation affected how we make updates to HH payment rates.

Section 701 of the MMA changed the yearly update cycle of the HH PPS rates from that of a fiscal year to a calendar year update cycle for 2004 and any subsequent year. Generally, section 701(a) of the MMA changed the references in the statute to refer to the calendar year for 2004 and any subsequent year. The changes resulted in updates to the HH PPS rates described as “fiscal year” updates for 2002 and 2003 and as “calendar year” updates for 2004 and any subsequent year (section 1895(b)(3)(B)(i) of the Act. Beginning on January 1, 2005, the HH PPS will be updated on a calendar year update cycle.

In addition to changing the update cycle for HH PPS rates, section 701 of the MMA made adjustments to the home health applicable increase percentage for 2004, 2005, and 2006. Specifically, section 701(a)(2)(D) of the MMA left unchanged the home health market basket update for the last calendar year quarter of 2003 and the first calendar year quarter of 2004 (section 1895(b)(3)(B)(ii)(II) of the Act).

Furthermore, section 701(b)(4) of the MMA set the home health applicable percentage increase for the last 3 quarters of 2004 as the home health market basket (3.1 percent) minus 0.8 percentage point (section 1895(b)(3)(B)(ii)(III) of the Act). We implemented this provision through Pub. 100-20, One Time Notification, Transmittal 59, issued February 20, 2004. Section 701(b)(4) of the MMA also provided that updates for CY 2005 and CY 2006 will equal the applicable home health market basket percentage increase minus 0.8 percentage point. Lastly, section 701(b)(3) of the MMA revised the statute to provide that HH PPS rates for CY 2007 and any subsequent year will be updated by that year's home health market basket percentage increase (section 1895(b)(3)(B)(ii)(IV) of the Act).

B. Updates

1. 2000 Final Rule

On July 3, 2000, we published a final rule (65 FR 41128) in the Federal Register to implement the HH PPS legislation. That final rule established requirements for the new PPS for HHAs as required by section 4603 of the BBA, and as subsequently amended by section 5101 of the Omnibus Consolidated and Emergency Supplemental Appropriations Act (OCESAA) for Fiscal Year 1999 (Pub. L. 105-277), enacted on October 21, 1998; and by sections 302, 305, and 306 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act (BBRA) of 1999 (Pub. L. 106-113), enacted on November 29, 1999. The requirements include the implementation of a PPS for HHAs, consolidated billing requirements, and a number of other related changes. The PPS described in that rule replaced the retrospective reasonable-cost-based Start Printed Page 68133system that was used by Medicare for the payment of home health services under Part A and Part B.

2. 2004 Final Rule

On October 22, 2004, we published a final rule (69 FR 62124), which set forth an update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health agencies. As part of that final rule, we rebased and revised the home health market basket to ensure it continues to adequately reflect the price changes of efficiently providing home health services. In addition, we revised the fixed dollar loss (FDL) ratio, which is used in the calculation of outlier payments. That final rule was also the first update of the HH PPS rates on a calendar year update cycle. HH PPS was moved to a calendar year update cycle as a result the MMA.

C. System for Payment of Home Health Services

Generally, Medicare makes payment under the HH PPS on the basis of a national standardized 60-day episode payment, adjusted for case mix and wage index. For episodes with four or fewer visits, Medicare pays on the basis of a national per-visit amount by discipline, referred to as a low utilization payment adjustment (LUPA). Medicare also adjusts the 60-day episode payment for certain intervening events that give rise to a partial episode payment adjustment (PEP adjustment) or a significant change in condition adjustment (SCIC). For certain cases that exceed a specific cost threshold, an outlier adjustment may also be available. For a complete and full description of the HH PPS as required by the BBA and as amended by OCESAA and BBRA, see the July 3, 2000 HH PPS final rule (65 FR 41128).

D. Requirements for Issuance of Regulations

Section 902 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) amended section 1871(a) of the Act and requires the Secretary, in consultation with the Director of the Office of Management and Budget, to establish and publish timelines for the publication of Medicare final regulations based on the previous publication of a Medicare proposed or interim final regulation. Section 902 of the MMA also states that the timelines for these regulations may vary but shall not exceed 3 years after publication of the preceding proposed or interim final regulation except under exceptional circumstances.

This final rule finalizes provisions set forth in the July 14, 2005 proposed rule (70 FR 40788). In addition, this final rule has been published within the 3-year time limit imposed by section 902 of the MMA. Therefore, we believe that the final rule is in accordance with the Congress' intent to ensure timely publication of final regulations.

II. Provisions of the Proposed Regulations

We published a proposed rule in the Federal Register on July 14, 2005 (70 FR 40788) that set forth a proposed update to the 60-day national episode rates and the national per-visit amounts under the Medicare prospective payment system for home health agencies. We also proposed to implement the revised area labor market Metropolitan Statistical Area designations for calendar year 2006.

A. National Standardized 60-Day Episode Rate

Medicare HH PPS has been effective since October 1, 2000. As set forth in the final rule published July 3, 2000 in the Federal Register (65 FR 41128), the unit of payment under Medicare HH PPS is a national standardized 60-day episode rate. As set forth in 42 CFR 484.220, we adjust the national standardized 60-day episode rate by a case mix grouping and a wage index value based on the site of service for the beneficiary. The proposed CY 2006 HH PPS rates used the same case-mix methodology and application of the wage index adjustment to the labor portion of the HH PPS rates as set forth in the July 3, 2000 final rule. In the October 22, 2004 final rule, we rebased and revised the home health market basket, resulting in a labor related share of 76.775 percent and a non-labor portion of 23.225 percent (69 FR 62126). We multiply the national 60-day by the patient's applicable case-mix weight. We divide the case-mix adjusted amount into a labor and non-labor portion. We multiply the labor portion by the applicable wage index based on the site of service of the beneficiary. As the home health market basket was rebased and revised last year, we did not propose to rebase it for CY 2006.

As required by section 1895(b)(3)(B) of the Act, we have updated the HH PPS rates annually in a separate Federal Register document. Section 484.225 sets forth the specific percentage update for fiscal years 2001 through 2008. As amended by section 701 of the MMA, § 484.225(f) sets the CY 2006 unadjusted national prospective 60-day episode payment rate equal to the rate from the previous calendar year (CY 2005), increased by the applicable home health market basket minus 0.8 percentage point.

For CY 2006, we proposed to use again the design and case-mix methodology described in section III.G of the HH PPS July 3, 2000 final rule (65 FR 41192 through 41203). For CY 2006, we will base the wage index adjustment to the labor portion of the PPS rates on the most recent pre-floor and pre-reclassified hospital wage index as discussed in section II.D of this final rule (not including any reclassifications under section 1886(d)(8)(B)) of the Act.

As discussed in the July 3, 2000 HH PPS final rule, for episodes with four or fewer visits, Medicare pays the national per-visit amount by discipline, referred to as a LUPA. We update the national per-visit amounts by discipline annually by the applicable home health market basket percentage. We adjust the national per-visit amount by the appropriate wage index based on the site of service for the beneficiary as set forth in § 484.230. We will adjust the labor portion of the updated national per-visit amounts by discipline used to calculate the LUPA by the most recent pre-floor and pre-reclassified hospital wage index, as discussed in section II.D of the July 14, 2005 proposed rule.

Medicare pays the 60-day case-mix and wage-adjusted episode payment on a split percentage payment approach. The split percentage payment approach includes an initial percentage payment and a final percentage payment as set forth in § 484.205(b)(1) and (b)(2). We may base the initial percentage payment on the submission of a request for anticipated payment and the final percentage payment on the submission of the claim for the episode, as discussed in § 409.43. The claim for the episode that the HHA submits for the final percentage payment determines the total payment amount for the episode and whether we make an applicable adjustment to the 60-day case-mix and wage-adjusted episode payment. The end date of the 60-day episode as reported on the claim determines the rate level at which Medicare will pay the claim for the fiscal period.

We may also adjust the 60-day case-mix and wage-adjusted episode payment based on the information submitted on the claim to reflect the following:

• A low utilization payment provided on a per-visit basis as set forth in § 484.205(c) and § 484.230. Start Printed Page 68134
• A partial episode payment adjustment as set forth in § 484.205(d) and § 484.235.
• A significant change in condition adjustment as set forth in § 484.205(e) and § 484.237.
• An outlier payment as set forth in § 484.205(f) and § 484.240.

The July 14, 2005 proposed rule reflected the proposed updated CY 2006 rates, effective January 1, 2006.

B. CY 2006 Update to the Home Health Market Basket Index

Section 1895(b)(3)(B) of the Act, as amended by section 701 of the MMA, requires for CY 2006 that the standard prospective payment amounts be increased by a factor equal to the applicable home health market basket update minus 0.8 percentage point.

CY 2006 Adjustments

In calculating the annual update for the CY 2006 60-day episode rates, we first look at the CY 2005 rates as a starting point. The CY 2005 national 60-day episode rate, as published in the Federal Register (69 FR 62124) is $2,264.28.

In order to calculate the CY 2006 national 60-day episode rate, we multiply the CY 2005 national 60-day episode rate ($2,264.28) by the estimated home health market basket update of 3.6 percent for CY 2006 minus 0.8 percentage point.

We increase the CY 2005 60-day episode payment rate by the estimated home health market basket update (3.6 percent) minus 0.8 percentage point ($2,264.28 × 2.8 percent) to yield the updated CY 2006 national 60-day episode rate ($2,327.68) (see Table 1).

National Per-visit Amounts Used to Pay LUPAs and Compute Imputed Costs Used in Outlier Calculations

As discussed previously in the July 14, 2005 proposed rule, the policies governing the LUPAs and outlier calculations set forth in the July 3, 2000 HH PPS final rule will continue during CY 2006. In calculating the annual update for the CY 2006 national per-visit amounts we use to pay LUPAs and to compute the imputed costs in outlier calculations, we look again at the CY 2005 rates as a starting point. We then multiply those amounts by the estimated home health market basket update minus 0.8 percentage point for CY 2006 to yield the updated per-visit amounts for each home health discipline for CY 2006 (see Table 2).

C. Outliers & the Fixed Dollar Loss Ratio

Outlier payments are payments made in addition to regular 60-day case-mix and wage-adjusted episode payments for episodes that incur unusually large costs due to patient home health care needs. Outlier payments are made for episodes for which the estimated cost exceeds a threshold amount. The episode's estimated cost is the sum of the national wage-adjusted per-visit payment amounts for all visits delivered during the episode. The outlier threshold for each case-mix group, PEP adjustment, or total SCIC adjustment is defined as the 60-day episode payment amount, PEP adjustment, or total SCIC adjustment for that group plus an FDL amount. Both components of the outlier threshold are wage-adjusted.

The wage-adjusted FDL amount represents the amount of loss that an agency must bear before an episode becomes eligible for outlier payments. The FDL is computed by multiplying the wage-adjusted 60-day episode payment amount by the FDL ratio, which is a proportion expressed in terms of the national standardized episode payment amount. The outlier payment is defined to be a proportion of Start Printed Page 68135the wage-adjusted estimated costs beyond the wage-adjusted threshold. The proportion of additional costs paid as outlier payments is referred to as the loss-sharing ratio.

Section 1895(b)(5) of the Act requires that estimated total outlier payments are no more than 5 percent of total estimated HH PPS payments. In response to the concerns about potential financial losses that might result from unusually expensive cases expressed in comments to the October 28, 1999 proposed rule (64 FR 58133), the July 3, 2000 final rule set the target for estimated outlier payments at the 5 percent level. The FDL ratio and the loss-sharing ratio were then selected so that estimated total outlier payments would meet the 5 percent target.

For a given level of outlier payments, there is a trade-off between the values selected for the FDL ratio and the loss-sharing ratio. A high FDL ratio reduces the number of episodes that can receive outlier payments, but makes it possible to select a higher loss-sharing ratio and, therefore, increase outlier payments for outlier episodes. Alternatively, a lower FDL ratio means that more episodes can qualify for outlier payments, but outlier payments per episode must be lower. As a result of public comments on the October 28, 1999 proposed rule, in our July 3, 2000 final rule, we made the decision to set the FDL at a level estimated to cover a relatively high proportion of the costs of outlier cases for the most expensive episodes that would qualify for outlier payments within the 5 percent constraint.

In the July 3, 2000 final rule, we chose a value of 0.80 for the loss-sharing ratio, which preserves incentives for agencies to attempt to provide care efficiently for outlier cases. A loss-sharing ratio of 0.80 was also consistent with the loss-sharing ratios used in other Medicare PPS outlier policies. We still believe that a loss-sharing ratio of 0.80 is appropriate. Furthermore, we estimated the value of the FDL ratio that would yield estimated total outlier payments that were 5 percent of total home health PPS payments. The resulting value for the FDL ratio, for the July 3, 2000 final rule, was 1.13.

In the CY 2005 update to the HH PPS rates (69 FR 62124), we revised the FDL ratio from the original 1.13 to 0.70 to allow more home health episodes to qualify for outlier payments and to better meet the estimated 5 percent target of outlier payments to total HH PPS payments. We stated in that CY 2005 update that we planned to continue to monitor the outlier expenditures on a yearly basis and to make adjustments as necessary (69 FR 62129). To do so, we planned on using the best Medicare data available at the time of publication. For the CY 2005 update, we used CY 2003 home health claims data. At the time of publication of the CY 2006 proposed rule, we did not have more recent data, but noted that we may update the FDL ratio for CY 2006 depending on the availability of more recent data. We further noted that if we updated the FDL ratio for the CY 2006 update, we would use the same methodology performed in updating the current FDL ratio described in the October 22, 2004 final rule. Subsequent to publication of the CY 2006 proposed rule, we have now obtained more recent data, that is, CY 2004 home health claims data.

Accordingly for this final rule, we have used the same methodology and performed an analysis on the CY 2004 HH PPS analytic data to update the FDL ratio for CY 2006. The results of this analysis indicate that an FDL ratio of 0.65 is consistent with the existing loss-sharing ratio of 0.80 and a projected target percentage of estimated outlier payments of 5 percent. Therefore, we are updating the FDL ratio from the current 0.70 to 0.65 for CY 2006. As explained below, we believe reducing the FDL ratio will allow more episodes to qualify for outlier payments.

Expressed in terms of a fixed dollar loss amount, an FDL ratio of 0.65 indicates that providers would absorb approximately $1,513 of their costs (before wage adjustment), in addition to their loss-sharing portion of the estimated cost in excess of the outlier threshold. This fixed dollar loss amount of approximately $1,513 is computed by multiplying the standard 60-day episode payment amount ($2,327.68) by the FDL ratio (0.65). In contrast, using the current FDL ratio (0.70), the fixed dollar loss amount would be approximately $1,629 ($2,327.68 × 0.70).

Thus, we believe that an FDL ratio of 0.65 continues to preserve a reasonable degree of cost sharing, and continues to meet the statutory requirements while still allowing a greater number of episodes to qualify for outlier payments.

D. Hospital Wage Index

1. Revised OMB Definition for Geographical Statistical Areas

Sections 1895(b)(4)(A)(ii) and (b)(4)(C) of the Act require the Secretary to establish area wage adjustment factors that reflect the relative level of wages and wage-related costs applicable to the furnishing of home health services and to provide appropriate adjustments to the episode payment amounts under HH PPS to account for area wage differences. We apply the appropriate wage index value to the labor portion (76.775 percent; see 60 FR 62126) of the HH PPS rates based on the geographic area in which the beneficiary received home health services as discussed in section II.A of the July 14, 2005 proposed rule. Generally, we determine each HHA's labor market area based on definitions of Metropolitan Statistical Areas (MSAs) issued by the Office of Management and Budget (OMB).

We acknowledged in our October 22, 2004 final rule that, on June 6, 2003, the OMB issued an OMB Bulletin (No. 03-04) announcing revised definitions for MSAs, new definitions for Micropolitan Statistical Areas and Combined Statistical Areas, and guidance on using the statistical definitions. A copy of the Bulletin may be obtained at the following Internet address: http://www.whitehouse.gov/​omb/​bulletins/​b03-04.html. At that time, we did not propose to apply these new definitions known as Core-Based Statistical Areas (CBSAs). In the July 14, 2005 proposed rule, we proposed to use the OMB-revised definitions to adjust the CY 2006 HH PPS payment rates and revise the regulations at 42 CFR 484.202 to reflect this proposed change. The Hospital Inpatient PPS (IPPS) applied these revised definitions as discussed in the August 11, 2004 IPPS final rule (68 FR 49207).

a. Background

As discussed previously and set forth in the July 3, 2000 final rule, the statute provides that the wage adjustment factors may be the factors used by the Secretary for purposes of section 1886(d)(3)(E) of the Act for hospital wage adjustment factors. Again, as discussed in the July 3, 2000 final rule, we will use the pre-floor and pre-reclassified hospital wage index data to adjust the labor portion of the HH PPS rates based on the geographic area in which the beneficiary receives the home health services. We believe the use of the pre-floor and pre-reclassified hospital wage index data results in the appropriate adjustment to the labor portion of the costs as required by statute. For the CY 2006 update to the home health payment rates, we will continue to use the most recent pre-floor and pre-reclassified hospital wage index available at the time of publication. See Addenda A and B of this final rule, respectively, for the rural and urban hospital wage indices using the new MSA designations. For HH PPS rates addressed in the July 14, 2005 proposed rule, we used preliminary 2006 pre-floor and pre-reclassified hospital wage index data. We incorporated updated hospital Start Printed Page 68136wage index data for the 2006 pre-floor and pre-reclassified hospital wage index to be used in the final rule for the CY 2006 HH PPS update (not including any reclassifications under section 1886(d)(8)(B) of the Act).

As implemented under the HH PPS in the July 3, 2000 HH PPS final rule, each HHA's labor market is determined based on definitions of MSAs issued by OMB. In general, an urban area is defined as an MSA or New England County Metropolitan Area (NECMA) as defined by OMB. Under § 412.62(f)(1)(iii), a rural area is defined as any area outside of the urban area. The urban and rural area geographic classifications are defined in § 412.62(f)(1)(ii) and (f)(1)(iii), respectively, and have been used under HH PPS since it was implemented.

Under the HH PPS, the wage index value used is based upon the location of the beneficiary's home. As has been our longstanding practice, any area not included in an MSA (urban area) is considered to be nonurban (§ 412.64(b)(1)(ii)(C)) and receives the statewide rural wage index value (see, for example, 65 FR 41173).

In the August 11, 2004 IPPS final rule (69 FR 49206 through 49034), revised labor market area definitions were adopted under § 412.64(b), which were effective October 1, 2004 for acute care hospitals. The new standards, CBSAs, were announced by OMB in late 2000 and were also discussed in greater detail in the July 14, 2005 HH PPS proposed rule. Recently other prospective payment systems such as the inpatient rehabilitation facility PPS (IRF PPS) and the skilled nursing facility PPS (SNF PPS) and Medicare payment for hospice care have been updated to utilize the new revised labor market area definitions. For the purposes of this rule, the term “MSA-based” refers to wage index values and designations based on the previous MSA designations. Conversely, the term “CBSA-based” refers to wage index values and designations based on the new OMB revised MSA designations which now include CBSAs.

III. Analysis of and Responses to Public Comments

We received approximately 35 comments on the HH PPS proposed rule published on July 14, 2005. A summary of the major issues and our responses follow:

Market Basket

Comment: A commenter indicated that CMS institute a modification to the market basket index formula to allow for consideration of cost increases, specifically transportation costs related to rising gasoline prices. The commenter noted that the rising spike in gas prices highlights the unique costs and challenges in delivering home health services that are not faced by hospitals or other health care providers. The commenter further noted that HHAs are one of the few Medicare providers so reliant upon fuel to provide healthcare services and this is especially relevant in rural areas where distance between patients can exceed 50 miles.

Response: As an input price index, the 2000-based HH market basket and CY 2006 HH update is intended to reflect the price increases associated with transportation, not cost increases. The transportation base year cost weight, derived from the 2000 HHA Medicare cost reports, represents 2.744 percent of the HH market basket. In determining the HH market basket percentage increase, these costs are proxied using the Consumer Price Index (CPI) for private transportation; therefore, we believe forecasts of this price proxy reflect the price changes of fuel.

Comment: A commenter noted that CMS has chosen not to rebase and revise the home health market basket for 2006. The commenter stated that CMS should develop a timely process to rebase and revise the home health market basket. The commenter also stated that CMS should consider rebasing more frequently than previous years as more current data become available.

Response: We note that we recently rebased the 2000-based HH market basket for the CY 2004 HH PPS update. As we noted in the October 22, 2004 final rule, we typically rebase the market baskets on a 5-year cycle. We will continue to monitor the home health market basket to ensure that it continues to accurately reflect the cost structures of HHAs.

Comment: A commenter recommended that CMS should establish a technical advisory group that includes economists who can review the costs going into the home health market basket. Technology costs, transportation costs, workers compensation insurance, and the cost of providing home health preparedness in emergency situations significantly impact the ability to provide adequate home health services. Another commenter urged CMS to review and consider more appropriate ways to reflect the true economic realities as they relate to home health services. More accurate reflection of the economic environment will also alleviate the large variations in changes to the wage index from year to year for home health providers.

Response: The majority of the 2000 base year cost weights (accounting for more than 90 percent of the home health market basket cost structure) were derived using the 2000 Medicare cost reports for freestanding HHAs. The price increases associated with the individual cost weights are forecasted by Global Insight, Inc. (GII). GII is a nationally recognized economic and financial forecasting firm that forecasts the components of the market baskets. While we believe the HH forecast is a reliable measure of the costs of providing HH services, specific comments and suggestions by other technical experts on the market basket, cost structure, and price increases are appreciated.

Comment: Although required by law, a commenter opposed implementation of the 0.8 percent reduction to the market basket.

Response: We acknowledge the comment but believe we must fulfill the statutory mandate that requires that our update to the HH payment rate be the applicable HH market basket percentage increase minus 0.8 percentage points.

Outlier Payment

Comment: A commenter noted that, in the proposed rule, CMS proposes no change to the outlier payment formula and notes that if CMS is considering modifying the outlier formula for the final rule, CMS should issue a proposed rule on any such change to allow for full public review and comment. The commenter stated that making policy changes on the HH PPS final rule is improper, and doing so would not follow appropriate procedure for CMS inspection and assessment in developing policies. Moreover, the commenter believes that the outlier threshold should be reduced each year until expenditures equal the 5 percent threshold specified in legislation and that when CMS determines that expenditures have reached the threshold, the evidence for making no further reductions in the threshold should be presented in the proposed rule and finalized after public comment.

Response: We do not disagree with the commenter but, as we stated in the July 14, 2005 proposed rule, we did not propose any change to the outlier methodology. We are updating the FDL ratio using the same methodology described in the October 22, 2004 final rule using the most recent available data. Using the most available data, our analysis showed that the FDL ratio applied to the computation of outlier payments should be decreased. As such, the lower FDL ratio will benefit HHAs by allowing more episodes to qualify for Start Printed Page 68137outlier payments. The updated FDL ratio is 0.65, which we believe results in the estimated total outlier payments meeting the 5 percent target.

We will continue to analyze current and future data in order to ensure that the FDL ratio is effective at maintaining estimated total outlier payments at the 5 percent level.

Rural Add-On

Comment: Several commenters urged CMS to either restore or advocate for the re-establishment of the rural add-on for home health services furnished to beneficiaries living in rural areas.

Response: The rural add-on was a temporary add-on established by the MMA. Specifically, section 421 of the MMA required, for home health services furnished in a rural area with respect to episodes and visits ending on or after April 1, 2004 and before April 1, 2005, that we increase by 5 percent the payment amount that otherwise would be made for the services. The statute does not provide for a continuation of the add-on.

Wage Index Tables

Comment: A commenter would like to see wage index tables that compare the proposed wage index with the current wage index and show the year to year change in each locality. The commenter suggested that tables be presented both in CBSA alphabetical order, as well as by county within the State, as was done in the July 14, 2005 proposed rule. Also, the commenter suggested that a table highlight those areas experiencing the largest increases and decreases in the wage index. If more complete tables cannot be published in the Federal Register itself, the commenter suggested contemporaneous publication on the CMS Web site.

Response: The final rule presents the wage index values in several different table formats. The wage index values are presented in CBSA order in Addendum B and Addendum C. The wage index values are presented by State and county in Addendum A.

Home Health Wage Index

Comment: A commenter questioned how CMS’ pre-floor, pre-reclassified hospital wage index published in the July 14, 2005 Federal Register for the HH PPS proposed rule could be substantially different from the pre-floor, pre-reclassified hospital wage index published in the August 4, 2005 Federal Register for the SNF PPS final rule (70 FR 45026).

Response: The difference between “Table 8.—FY2006 Wage Index for Urban Areas Based on CBSA Labor Market Areas” contained in the August 4, 2005 SNF PPS final rule and “Addendum B.—Proposed CY 2006 Wage Index for Urban Areas by CBSA; Applicable Pre-Floor and Pre-Reclassified Hospital Wage Index” in the July 14, 2005 home health proposed rule is attributable to the fact that the SNF update and the HH proposed update are published at different times. In the July 14, 2005 HH PPS proposed rule, the 2006 pre-floor, pre-reclassified hospital wage index was a preliminary version of the wage index. Between the time of publication of the July 14, 2005 home health PPS proposed rule and the time of publication of the SNF PPS final rule, a final version of the 2006 pre-floor, pre-reclassified hospital wage index became available and was subsequently published in the SNF PPS final rule.

Comment: A number of commenters stated that the wage index formula is seriously flawed, claiming it does not reflect the cost of providing home health services. The commenters noted that providing home health services is unique from providing hospital services in that HHAs incur transportation costs (high gasoline costs) and auto insurance. Moreover, they stated that in the era of this nursing shortage, it is difficult to compete with hospitals to recruit and retain nursing staff. The commenters suggested that CMS should review its factors used in the wage index and communicate to providers how it applies the formulas to take into account the unique costs to HH that impact Medicare beneficiaries.

Response: We disagree with the commenters' statement that the wage index formula is flawed. We believe the home health payment policy that utilizes hospital data as the input for calculating geographic area wage adjustments is the best available proxy for determining the related cost of home health wage and wage level costs. In addition, the home health payment rates incorporate a home health market basket update factor which reflects the unique costs of providing home health services as opposed to hospital or any other type of healthcare services.

Comment: A commenter stated that future changes to the wage index should be accompanied by a comprehensive impact analysis and at least one year's notice in advance of the proposed change. Adaptations to large swings in reimbursement cannot be accommodated on short notice and threaten stability in providing services.

Response: We believe that using the best available data, at the time of publication, for purposes of updating the HH payment rates is a valid reflection of the wage and wage level costs used in providing HH services.

Comment: A commenter stated that the wage index listed in the proposed rule is based on preliminary 2006 pre-floor, pre-reclassified hospital wage data. In the proposed rule, CMS stated it will use the most recent pre-floor, pre-reclassified hospital wage index data available at the time of publication. The commenter suggested that CMS should update the wage index based on the final 2006 pre-floor and pre-reclassified hospital wage data, not preliminary data. The preliminary data contained errors that were corrected when final hospital wage indexes were issued.

Response: We are updating the HH payment rates using the most recent 2006 pre-floor, pre-reclassified hospital wage index data. As we noted in the July 14, 2005 proposed rule, because of the timing of the proposed rule, the most recent available data at that time were the preliminary 2006 pre-floor, pre-reclassified hospital wage index, and that more recent data would be used in the final rule.

Comment: Several commenters supported the move to CBSAs. One commenter believes that CBSAs provide significantly better measures of individual labor markets and fully supports their adoption.

Response: We appreciate the commenter's support. As we note later, we are adopting wage index values using CBSA designations.

Comment: A commenter suggested that CMS should validate the accuracy and completeness of wage data submitted by hospitals to ensure that all hospitals in an area have reported.

Response: We believe CMS employs current processes that accomplish this validation. All IPPS hospitals must complete the wage index survey (Worksheet S-3, Parts II and III) as part of their Medicare cost reports. Cost reports will be rejected if Worksheet S-3 is not completed. Additionally, intermediaries perform desk reviews on all hospitals' Worksheet S-3 wage data, and CMS runs edits on the wage data to further ensure the accuracy and validity of the wage data.

Comment: A commenter suggested that CMS should provide a mechanism for HHAs to challenge the accuracy of wage index values for their areas, especially in cases where there are indications of an irregularity.

Response: As we currently use hospital wage index data as the basis for the HH geographic wage adjustment, HHAs have the opportunity to submit comments on the hospital wage index data during the annual IPPS rulemaking period. Start Printed Page 68138

Transition

Comment: We received a number of comments against using the new CBSA designations. We received a number of comments stating that at a minimum, CMS should institute a transition policy similar to that being implemented by SNFs, hospices, and inpatient rehabilitation facilities. Most commenters suggested a one-year transition period. Some of the commenters recommended a two-year or three-year transition period.

Most commenters recommended a 50/50 blend of the previous and new labor market definitions. One commenter suggested a multi-year phase-in using a blend of previous and new with increasing reliance on the new wage index in each successive year (for example, 25 percent, 50 percent, 75 percent, then 100 percent of the CBSA). Several commenters stated that the transition policy should be applied to wage areas that would experience a decrease in their wage index. Some commenters stated that wage index values for wage areas that would be subject to a decrease remain static. Other commenters suggested the use of a wage index floor to avoid large fluctuations in the wage index. Most commenters wanted a transition period for all wage areas.

Response: We have considered all the comments, and we are adopting a wage index transition policy for HH PPS for CY 2006. The wage index transition policy for CY 2006 is a 50/50 blend of the CBSA-based wage index values and the MSA-based wage index values and will be applied to all wage areas. For CY 2007, the HH PPS will be solely based on a CBSA-based wage index. We believe that the one-year transition policy using a 50/50 blend is responsive to the majority of comments that recommended a one-year transition and the majority that recommended a 50/50 blend while still maintaining an appropriate adjustment to account for geographic wage differences. Addendum A displays the wage index in State and County order showing the MSA-based wage index values, the CBSA-based wage index values, and the blended wage index values. Addendum B and Addendum C display the wage index in CBSA order.

Comment: A commenter suggested that CMS needs to revisit the assumption underlying the wage indices in micropolitan areas. The commenter stated that in any situation where a county of a micropolitan area is contiguous with the principal county of a metropolitan area, CMS must independently determine whether a unified labor market exists and allow for use of an urban rate calculation.

Response: We refer readers to the explanation in the FY 2005 IPPS final rule published August 11, 2004 for our adoption of the new Census designations as well as the treatment of micropolitan areas as rural (69 FR 49026).

Comment: A commenter recommended that the hospital wage index should not exclude CAHs when used for the specific purpose of determining rates for other providers that operate in the same areas served by the CAHs.

Response: This comment is outside the scope of the HH PPS update final rule. Any comments regarding the specifics of the hospital wage index policy should be presented during the IPPS rulemaking period.

Comment: A commenter requested that CMS review and reconsider the wage index calculation for Massachusetts' rural areas.

Response: As the only hospitals left in rural Massachusetts are two critical access hospitals (CAHs), and data from CAHs are no longer included in the IPPS, there are no updated data from which to calculate a wage index for rural Massachusetts for use in the HH PPS update for CY 2006. In providing for an appropriate standard to account for area wage differences, for the purposes of the HH PPS update, we believe a reasonable proxy for the wage index for rural Massachusetts for CY 2006 is the 2005 pre-floor, pre-reclassified hospital wage index data.

Comment: Several commenters expressed concern about decreasing wage index values for specific counties.

Response: We appreciate the detailed concerns sent by the commenters regarding the impact of the wage index update for their specific counties. We note that there will always be some areas that experience an increase in wage index values while others experience a decrease in wage index values. Variability in wage index values occurs each year as wage index values fluctuate from year to year based on the changes to the hospital wage data. As a result, wage index values within the system increase or decrease. We are aware of the changes to wage index values due in part to the adoption of the revised OMB designations and note we have provided a transition period for CY 2006.

Wage Index Reform

Comment: A commenter recommended that in order to provide parity between hospitals and HHAs in areas where hospitals have reclassified to a higher wage index area, CMS should either authorize a similar wage index adjustment for HHAs or seek such authority from the Congress, as well as authority to put a floor on wage index reductions from one year to the next.

The commenter also suggested that CMS should begin a wholesale revision and reform of the home health wage index. This reform should consider the impact on care access and financial stability of HHAs measured at the local level.

Response: The statute does not provide authority to allow HHAs to apply for geographic reclassification. We also note that the HH PPS wage index adjustment is based on the geographic area where the beneficiary received home health services, not where the HHA is located. As to the revision and reform of the home health wage index, we further note that CMS has, along with the industry, explored the feasibility of developing a home health specific wage index. Because of the volatility of the home health wage data and the significant amount of resources that would be required to improve the quality of that data, we do not expect to propose a home health specific wage index until we can demonstrate that a home health specific wage index would be more reflective of the wages and salaries paid in a specific area, that it would significantly improve our ability to determine payment for home health agencies, and that we can justify the resources required to collect the data, as well as the increased burden on providers.

Comment: A commenter recommended that there needs to be an ongoing dialogue between State and national home care associations and CMS in order to determine a more appropriate payment methodology for home care. A commenter stated that CMS should establish a home health technical advisory group to regularly review and update the multitude of parts of the HH PPS reimbursement methodology.

Response: We appreciate the comment; however, we do not believe such a group is necessary as such a dialogue envisioned by the commenter currently exists. We have always received input from the industry on various aspects of our Medicare payment systems, and we anticipate this practice will continue into the future. Moreover, the “open-door” forums, that we initiated, provide the public with an opportunity to provide input and comment on home health in general, including the payment policies used in the HH PPS. Start Printed Page 68139

LUPA

Comment: We received a comment that LUPA reimbursement is inadequate for New York. The commenter stated that there should be a review and increase to the LUPA per visit rates to ensure that they cover the costs of providing care.

Response: We believe the LUPA per-visit rates adequately account for the costs of providing care in such a situation. The per-visit rates used for the LUPA are adjusted by the appropriate wage index and updated annually by the home health market basket update minus 0.8 percent as required by the statute.

Case Mix Weight

Comment: Commenters stated that the HHRG case mix classification does not recognize the added costs of the dually eligible beneficiaries, noting that this population has more comorbidities and often lacks the informal supports non-dual eligible beneficiaries have. As these complexities add to the cost of providing care, the commenters suggested that an add-on for these patients should be implemented until refinements to the case mix system can be made.

Response: We are currently analyzing possible refinements to the case mix system. Concerns such as those expressed by the commenters are included in our review and analysis. We note that our analysis includes not only review of statistical data but also review of operational feasibility and policy implications.

Comment: We received a comment stating that the case-mix system does not adequately recognize the costs of wound care given the intensity of some of these patients and the newest supplies that can facilitate rapid healing.

Response: We appreciate the comment and note that wound care's impact on case-mix is being addressed in our refinement review and analysis through a study of supplies' costs as a component of case mix and through other types of case-mix model refinements.

Comment: A commenter recommended that CMS should institute ongoing analysis of the case-mix weights along with a mechanism to refine the case-mix adjustments. CMS has 3 years of data that should assist in this process.

Response: We agree and our refinement review and analysis, which is currently under development, addresses a revision of the case-mix weights resulting from a refinement of the underlying case mix model and of the resulting set of groups.

IV. Provisions of the Final Regulations

Generally, this final rule incorporates the provisions of the July 14, 2005 proposed rule. Those provisions of this final rule that differ from the proposed rule are as follows:

There will be a one-year transition period in implementing the new area labor market designations for purposes of adjusting for area wage differences. In calculating the wage index applicable to HH PPS for CY 2006, the wage index will be a blend of 50 percent of wage index values based on CBSA designations and 50 percent of the wage index values based on MSA designations.

In addition, we are revising the fixed-dollar loss ratio used in the calculation of outlier payments.

V. Collection of Information Requirements

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

VI. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.

Executive Order 12866 (as amended by Executive Order 13258, which merely reassigns responsibility of duties) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). The update set forth in July 14, 2005 proposed rule applies to Medicare payments under HH PPS in CY 2006. Accordingly, the following analysis describes the impact in CY 2006 only. We estimate that there will be an additional $370 million in CY 2006 expenditures attributable to the CY 2006 proposed estimated home health market basket update (3.6 percent) minus 0.8 percentage points, for a CY 2006 update of 2.8 percent.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government jurisdictions. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year. For purposes of the RFA, approximately 75 percent of HHAs are considered small businesses according to the Small Business Administration's size standards with total revenues of $11.5 million or less in any 1 year. Individuals and States are not included in the definition of a small entity. This final rule will have a significant positive effect upon small entities.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds or a hospital located in a CBSA. We have determined that this final rule will not have a significant economic impact on the operations of a substantial number of small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $120 million. We believe this final rule will not mandate expenditures in that amount.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a final rule that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. We have reviewed this rule under the threshold criteria of Executive Order 13132, Federalism. We have determined that this final rule will not have substantial direct effects on the rights, roles, and responsibilities of States. Start Printed Page 68140

B. Anticipated Effects

This rule updates the HH PPS rates contained in the CY 2005 final rule (69 FR 62124, October 22, 2004). The impact analysis of this rule presents the projected effects of the change from MSA designations to a 50/50 blend of MSA and CBSA designations in determining the wage index used to calculate the HH PPS rates for CY 2006. We estimate the effects by estimating payments while holding all other payment variables constant. We use the best data available, but we do not attempt to predict behavioral responses to these changes, and we do not make adjustments for future changes in such variables as days or case-mix.

This analysis incorporates the latest estimates of growth in service use and payments under the Medicare home health benefit, based on the latest available Medicare claims from 2004. We note that certain events may combine to limit the scope or accuracy of our impact analysis, because such an analysis is future-oriented and, thus, susceptible to forecasting errors due to other changes in the forecasted impact time period. Some examples of such possible events are newly-legislated general Medicare program funding changes by the Congress, or changes specifically related to HHAs. In addition, changes to the Medicare program may continue to be made as a result of the BBA, the BBRA, the BIPA, the MMA, or new statutory provisions. Although these changes may not be specific to the HH PPS, the nature of the Medicare program is such that the changes may interact, and the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon HHAs.

Our discussions for this final rule will focus on the impact of changes in the wage index, most notably the adoption of the CBSA designations. The impacts are shown in Table 3 below. The breakdown of the various impacts displayed in the table follows.

The rows display the estimated effect of the proposed changes on different categories. The first row of figures represents the estimated effects on all facilities. The next 2 rows show the effect on urban and rural facilities. This is followed, in the next 4 rows, by impacts on urban and rural facilities based on whether they are a hospital-based or freestanding facility. The next 20 rows show the effect on urban and rural facilities based on the census region in which they are located.

The first column shows the breakdown of all HHAs by urban or rural status, hospital-based or freestanding status, and census region.

The second column in the table shows the number of facilities in the impact database. A facility is considered urban if it is located in an MSA and, conversely, rural if it is not located in an MSA.

The third column of the table shows the effect of the updating the MSA-based wage index (without moving to CBSAs). This column represents the difference between the 2005 MSA-based wage index and the 2006 MSA-based wage index.

The fourth column of the table reflects the impact of using the new OMB geographic designations based on CBSAs, compared to using the MSA designations without a transition policy. As we are implementing a transition policy, this column is shown for reference purposes only.

The fifth column of the table shows the effect of all of the changes on the CY 2006 payments without implementing a transition policy. The update of 2.8 percentage points (market basket increase of 3.6 percent minus 0.8 percentage points, as mandated by the MMA) is constant for all providers and, though not shown individually, is included in this column. In essence, this column represents the sum of columns three and four, adding in the 2.8 percent increase with slight differences due to rounding. Again, as we are implementing a transition policy, this column is shown for reference purposes only.

The sixth column of the table reflects the impact of using the new OMB geographic designations based on CBSAs, compared to using the MSA designations with a transition policy consisting of a 50/50 blend of the previous (MSA-based) and the new (CBSA-based) wage area designations. Specifically, the effect of using the blended wage index values in determining payment for facilities in urban areas is, on average, a decrease of 0.1 percent. On the other hand, facilities in a rural area show an average increase of 0.4 percent. Rural HHAs, by region, generally show an increase using the CBSA-determined wage index (ranging from an increase of 0.1 percent to 1.1 percent), except for facilities in the Middle Atlantic and the Mountain regions where payments are estimated to decrease by 0.3 percent and 0.2 percent respectively. The impact on urban HHAs, by region, is generally moderate using the 50/50 transition blend of MSA-based and CBSA-based wage index values (ranging from a 0.1 percent increase to a 0.3 percent decrease). By type of facility, the impact on rural facilities using the blended wage index is positive, with payments to freestanding facilities and hospital-based facilities estimated to increase by 0.4 percent. Conversely, hospital-based urban facilities are estimated to experience no impact while freestanding urban facilities are estimated to see a decrease in payments by 0.1 percent.

The seventh column of the table shows the total wage index change with the transition policy. This column represents the sum of the change due to the updated wage data (column 3) and the change due to the move to CBSAs using the transition policy (column 6) with slight differences due to rounding.

The eighth column of the table shows the effect of all of the changes on the CY 2006 payments with a transition policy. The update of 2.8 percentage points (market basket increase of 3.6 percent minus 0.8 percentage points, as mandated by the MMA) is constant for all providers and, though not shown individually, is included in this column. It is projected that total aggregate payments would increase by 2.7 percent; assuming facilities do not change their care delivery and billing practices in response.

As can be seen from this table, the combined effects of all of the changes would vary by specific types of providers and by location. For example, HHAs in rural New England show the largest estimated increase in payment at 5.9 percent, while HHAs in the urban West North Central and East North Central regions show the smallest increases in payments at 1.5 percent and 1.7 percent respectively. Rural HHAs in the West North Central regions and East North Central regions differ from urban HHAs in those regions, seeing an estimated increase in payments of 2.7 percent and 3.5 percent, respectively. Amongst the different type of facility categories, freestanding rural HHAs have the largest estimate of increase, with an estimated increase in payments of 3.4 percent. Hospital-based rural HHAs are next with an estimated increase in payments of 3.3 percent with hospital-based urban and freestanding urban HHAs with estimated increases of 2.5 percent and 2.6 percent, respectively.

Start Printed Page 68141

C. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/​omb/​circulars/​a004/​a-4.pdf), in Table 4 below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this final rule. This table provides our best estimate of the increase in Medicare payments under the HH PPS as a result of the changes presented in this final rule based on the data for 7,370 HHAs in our database. All expenditures are classified as transfers to Medicare providers (that is, HHAs). Start Printed Page 68142

D. Conclusion

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

Start List of Subjects

List of Subjects in 42 CFR Part 484

• Health facilities
• Health professions
• Medicare
• Reporting and recordkeeping requirements

End List of Subjects Start Amendment Part

For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services amends 42 CFR chapter IV as set forth below:

End Amendment Part Start Part

PART 484—HOME HEALTH SERVICES

End Part Start Amendment Part

1. The authority citation for part 484 continues to read as follows:

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

End Authority

Subpart E—Prospective Payment System for Home Health Agencies

Start Amendment Part

2. In § 484.202, the definitions for “Rural area” and “Urban area” are added in alphabetical order to read as follows:

End Amendment Part

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

Start SignatureEnd Signature

Note:

The following tables and addenda will not appear in the Code of Federal Regulations.

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