In Table 11 below, we list the FY 2006 invalid ICD diagnosis code 585 that we will be removing from the comorbidity adjustment under the IPF PPS. This table does not reflect all of the currently valid ICD codes applicable for the IPF PPS comorbidity adjustment.

The seventeen comorbidity categories for which we are providing an adjustment, their respective codes, including the new FY 2006 ICD codes, and their respective adjustment factors, are listed below in Table 12.

We received several comments offering suggestions on how we could improve the comorbidity adjustment category list. The suggestions ranged from requests for the addition of a single ICD-9-CM code to a request for expanding the comorbidity categories to account for every ICD-9-CM code.

Public comments and our responses to the proposed changes to payment for comorbid conditions are summarized below.

Comment: We received a comment expressing concern that the comorbidity adjustment list does not include the more common conditions seen in psychiatric patients. This commenter indicated that most psychiatric patients are treated for multiple common conditions and illnesses (for example, heart conditions, and stroke), none of which would trigger a payment adjustment under the IPF PPS.

Response: We explained in the November 2004 IPF PPS final rule (69 FR 66922), that the data used in calculating the Federal per diem base rate included all the costs for comorbid diagnoses submitted in the FY 2002 claims. Therefore, the cost for providing patient care (for example, medications, routine nursing care) required for common conditions seen in the psychiatric population, and recommended for comorbidity adjustment by commenters (that is, heart conditions or strokes) are already included in the Federal per diem base rate and a comorbidity adjustment for their presence was duplicative and unnecessary.

Further, the design of the IPF PPS with its Federal per diem base rate, provides numerous adjustments for complex cases and the availability of outlier payments, and stop loss payments during the 3-year transition.

Comment: A few commenters stated that the range of diagnostic codes proposed for adjustment did not include all the ICD-9-CM codes within a diagnostic category. A particular commenter indicated that the list of codes under diabetes did not include all the diabetes codes. In addition, other commenters provided a list of ICD-9-CM codes and comorbidity adjustments that they believe should be included in the comorbidity adjustment category list.

Response: The intent of the comorbidity adjustment is to provide additional payments for concurrent medical or psychiatric conditions that are expensive to treat and require comparatively more costly treatment during an IPF stay than other comorbid conditions.

Although we are updating the IPF PPS to reflect updates to the ICD-9-CM codes, the comorbidity adjustment categories and factors currently in effect will remain in effect for the RY beginning July 1, 2006. As indicated in the November 2004 IPF PPS final rule, we do not plan to update the regression analysis until we analyze IPF PPS data.

Comment: A commenter recommended that code 404.03 hypertensive heart and renal disease, malignant, with heart failure and renal failure continue to qualify for both Cardiac Conditions and Chronic Renal Failure comorbidity adjustments.

Response: We are aware that ICD code 404.03, hypertensive heart and renal disease, malignant, with heart failure and renal failure, has caused confusion since this ICD code is currently used to code an adjustment in two separate IPF comorbidity categories, (that is, both “Renal Failure, Chronic” and “Cardiac Conditions”). We believe that it more appropriately corresponds to the “Cardiac Conditions” comorbidity than to the “Renal Failure, Chronic” comorbidity. Therefore, to be more clinically cohesive and to eliminate confusion, we are removing ICD code 404.03 from the comorbidity adjustment category “Renal Failure, Chronic,” but retaining it in the “Cardiac Conditions” comorbidity category. Since both comorbidity categories have the same adjustment factor of 1.11, we believe no negative payment consequence will result from this change.

Final Rule Action: We are adopting the comorbidity adjustments currently in effect and as shown in Table 12 above for RY 2007 beginning July 1, 2006.

As explained in the November 2004 IPF PPS final rule, we analyzed the impact of age on per diem cost by examining the age variable (that is, the range of ages) for payment adjustments.

In general, we found that the cost per day increases with increasing age. The older age groups are more costly than the under 45 years of age group; the differences in per diem cost increase for each successive age group, and the differences are statistically significant.

Based on the results of the regression analysis, we established 8 adjustment factors for age beginning with age groupings 45 and under 50, 50 and under 55, 55 and under 60, 60 and under 65, 65 and under 70, 70 and under 75, 75 and under 80, and 80 years of age and over. Patients under 45 years of age are assigned an age adjustment factor of 1.00. As we indicated in the November 2004 IPF PPS final rule, we do not plan to update the regression analysis until we analyze IPF PPS data. As a result, we are adopting the patient age adjustments currently in effect and shown in Table 13 below.

Final Rule Action: In response to the RY 2007 proposed rule, we received no comments concerning the age adjustment. We are adopting the age adjustments currently in effect and as shown in Table 13 above, for RY 2007.

We explained in the November 2004 IPF PPS final rule that cost regressions indicated that per diem cost declines as the LOS increases (69 FR 66947). The variable per diem adjustments to the Federal per diem base rate account for ancillary and administrative costs that occur disproportionately in the first days after admission to an IPF.

We used regression analysis to estimate the average differences in per diem cost among stays of different length. Regression analysis simultaneously controls for cost differences associated with the other variables (for example, age, DRG, and presence of specific comorbidities). The regression coefficients measure the relative average cost per day for stays of differing lengths compared to a reference group's LOS. We analyzed through cost regression the relative cost per day for day 1 through day 30. We determined that the average per diem cost declined smoothly until the 22nd day. As a result of this analysis, we established variable per diem adjustments that begin on day 1 and decline gradually until day 21 of a patient's stay. For day 22 and thereafter, the variable per diem adjustment remains the same each day for the remainder of the stay. However, the adjustment applied to day 1 depends upon whether the IPF has a qualifying emergency department (ED). If an IPF has a qualifying ED, it receives a 1.31 adjustment for day 1 of each patient stay. If an IPF does not have a qualifying ED, it receives a 1.19 adjustment for day 1 of the stay. The ED adjustment is explained in more detail in section VI.C.5 of this final rule.

As we indicated in the November 2004 IPF PPS final rule, we do not plan to make changes to the regression analysis until we analyze IPF PPS data. As a result, for the RY beginning July 1, 2006, we are adopting the variable per diem adjustment factors currently in effect. Table 14 below shows the variable per diem adjustments that we will be using for updating the IPF PPS.

Final Rule Action: In response to the RY 2007 proposed rule, we received no comments concerning the proposed variable per diem adjustments. We are adopting the variable per diem adjustment factors currently in effect, and as shown in Table 14 above for RY 2007.

The IPF PPS includes facility-level adjustments for the wage index, IPFs located in rural areas, teaching IPFs, cost of living adjustments for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.

In the November 2004 IPF PPS final rule, we explained that in establishing an adjustment for area wage levels, the labor-related portion of an IPF's Federal prospective payment is adjusted by using an appropriate wage index. We also explained that an IPF's wage index is determined based on the location of the IPF in an urban or rural area as defined in § 412.62(f)(1)(ii) and (f)(1)(iii), respectively.

An urban area under the IPF PPS is defined at § 412.62(f)(1)(ii)(A) and (B). In general, an urban area is defined as a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA) as defined by the Office of Management and Budget (OMB). In addition, a few counties located outside of MSAs are considered urban as specified at § 412.62(f)(1)(ii)(B). Under § 412.62(f)(1)(iii), a rural area is defined as any area outside of an urban area. The geographic classifications defined in § 412.62(f)(1)(ii) and (f)(1)(iii), were used under the IPPS from FYs 1984 through 2004 (§ 412.62(f) and § 412.63(b)), and have been used under the IPF PPS since it was implemented for cost reporting periods beginning on or after January 1, 2005.

Under the IPPS, the wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located or geographically reclassified to in accordance with sections 1886(d)(8) and (d)(10) of the Act. Under the IPF PPS, the wage index is calculated using IPPS wage index data (as discussed below in section VI.C.1.d of this preamble) on the basis of the labor market area in which the IPF is located, without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act and without applying the “rural floor” established under section 4410 of the BBA. (Section 4410 of the BBA provides that for the purposes of section 1886(d)(3)(E) of the Act, the area wage index applicable to hospitals located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in the State. This provision is commonly referred to as the “rural floor” under the IPPS.) However, when we established the IPF PPS, we did not apply the rural floor to IPFs. For this reason, the hospital wage index used for IPFs is commonly referred to as the “pre-floor” hospital wage index indicating that the “rural floor” provision of the BBA is not applied. As a result, the applicable IPF wage index value is assigned to the IPF on the basis of the labor market area in which the IPF is geographically located.

As noted above, the current IPF PPS labor market areas are defined based on the definitions of MSAs, Primary MSAs (PMSAs), and NECMAs issued by the OMB (commonly referred to collectively as “MSAs”). The MSA definitions, which are discussed in greater detail below, are currently used under the IPF PPS and other PPSs (that is, the IRF PPS, the LTCH PPS, and the PPSs for home health agencies (HHA PPS) and skilled nursing facilities (SNF PPS)). In the FY 2005 IPPS final rule (69 FR 49026 through 49034), revised labor market area definitions were adopted under the IPPS (§ 412.64(b)), which were effective October 1, 2004. These new standards, called Core-Based Statistical Areas (CBSAs), were announced by the OMB late in CY 2000 and are discussed in greater detail below.

When we published the November 2004 IPF PPS final rule, we explained that we were not adopting the new statistical area definitions defined by OMB for the following reasons. First, the change in labor market areas under the IPPS had not changed at the time we published the IPF PPS proposed rule on November 28, 2003. As a result, IPFs and other interested parties were not afforded an opportunity to comment on the use of the new labor market area definitions under the IPF PPS. Second, we wanted to conduct a thorough analysis of the impact of the new labor market area definitions on payments under the IPF PPS. Finally, in the November 2004 IPF PPS final rule, we indicated our intent to publish in a proposed rule any changes we were considering for new labor market definitions.

The analysis of the impact of the new labor market definitions has been completed. In the RY 2007 proposed rule, we proposed to adopt the new CBSA-based labor market area definitions. In this final rule, we are adopting these labor market area definitions for the IPF PPS. We believe it is helpful to provide a detailed description of the current IPF PPS labor market areas to help explain the changes to the IPF PPS labor market areas.

As mentioned earlier, since the implementation of the IPF PPS, we have used labor market areas to further characterize urban and rural areas as determined under § 412.62(f)(1)(ii) and (iii). To this end, we have defined labor market areas under the IPF PPS based on the definitions of MSAs, PMSAs, and NECMAs issued by the OMB in 1993, which is consistent with the IPPS approach prior to FY 2005. We note that OMB also defines Consolidated MSAs (CMSAs). A CMSA is a metropolitan area with a population of 1 million or more, comprising two or more PMSAs (identified by their separate economic and social character). However, for purposes of the wage index, we use the PMSAs rather than CMSAs because 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.

These different designations use counties as the building blocks upon which they are based. Therefore, under the IPF PPS, hospitals are assigned to either an MSA, PMSA, or NECMA based on whether the county in which the IPF is located is part of that area. All of the counties in a State outside a designated MSA, PMSA, or NECMA are designated as rural.

The OMB reviews its Metropolitan Area definitions preceding each decennial census. As discussed in the FY 2005 IPPS final rule (69 FR 49026), in the fall of 1998, OMB chartered the Metropolitan Area Standards Review Committee to examine the Metropolitan Area standards and develop recommendations for possible changes to those standards. Three notices related to the review of the standards, providing an opportunity for public comment on the recommendations of the Committee, were published in the Federal Register on the following dates: December 21, 1998 (63 FR 70526); October 20, 1999 (64 FR 56628); and August 22, 2000 (65 FR 51060).

In the December 27, 2000 Federal Register (65 FR 82228 through 82238), OMB announced its new standards. In that notice, OMB defines a Core-Based Statistical Area (CBSA), beginning in 2003, as “a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties. The standards designate and define two categories of CBSAs: Metropolitan Statistical Areas and Micropolitan Statistical Areas.” (65 FR 82236 through 82238).

According to the OMB, MSAs are based on urbanized areas of 50,000 or more population, and Micropolitan Statistical Areas (referred to in this discussion as Micropolitan Areas) are based on urban clusters of at least 10,000 population, but less than 50,000 population. Counties that do not fall within CBSAs (either MSAs or Micropolitan Areas) are deemed “Outside CBSAs.” In the past, OMB defined MSAs around areas with a minimum core population of 50,000, and smaller areas were “Outside MSAs.” On June 6, 2003, the OMB announced the new CBSAs, comprised of MSAs and the new Micropolitan Areas based on Census 2000 data. (A copy of the announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html. )

The new CBSA designations recognize 49 new MSAs and 565 new Micropolitan Areas, and extensively revise the composition of many of the existing MSAs. There are 1,090 counties in MSAs under the new CBSA designations (previously, there were 848 counties in MSAs). Of these 1,090 counties, 737 are in the same MSA as they were prior to the change in designations, 65 are in a different MSA, and 288 were not previously designated to any MSA. There are 674 counties in Micropolitan Areas. Of these, 41 were previously in an MSA, while 633 were not previously designated to an MSA. There are five counties that previously were designated to an MSA but are no longer designated to either an MSA or a new Micropolitan Area: Carter County, KY; St. James Parish, LA; Kane County, UT; Culpepper County, VA; and King George County, VA. For a more detailed discussion of the conceptual basis of the new CBSAs, refer to the FY 2005 IPPS final rule (67 FR 49026 through 49034).

In its June 6, 2003 announcement, OMB cautioned that these new definitions “should not be used to develop and implement Federal, State, and local nonstatistical programs and policies without full consideration of the effects of using these definitions for such purposes. These areas should not serve as a general-purpose geographic framework for nonstatistical activities, and they may or may not be suitable for use in program funding formulas.”

We currently use MSAs to define labor market areas for purposes of Medicare wage indices in the IPF PPS since its implementation for cost reporting periods beginning on or after January 1, 2005. Until recently, MSAs were used to define labor market areas for purposes of the wage index for many of the other Medicare payment systems (for example, IRF PPS, SNF PPS, HHA PPS, and Outpatient PPS). While we recognize MSAs are not designed specifically to define labor market areas, we believe they represent a useful proxy for this purpose, because they are based upon characteristics we believe also generally reflect the characteristics of unified labor market areas. For example, CBSAs consist of a core population plus an adjacent territory that reflects a high degree of social and economic integration. This integration is measured by commuting ties, thus demonstrating that these areas may draw workers from the same general areas. In addition, the most recent CBSAs reflect the most up-to-date information. Our analysis and discussion here are focused on issues related to adopting the new CBSA designations to define labor market areas for the purposes of the IPF PPS.

Historically, Medicare PPSs have utilized Metropolitan Area definitions developed by the OMB. As noted above, the labor market areas currently used under the IPF PPS are based on the Metropolitan Area definitions issued by the OMB and the OMB reviews its Metropolitan Area definitions preceding each decennial census to reflect more recent population changes. The CBSAs are OMB's latest Metropolitan Area definitions based on the Census 2000 data. Because we believe that the OMB's latest Metropolitan Area designations more accurately reflect the local economies and wage levels of the areas in which hospitals are currently located, we adopted the revised labor market area designations based on the OMB's CBSA designations under the IPPS effective October 1, 2004. When we implemented the wage index adjustment at § 412.424(d)(1)(i) under the November 2004 IPF PPS final rule (69 FR 66952 through 66954), we explained that the IPF PPS wage index adjustment was intended to reflect the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level. The OMB's CBSA designations based on Census 2000 data reflect the most recent available geographic classifications (Metropolitan Area definitions). Therefore, we are revising the labor market area definitions used under the IPF PPS based on the OMB's CBSA designations. This change ensures that the IPF PPS wage index adjustment most appropriately accounts for and reflects the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level.

Specifically, we are revising the IPF PPS labor market definitions based on the OMB's new CBSA designations (as discussed in greater detail below) effective for IPF PPS discharges occurring on or after July 1, 2006. Accordingly, we are revising § 412.402, definitions for rural and urban areas. Effective for discharges occurring on or after July 1, 2006, “rural” and “urban” areas will be defined in § 412.64(b)(1)(ii)(A) through (C). These definitions are the labor market definitions based on OMB's CBSA designations. For clarity, we are also revising the regulation text to include the urban and rural definitions applicable to discharges occurring during cost reporting periods beginning on or after January 1, 2005, but before July 1, 2006, under § 412.62(f)(1)(ii) and § 412.62(f)(1)(iii).

We note that these are the same labor market area definitions (based on the OMB's new CBSA designations) implemented for acute care hospitals under the IPPS at § 412.64(b), which were effective for those hospitals beginning October 1, 2004 as discussed in the FY 2005 IPPS final rule (69 FR 49026-49034). The IPF PPS uses the acute care inpatient hospitals' wage data in calculating the IPF PPS wage index. However, unlike the IPPS, and similar to other Medicare payment systems (for example, SNF PPS and IRF PPS), the IPF PPS uses the pre-floor, pre-reclassified hospital wage index.

Below, we discuss the composition of the RY 2007 IPF PPS labor market areas based on OMB's new CBSA designations. It should be noted that OMB's new CBSA designations are comprised of several county-based area definitions as explained above, which include Metropolitan Areas, Micropolitan Areas, and areas “outside CBSAs.” We implemented the IPF PPS using two types of labor market areas, that is, urban and rural. In this final rule, we are adopting the revised labor market areas based on OMB's new CBSA-based designations. As proposed in the RY 2007 proposed rule, we will continue to have 2 types of labor market areas (urban and rural). In the discussion that follows, we explain how we are recognizing Metropolitan Areas, which include New England MSAs and Metropolitan Divisions, as urban. We also explain how we are recognizing Micropolitan Areas and areas “outside CBSAs” as rural. As discussed below in this final rule and as described in the RY 2007 proposed rule, we describe the methodology for mapping OMB's CBSA-based designations into the IPF PPS (urban area or rural area) format.

As stated above, we currently use NECMAs to define labor market areas in New England, because these are county-based designations, rather than the 1990 MSA definitions for New England, which used minor civil divisions such as cities and towns. Under the current MSA definitions, NECMAs provided more consistency in labor market definitions for New England compared with the rest of the country, where MSAs are county-based. Under the new CBSAs, the OMB has now defined the MSAs and Micropolitan Areas in New England on the basis of counties. The OMB also established New England City and Town Areas, which are similar to the previous New England MSAs.

In order to create consistency across all IPF labor market areas, as proposed and in this final rule, we are using the county-based areas for all MSAs in the nation, including those in New England. The OMB has now defined the New England area based on counties, creating a city- and town-based system as an alternative. We believe that adopting county-based labor market areas for the entire country except those in New England will lead to inconsistencies in our designations. Adopting county-based labor market areas for the entire country provides consistency and stability in Medicare program payment because all of the labor market areas throughout the country, including New England, will be defined using the same system (that is, counties) rather than different systems in different areas of the county, and minimizes programmatic complexity.

In addition, we have consistently employed a county-based system for New England for precisely that reason: To maintain consistency with the labor market definitions used throughout the country. Since we have never used cities and towns for defining IPF labor market areas, employing a county-based system in New England maintains that consistent practice. We note that this is consistent with the implementation of the CBSA-based designations under the IPPS for New England (69 FR 49028). Accordingly, for the IPF PPS, we are using the New England MSAs as determined under the new CBSA-based labor market area definitions in defining the revised IPF PPS labor market areas.

Under OMB's new CBSA designations, a Metropolitan Division is a county or group of counties within a CBSA that contains a core population of at least 2.5 million, representing an employment center, plus adjacent counties associated with the main county or counties through commuting ties. A county qualifies as a main county if 65 percent or more of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least 0.75. A county qualifies as a secondary county if 50 percent or more, but less than 65 percent, of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least 0.75. After all the main and secondary counties are identified and grouped, each additional county that already has qualified for inclusion in the MSA falls within the Metropolitan Division associated with the main/secondary county or counties with which the county at issue has the highest employment interchange measure. Counties in a Metropolitan Division must be contiguous (65 FR 82236).

The construct of relatively large MSAs being comprised of Metropolitan Divisions is similar to the current construct of CMSAs comprised of PMSAs. As noted above, in the past, the OMB designated CMSAs as Metropolitan Areas with a population of 1 million or more and comprised of two or more PMSAs. Under the IPF PPS, we currently use the PMSAs rather than CMSAs to define labor market areas because they comprise a smaller geographic area with potentially varying labor costs due to different local economies. We believe that CMSAs may be too large of an area with a relatively large number of hospitals, to accurately reflect the local labor costs of all of the individual hospitals included in that relatively “large” area. A large market area designation increases the likelihood of including many hospitals located in areas with very different labor market conditions within the same market area designation. This variation could increase the difficulty in calculating a single wage index that will be relevant for all hospitals within the market area designation. Similarly, we believe that MSAs with a population of 2.5 million or greater may be too large of an area to accurately reflect the local labor costs of all of the individual hospitals included in that relatively “large” area. Furthermore, as indicated above, Metropolitan Divisions represent the closest approximation to PMSAs, the building block of the current IPF PPS labor market area definitions, and therefore, will most accurately maintain our current structuring of the IPF PPS labor market areas. As implemented under the IPPS (69 FR 49029), we proposed and for this final rule, we are using the Metropolitan Divisions where applicable (as described below) under the new CBSA-based labor market area definitions.

In addition to being comparable to the organization of the labor market areas under current MSA designations (that is, the use of PMSAs rather than CMSAs), we believe that using Metropolitan Divisions where applicable (as described below) under the IPF PPS will result in a more accurate adjustment for the variation in local labor market areas for IPFs. Specifically, if we recognize the relatively “larger” CBSA that comprises two or more Metropolitan Divisions as an independent labor market area for purposes of the wage index, it will be too large and include data from too many hospitals to compute a wage index that will accurately reflect the various local labor costs of all of the individual hospitals included in that relatively “large” CBSA. As mentioned earlier, a large market area designation increases the likelihood of including many hospitals located in areas with very different labor market conditions within the same market area designation. This variation could increase the difficulty in calculating a single wage index that will be relevant for all hospitals within the market area designation. Rather, by recognizing the Metropolitan Divisions where applicable (as described below) under the proposed new CBSA-based labor market area definitions under the IPF PPS, we believe that in addition to more accurately maintaining the current structuring of the IPF PPS labor market areas, the local labor costs will be more accurately reflected, thereby resulting in a wage index adjustment that better reflects the variation in the local labor costs of the local economies of the IPFs located in these relatively “smaller” areas.

Below we describe where Metropolitan Divisions will be applicable under the new CBSA-based labor market area definitions under the IPF PPS.

Under OMB's new CBSA-based designations, there are 11 MSAs containing Metropolitan Divisions: Boston; Chicago; Dallas; Detroit; Los Angeles; Miami; New York; Philadelphia; San Francisco; Seattle; and Washington, D.C. Although these MSAs were also CMSAs under the prior definitions, in some cases these areas have been significantly altered. Under the current IPF PPS MSA designations, Boston is a single NECMA. Under the CBSA-based labor market area designations, it is comprised of four Metropolitan Divisions. Los Angeles will go from four PMSAs under the current IPF PPS MSA designations to two Metropolitan Divisions under the CBSA-based labor market area designations because two MSAs became separate MSAs. The New York CMSA will go from 15 PMSAs under the current IPF PPS MSA designations to only four Metropolitan Divisions under the CBSA-based labor market area designations. The five PMSAs in Connecticut under the current IPF PPS MSA designations will become separate MSAs under the CBSA-based labor market area designations, and the number of PMSAs in New Jersey under the current IPF PPS MSA designations will go from five to two, with the consolidation of two New Jersey PMSAs (Bergen-Passaic and Jersey City) into the New York-Wayne-White Plains, NY-NJ Division, under the CBSA-based labor market area designations. In San Francisco, under the CBSA-based labor market area designations, there are only two Metropolitan Divisions. Currently, there are six PMSAs, some of which are now separate MSAs under the current IPF PPS labor market area designations.

Under the current IPF PPS labor market area designations, Cincinnati, Cleveland, Denver, Houston, Milwaukee, Portland, Sacramento, and San Juan are all designated as CMSAs, but will no longer be designated as CMSAs under the CBSA-based labor market area designations. As noted previously, the population threshold to be designated as a CMSA under the current IPF PPS labor market area designations is 1 million. In most of these cases, counties currently in a PMSA under the current IPF PPS labor market area designations will become separate, independent MSAs under the CBSA-based labor market area designations.

We note that subsequent to the publication of the RY 2007 IPF PPS proposed rule, titles to certain CBSAs were changed based on OMB Bulletin No. 06-01 (December 2005). The title changes listed below are nomenclatures that do not result in substantive changes to the CBSA-based designations. Thus, these changes are listed below and will be incorporated into the FY 2007 CBSA-based urban wage index tables.

• CBSA 26900: Indianapolis-Carmel, IN

• CBSA 42680: Sebastian-Vero Beach, FL

• CBSA 19780: Des Moines-West Des Moines, IA

• CBSA 47644: Warren-Troy-Farmington Hills, MI

• CBSA 31140: Louisville-Jefferson County, KY-IN

Under OMB's new CBSA-based designations, Micropolitan Areas are essentially a third area definition consisting primarily of currently rural areas, but also include some or all of areas that are currently designated as an urban MSA. As discussed in greater detail in the FY 2005 IPPS final rule (69 FR 49029 through 49032), how these areas are treated will have significant impacts on the calculation and application of the wage index. Specifically, whether or not Micropolitan Areas are included as part of the respective statewide rural wage indices will impact the value of statewide rural wage index of any State that contains a Micropolitan Area because a hospital's classification as urban or rural affects which hospitals' wage data are included in the statewide rural wage index. We combine all of the counties in a State outside a designated urban area together to calculate the statewide rural wage index for each State.

Including Micropolitan Areas as part of the statewide rural labor market area would result in an increase to the statewide rural wage index because hospitals located in those Micropolitan Areas typically have higher labor costs than other rural hospitals in the State. Alternatively, if Micropolitan Areas were to be recognized as independent labor market areas, because there would be so few hospitals in each labor market area, the wage indices for IPFs in those areas could become relatively unstable as they might change considerably from year to year.

We currently use MSAs to define urban labor market areas and group all the hospitals in counties within each State that are not assigned to an MSA together into a statewide rural labor market area. We have used the terms “urban” and “rural” wage indexes in the past for ease of reference. However, the introduction of Micropolitan Areas by the OMB potentially complicates this terminology because these areas include many hospitals that are currently included in the statewide rural labor market areas.

We proposed to treat Micropolitan Areas as rural labor market areas under the IPF PPS for the reasons outlined below. That is, counties that are assigned to a Micropolitan Area under the CBSA-based designations would be treated the same as other “rural” counties that are not assigned to either an MSA (Metropolitan Statistical Area) or a Micropolitan Area. Therefore, in determining an IPF's applicable wage index (based on IPPS hospital wage index data), an IPF in a Micropolitan Area under OMB's CBSA-based designations would be classified as “rural” and would be assigned the statewide rural wage index for the State in which it resides.

In the FY 2005 IPPS final rule (69 FR 49029 through 49032), we discuss our evaluation of the impact of treating Micropolitan Areas as part of the statewide rural labor market area instead of treating Micropolitan Areas as independent labor market areas for hospitals paid under the IPPS. As discussed in that same final rule, one of the reasons Micropolitan Areas have such a dramatic impact on the wage index is because Micropolitan Areas encompass smaller populations than MSAs. In addition, they tend to include fewer hospitals per Micropolitan Area. Currently, there are only 25 MSAs with one hospital in the MSA. However, under the new CBSA-based definitions, there are 373 Micropolitan Areas with one hospital, and 49 MSAs with only one hospital.

Since Micropolitan Areas encompass smaller populations than MSAs, they tend to include fewer hospitals per Micropolitan Area, recognizing Micropolitan Areas as independent labor market areas will generally increase the potential for dramatic shifts in those areas' wage indices from 1 year to the next because a single hospital (or group of hospitals) could have a disproportionate effect on the wage index of the area. The large number of labor market areas with only one hospital and the increased potential for dramatic shifts in the wage indexes from 1 year to the next is a problem for several reasons. First, it creates instability in the wage index from year to year for a large number of hospitals. Second, it reduces the averaging effect (averaging effect allows for more data points to be used to calculate a representative standard of measured labor costs within a market area.) lessening some of the incentive for hospitals to operate efficiently. This incentive is inherent in a system based on the average hourly wages for a large number of hospitals, as hospitals could profit more by operating below that average. In labor market areas with a single hospital, high wage costs are passed directly into the wage index with no counterbalancing averaging with lower wages paid at nearby competing hospitals. Third, it creates an arguably inequitable system when so many hospitals have wage indexes based solely on their own wages, while other hospitals' wage indexes are based on an average hourly wage across many hospitals.

For the reasons noted above, and consistent with the treatment of these areas under the IPPS, as proposed and consist with this final rule, we are not adopting Micropolitan Areas as independent labor market areas under the IPF PPS. Under the CBSA-based labor market area definitions, Micropolitan Areas are considered a part of the statewide rural labor market area. Accordingly, we will determine an IPF PPS statewide rural wage index using the acute-care IPPS hospital wage data from hospitals located in non-MSA areas (for example, rural areas, including Micropolitan Areas) and that statewide rural wage index will be assigned to IPFs located in those non-MSA areas.

Section 124 of the BBRA is broadly written and gives the Secretary discretion in developing and making adjustments to the IPF PPS.

When the revised labor market areas based on the OMB's new CBSA-based designations were adopted under the acute care hospital IPPS beginning on October 1, 2004, a transition to the new labor market area designations was established due to the scope and substantial implications of these new boundaries and to buffer the subsequent significant impacts it may have on payments to numerous hospitals. As discussed in the FY 2005 IPPS final rule (69 FR 49032), during FY 2005, a blend of wage indexes is calculated for those acute care IPPS hospitals experiencing a drop in their wage indexes because of the adoption of the new labor market areas.

While we recognize that, just like IPPS hospitals, some IPFs may experience decreases in their wage index as a result of the labor market area changes, our analysis shows that a majority of IPFs either expect no change in wage index or an increase in wage index based on CBSA definitions. In addition, a very small number of IPFs (fewer than 3 percent) will experience a decline of 5 percent or more in the wage index based on CBSA designations. We also found that a very small number of IPFs (approximately 5 percent) will experience a change in either rural or urban designation under the CBSA-based definitions. Since a majority of IPFs will not be significantly impacted by the labor market areas, we believe it is not necessary for a transition to the new CBSA-based labor market area for the purposes of the IPF PPS wage index.

We received several comments on our proposed changes for implementing the area wage adjustments. Public comments and our responses on the proposed changes for implementing the area wage adjustments are summarized below:

Comment: Several commenters requested that CMS provide a transition period to phase in the CBSA-based labor market definitions. One commenter requested that IPFs should be allowed to choose whether or not they wanted a phase-in of the CBSA wage indices.

Response: For cost reporting periods beginning in 2006, IPFs are paid based on a blend of 50 percent reasonable cost payments and 50 percent PPS payments. The wage index adjustment is being phased in on the PPS portion of the payment. Since we are already in the middle of a transition to a full wage-index adjustment under the IPF PPS, we believe that the effects on the IPF PPS wage index from the changes to the IPF PPS labor market areas definitions will be mitigated. Specifically, most IPFs will be in their FY 2006 cost reporting period and therefore will be in the second year of the 3-year phase-in of the IPF PPS wage index adjustment when the revised labor market area designations will be applied. During the second year of the transition to the IPF PPS, the applicable wage index value is one-half (50 percent) of the applicable full IPF PPS wage index adjustment. Since most IPFs will be in the second year of the 3-year phase-in of the wage index adjustment, for most IPFs, the labor-related portion of the Federal rate is only adjusted by 50 percent of the applicable full wage index (that is, one-half wage index value). As noted above, the IPF PPS wage index adjustment is made by multiplying the labor-related share of the IPF PPS Federal per diem base rate (75.66 percent) by the applicable wage index value.

Consequently, for most IPFs, only approximately 38 percent of the Federal per diem base rate is affected by the wage index adjustment (75.665 percent × 0.50 = 37.8325 percent), and the revision to the labor market area definitions based on OMB's new CBSA-based designations will only have a minimal impact on IPF PPS payments.

For the reasons discussed above, and also addressed in the RY 2007 proposed rule (71 FR 3633), we are not providing a transition under the IPF PPS from the current MSA-based labor market areas designations to the new CBSA-based labor market area designations. Rather, we are adopting the current CBSA-based labor market area definitions beginning July 1, 2006 without a transition period.

Comment: Several commenters do not believe that because the IPF PPS is in the second year of the transition blend, the effects of the wage index changes would be mitigated. The commenters stated that similar wage transitions have been applied in HHA and IRF, and therefore inconsistencies exist between payment systems.

Response: We do not believe a need exists to implement a separate transition for the wage index changes. We acknowledge that similar wage transitions exist in other PPSs. However, unlike the IPF PPS, in those instances, the payment systems were not already in a transition period (as described above).

Comment: Several commenters agreed with CMS's approach to wait 1 full year until IPF PPS claims and cost report data could be analyzed before changing the wage index definitions. Other commenters indicated that if CMS were to implement this change now, it would be inconsistent with the approach to wait a year before analyzing IPF PPS data.

The same commenters expressed concern that if CMS changes urban and rural classifications without any recourse (such as the Medicare Geographic Classification Review Board (MGCRB)) when CMS analyzes the PPS data and compares urban and rural IPFs, rural IPF data under MSA definitions would not be comparable to rural IPF data under CBSA definitions.

Response: In the November 2004 IPF PPS rule, we stated that we would use the best available hospital wage index data, and that we would propose any changes to the wage index in a proposed rule. We note that all of the other PPSs have adopted, or begun to adopt, the CBSA definitions. Consistent with other Medicare PPSs, and in order to utilize the best available data, as we indicated we would do, the IPF PPS will adopt the CBSA definitions. We want to ensure that the IPF PPS wage index adjustment most appropriately accounts for and reflects the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level, and we believe that OMB's CBSA designations based on Census 2000 data reflect the most recent available geographic classifications.

With respect to the last comment, the meaning is not completely clear. If the commenters are concerned that changes to the area wage definitions will limit our ability to analyze the impact of the IPF PPS, CMS does not believe this is an issue. When we analyze the first year of IPF PPS claims and cost report data, the urban and rural designations will be under MSA definitions. We are now adopting the latest OMB definitions of urban and rural under CBSAs and we will view rural IPFs under these definitions. Finally, we want to note that, since the IPF PPS Provider Specific File is cumulative, CMS will have a record of which IPFs changed designations.

Comment: One commenter expressed support for the proposed change to the CBSA-based labor market definitions. The commenter believes that the CBSAs provide an accurate measure of the labor market areas in the United States.

Response: We agree with the commenter that the CBSAs represent the best available wage data.

Comment: The IPPS adopted a hold-harmless policy and an “out-commuting adjustment.” Several commenters believe that since the majority of IPFs are distinct part units, there is an inconsistency when the acute care hospitals are paid the out-commuting or out-migration adjustment and the IPFs are not paid the adjustment. The commenters stated that CMS should assume that IPF employees follow the same commuting patterns as those who work in the acute care hospital.

In addition, the commenters indicated that distinct part units would be at a disadvantage in recruiting and retaining workers for the IPF unless CMS adopted an out-commuting or out-migration adjustment.

Response: We are not providing a hold harmless policy or an “out-commuting” adjustment under the IPF PPS from the current MSA-based labor market areas designations to the new CBSA-based labor market area designations. Nor do we believe that we are required to provide an out-commuting adjustment. We note that section 505 of the MMA established new section 1886(d)(13) of the Act. Section 1886(d)(13) of the Act requires that the Secretary establish a process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. We believe that this requirement for an “out-commuting” or “out-migration” adjustment applies specifically to the IPPS and not to other PPS. Therefore, consistent with other PPS (for example, IRF and LTCH PPS), we did not propose out-commuting or out-migration adjustment under the IPF PPS, nor are we establishing such an adjustment under the IPF PPS in this final rule.

We believe that our decisions not to adopt a transition or an out-commuting adjustment are appropriate for IPFs because, despite some similarities between the IPF PPS and the IPPS, there are clear distinctions between the payment systems, particularly regarding wage index issues.

For example, a wage index adjustment has been a stable feature of the acute care hospital IPPS since its 1983 implementation and the IPPS had utilized the prior MSA-based labor market area designation for over 10 years. The IPF PPS has only been implemented since January 1, 2005.

The most significant distinction between acute care hospitals under the IPPS and IPFs is that acute care hospitals have been paid using full wage index adjusted payments since 1983 and had used the previous IPPS MSA-based labor market area designations for over 10 years, whereas under the IPF PPS, a wage index adjustment is being phased-in over a 3-year period. As previously explained, the impact that the wage index can have on IPF PPS payments is limited at this point, since only a small percentage of the IPF PPS Federal per diem base rate is affected by the wage index (approximately 38 percent in most cases) because of the 3-year phase-in of the wage index adjustment.

In contrast, a transition policy to the revised IPPS labor market area definitions under the IPPS was appropriate because there is no phase-in of a wage index adjustment under the IPPS and the full labor-related share of the IPPS standardized amount (that is, Federal rate) is affected by the IPPS wage index adjustment, which resulted in a more significant projected impact for acute care hospitals under the IPPS.

Comment: Several commenters indicated that IPFs that are distinct part units should be allowed to be reclassified to the same geographic area as the acute care hospital. The commenters also stated that wage issues between acute care hospitals and IPFs are similar, and that it is not logical for IPFs that are distinct part units to receive a different area wage index value than the acute care hospital. Commenters requested that CMS implement a rural floor like that of IPPS.

Response: As stated above, the IPF PPS wage index is calculated using IPPS wage index data on the basis of the labor market area in which the IPF is located, without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act and without applying the “rural floor” established under section 4410 of the BBA. We believe that the actual location of an IPF (as opposed to the location of affiliated providers) is most appropriate for determining the wage adjustment because the prevailing wages in the area in which the IPF is located influence the cost of a case. In addition, we are using the latest OMB labor market area definitions based on 2000 Census data. Since these data are more recent than the data used for the wage index in the IPF PPS implementation year (2000 versus 1993 data), we do not see a need for a reclassification policy. Finally, as discussed above, by recognizing the Metropolitan Divisions where applicable under the new CBSA-based labor market area definitions under the IPF PPS, we believe that the local labor costs will be more accurately reflected, thereby resulting in a wage index adjustment that better reflects the variation in the local labor costs of the local economies of the IPFs located in these relatively “smaller” areas when compared with CMSAs.

Although some commenters request CMS to develop a “rural floor” like the IPPS, we believe the “rural floor” is required only for the acute care hospital payment system because, as stated in section VI.B.2, section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) applies specifically to acute care hospitals and not excluded hospitals and excluded units. We believe that the “pre-reclassification and pre-floor” wage data is the best proxy and most appropriate wage index for IPFs.

Comment: Many commenters expressed concern regarding those IPFs who would lose the rural adjustment if they are redefined as urban under the CBSA-based labor market definitions. Specifically, the commenters stated that IPFs' reimbursement would decrease over the next several years due to the wage index changes. The commenters also indicated that the loss of the rural adjustment would increase the financial vulnerability of IPFs that are necessary to provide continued access to care in previously rural areas. As a result, the commenters requested that CMS provide a grandfathering provision to allow IPFs to continue to receive the rural adjustment or a hold harmless provision that would prevent payments from dropping below what the IPF would have received had they remained designated as a rural IPF.

Response: We are finalizing our proposal to transition IPFs to CBSA-based labor market definitions. We recognize that IPFs that were previously considered rural will lose the 17 percent rural facility-level adjustment when they are redesignated as urban. However, as discussed above, since we are currently in the middle of a transition period from reasonable-cost based payments to PPS payments, the effects of changing to CBSA-based definitions are mitigated, since currently the wage index affects approximately 38 percent of an IPF's payment, and the rural adjustment affects 50 percent of an IPF's payment.

In addition, the IPF PPS has a stop-loss policy in place to protect IPFs that receive less than 70 percent of what they would have received under TEFRA. In general, the group of providers that stands to lose the rural adjustment did well under TERFA, and the purpose of the transition from TERFA to PPS is to allow IPFs to control and reduce their costs.

As discussed in the August 11, 2004 IPPS final rule (69 FR 49032), during FY 2005, a hold harmless policy was implemented to minimize the overall impact of hospitals that were designated in FY 2004 as urban under the MSA designations, but would become rural under the CBSA designations. In the same final rule, hospitals were afforded a 3-year hold harmless policy because the IPPS determined that acute-care hospitals that changed designations from urban to rural would be substantially impacted by the significant change in wage index. Currently, under the IPF PPS, urban facilities that become rural would receive the rural facility adjustment (that is, 17 percent). As discussed in section VI.C.2 of this final rule, we are adopting the 17 percent rural adjustment. The rural facility adjustment will be applied in the same way to urban facilities that will become rural under the CBSA-based definitions. Thus, we believe that the impact of the wage index changes on any urban facilities that become rural under the new definitions will be mitigated by the rural adjustment. Finally, as discussed above, the IPF PPS has a stop-loss policy in effect during the transition from TEFRA to PPS payments. Therefore, we do not believe it is appropriate or necessary to adopt a hold harmless policy for facilities that would experience a change in designation under the CBSA-based definitions.

We note that for the CBSA designations, we identified some geographic areas where there were no hospitals, and thus no hospital wage index data on which to base the calculation of the RY 2007 IPF PPS wage index. In addressing this situation, we proposed approaches that we believe would serve as proxies for hospital wage data and provide an appropriate standard that accounts for geographic variation in labor costs.

The first situation involves rural locations in Massachusetts and Puerto Rico. We have determined that there are no rural hospitals in those locations. Since there is no reasonable proxy for more recent rural data within those areas, we are using last year's wage index value for rural Massachusetts and rural Puerto Rico. This approach is consistent with other Medicare PPSs (for example, SNF PPS and IRF PPS).

The second situation has to do with the urban area of Hinesville, GA (CBSA 25980). Under the new labor market areas there are no urban hospitals within this area. Therefore, we are using the urban areas within the State to serve as a reasonable proxy for the urban areas without specific hospital wage index data in determining the IPF PPS wage index. In this final rule, we are calculating the urban wage index value for purposes of the wage index for these areas without urban hospital data as the average wage index for all urban areas within the State. This approach is consistent with other Medicare PPSs (for example, SNF PPS and IRF PPS).

We could not apply a similar averaging in rural areas because in the rural areas there are no State rural hospital wage data available for averaging on a State-wide basis. We did not receive comments on these approaches for calculating the wage index values for areas without hospitals for RY 2007 and subsequent years. We are adopting the proposed approach in this final rule.

To facilitate an understanding of the policies related to the changes to the IPF PPS labor market areas discussed above, in the MSA/CBSA Crosswalk included as Addendum B of this final rule, we are providing a listing of each Social Security Administration (SSA) State and county location code; State and county name; existing MSA-based labor market area designation; MSA-based wage index value; CBSA-based labor market area; and the new CBSA-based wage index value. We are also providing in Addenda C the wage index for urban and rural areas based on CBSA labor market areas.

Final Rule Action: In summary, we are finalizing our proposal to adopt the CBSA labor market area definitions without a transition, without a hold-harmless policy, and without an out-commuting or out-migration adjustment.

Any adjustment or update to the IPF wage index will be made in a budget neutral manner that assures that the estimated aggregated payments under this subsection in the RY beginning July 1, 2006 are not greater or less than those that would have been made in the year without such an adjustment. Therefore, as proposed and in this final rule, we calculate a budget-neutral wage index adjustment factor using the following steps:

Steps 1: Determine the total amount of the estimated IPF PPS payments for the implementation year using the labor-related share and wage indices from FY 2005 (based on MSAs).

Step 2: Calculate the total amount of estimated IPF PPS payments for RY 2007 using the labor-related share and wage indices from FY 2006 (based on CBSAs).

Step 3: Divide the amount calculated in Step 1 by the amount calculated in Step 2 which yields a RY 2007 budget-neutral wage adjustment of 1.0042.

This factor is applied in the update of the Federal per diem base rate for RY 2007.

In the November 2004 IPF PPS final rule, we provided a 17 percent payment adjustment for IPFs located in a rural area. This adjustment was based on the regression analysis which indicated that the per diem cost of rural facilities was 17 percent higher than that of urban facilities after accounting for the influence of the other variables included in the regression. Many rural IPFs are small psychiatric units within small general acute care hospitals. We also stated in the November 2004 IPF PPS final rule that small-scale facilities are more costly on a per diem basis because there are minimum levels of fixed costs that cannot be avoided, and they do not have the economies of size advantage.

Based on the results of our regression analysis, we provided a payment adjustment for IPFs located in rural areas of 17 percent. In this final rule, we are not changing this adjustment factor. In addition, we stated in the November 2004 IPF PPS final rule that we do not plan to conduct another regression analysis until we analyze IPF PPS data. At that time, we can compare rural and urban IPFs to determine how much more costly rural facilities are on a per diem basis under the IPF PPS. In the meantime, we are applying a 17 percent payment adjustment for IPFs located in a rural area as defined at § 412.64(b)(1)(ii)(C).

Final Rule Action: In summary, we are adopting the 17 percent rural adjustment currently in effect for RY 2007.

In the November 2004 IPF PPS final rule, we established a facility-level adjustment for IPFs that are, or are part of, teaching institutions. The teaching status adjustment accounts for the higher indirect operating costs experienced by facilities that participate in graduate medical education (GME) programs. We have received numerous requests for clarification of the IPF PPS teaching adjustment, especially with regard to comparisons with the IPPS IME adjustment that were included in the November 2004 IPF PPS final rule. As a result, we are including an expanded explanation of the IPF PPS teaching status adjustment and are clarifying the changes to § 412.424(d)(1)(iii) regarding the teaching adjustment.

Medicare makes direct GME payments (for direct costs such as resident and teaching physician salaries, and other direct teaching costs) to all teaching hospitals including those paid under the IPPS, and those that were once paid under the TEFRA rate-of-increase limits but are now paid under other PPSs. These direct GME payments are made separately from payments for hospital operating costs and are not part of the PPSs. However, the direct GME payments do not address the higher indirect operating costs experienced by teaching hospitals. For teaching hospitals paid under the TEFRA rate-of-increase limits, Medicare did not make separate medical education payments because payments to these hospitals were based on the hospitals' reasonable costs. Since payments under TEFRA were based on hospitals' reasonable costs, the higher indirect costs that might be associated with teaching programs would automatically have been factored into the TEFRA payments.

As previously mentioned, we conducted regression analysis of FY 2002 IPF data as the basis for the payment adjustments included in the November 2004 IPF PPS final rule. In conducting the analysis, we used the resident counts reported on hospital cost reports (worksheet S-3, Part 1, line 12, column 7 for freestanding psychiatric hospitals and worksheet S-3, Part 1, line 14 (or line 14.01 for subprovider 2), column 7 for psychiatric units of acute care hospitals). That is, for the freestanding psychiatric hospitals, we used the number of residents and interns reported for the entire hospital. For the psychiatric units of acute care hospitals, we used the number of residents and interns reported for the psychiatric unit, which are reported separately on the cost report from the number reported for the rest of the hospital.

The regression analysis (with the logarithm of costs as the dependent variable) showed that the indirect teaching cost variable is significant in explaining the higher costs of IPFs that have teaching programs. We calculated the teaching adjustment based on the IPF's “teaching variable,” which is one plus the ratio of the number of full-time equivalent (FTE) residents training in the IPF (subject to limitations described below) to the IPF's average daily census (ADC).

In the cost regressions conducted for the November 2004 IPF PPS final rule, the logarithm of the teaching variable had a coefficient value of 0.5150. We converted this cost effect to a teaching payment adjustment by treating the regression coefficient as an exponent and raising the teaching variable to a power equal to the coefficient value. In other words, the teaching adjustment is calculated by raising the teaching variable (1 + FTE residents/ADC) to the 0.5150 power. To compute the percentage increase in the IPF PPS payment attributable to the teaching adjustment (that is, the amount to be reconciled at cost report settlement), raise the teaching variable (1 + FTE residents/ADC) to the 0.5150 power. For example, for an IPF with a teaching variable of 0.10 and using a coefficient value of 0.5150, the per diem payment would increase by 5.03 percent; for an IPF with a teaching variable of 0.05, the per diem payment would increase by 2.54 percent. We note that the coefficient value of 0.5150 was based on regression analysis holding all other components of the payment system constant.

In addition, we established the teaching adjustment in a manner that limited the incentives for IPFs to add FTE residents for the purpose of increasing their teaching adjustment. We imposed a cap on the number of FTE residents that may be counted for purposes of calculating the teaching adjustment, similar to that established by sections 4621 (IME FTE cap for IPPS hospitals) and 4623 (direct GME FTE cap for all hospitals) of the BBA. We emphasize that the cap limits the number of FTE residents that teaching IPFs may count for the purposes of calculating the IPF PPS teaching adjustment, not the number of residents teaching institutions can hire or train.

The FTE resident cap is applied the same way in freestanding teaching psychiatric hospitals and in distinct part psychiatric units with GME programs. Similar to the regulations for counting FTE residents under the IPPS as described in § 412.105(f), we calculated the number of FTE residents that trained in the IPF during a “base year” and use that FTE resident number as the cap. An IPF's FTE resident cap would ultimately be determined based on the final settlement of the IPF's most recent cost report filed before November 15, 2004 (that is, the publication date of the IPF PPS final rule).

Similar to teaching hospitals under the IPPS, IPFs that first begin training residents after November 15, 2004 initially receive an FTE cap of “0”. The FTE caps for teaching IPFs (whether they are new or existing IPFs) that start training residents in a new GME program may be subsequently adjusted in accordance with the IPPS policies described in § 412.105(f)(1)(vii) and GME policies described in § 413.79(e)(1)(i) and (ii). For purposes of the teaching status adjustment for IPFs, a new graduate medical education program means a medical education program that receives initial accreditation by the appropriate accrediting body or begins training residents on or after November 15, 2004. However, contrary to the policy for IME FTE resident caps under the IPPS, we do not allow IPFs to aggregate the FTE resident caps used to compute the IPF PPS teaching adjustment through affiliation agreements. We included these policies because we believe it is important to limit the total pool of resident FTE cap positions within the IPF community and avoid incentives for IPFs to add FTE residents in order to increase their payments.

Residents with less than full-time status and residents rotating through the psychiatric hospital or unit for less than the entire cost reporting period are counted in proportion to the time they spend in their assignment with the IPF. For example, a 3-month rotation by a full-time resident to the IPF during a 12-month cost reporting period will be counted as 0.25 FTE for purposes of counting residents to calculate the ratio. No FTE resident time counted for purposes of the IPPS IME adjustment is permitted to be counted for purposes of the teaching status adjustment for the IPF PPS.

As noted previously, the denominator used to calculate the teaching adjustment under the IPF PPS is the IPF's ADC from the current cost reporting period. We chose to use the ADC because it is closely related to the IPF's patient load, which affects the number of interns and residents the IPF can train. We also believe the ADC is a measure that can be defined precisely and is difficult to manipulate. Although the IPPS IME adjustment uses the hospital's number of beds as the denominator, the capital PPS (as specified at § 412.322) and the IRF PPS (as specified at § 412.624(e)(4) both use the ADC as the denominator for the indirect medical education and teaching adjustments, respectively.

If a psychiatric hospital's or unit's FTE count of residents in a given year is higher than the FTE count in the base year (the base year being used to establish the cap), we base payments in that year on the lower number (the cap amount). This approach is consistent with the IME adjustment under the IPPS and the teaching adjustment under the IRF PPS. The IPF remains free to add FTE residents above the cap amount, but it cannot count the number of FTE residents above the cap for purposes of calculating the teaching adjustment. This means that the cap serves as an upper limit on the number of FTE residents that may be counted for purposes of calculating the teaching status adjustment. IPFs can adjust their number of FTE residents counted for purposes of calculating the teaching adjustment as long as they remain under the cap. On the other hand, if a psychiatric hospital or unit were to have fewer FTE residents in a given year than in the base year (that is, fewer residents than its FTE resident cap), teaching adjustment payments in that year would be based on the lower number (that is, the current year's FTE count of resident).

In response to inquiries about how the teaching adjustment is applied under the IPF PPS, we proposed to add a new paragraph § 412.424(d)(1)(iii)(E) to clarify that the teaching adjustment is made on a claim basis as an interim payment and the final payment for the claim would be made in full during the final settlement of the cost report. The difference between those interim payments and the actual teaching adjustment amount computed in the cost report would be adjusted through lump sum payments/recoupments when the cost report is filed and later settled.

As noted in section VI.D.1.a of this final rule, in reviewing the methodology used to simulate the IPF PPS payments used for the November 2004 IPF PPS final rule, we discovered that the computer code incorrectly assigned non-teaching status to most teaching facilities. As a result, total IPF PPS payments were underestimated by about 1.36 percent. To resolve the issue, as discussed in section V.B.3 of this final rule, we are amending the Federal per diem base rate prospectively for all IPFs.

As with other adjustment factors derived through the regression analysis, we do not plan to rerun the regression analysis until we analyze IPF PPS data. Until then, as proposed, we are retaining the 0.5150 teaching adjustment to the Federal per diem base rate.

Public comments and our responses on the proposed changes for implementing the teaching adjustment are summarized below:

Comment: A commenter stated that the use of “final settled” cost reports may allow hospitals to report accurate counts during the audit process. However, the commenter indicated that if this is not correct, or if certain hospitals' 2004 cost reports have already gone through final settlement, CMS should take action to ensure that accurate resident counts for purposes of determining the IPF teaching adjustment resident cap.

The commenter indicated that for the regression analysis, CMS used the resident count reported on Worksheet S-3, Part 1, lines 14 and 14.01, column 7 for psychiatric units of acute care hospitals. The commenter expressed concern regarding the data used for the regression analysis due to the ambiguity of the cost reporting instructions. The commenter believes that this count may not accurately reflect the resident count in the hospital's psychiatric unit. Specifically, since the cost reporting instructions state that one should “enter the number of interns and full time equivalents in an approved program determined in accordance with 42 CFR 412.105(g) for the indirect medical education adjustment.” The commenter further stated that for cost reports before November 15, 2004, psychiatric unit resident counts were not eligible to be counted for purposes of the acute inpatient IME adjustment.

Response: As explained in the November 2004 IPF PPS final rule and the RY 2007 proposed rule, similar to the regulations for counting FTE residents under the IPPS as described in § 412.105(f), we calculate the number of FTE residents that trained in the IPF during a “base year” and use that FTE resident number as the cap. An IPF's FTE resident cap would ultimately be determined based on the final settlement of the IPF's most recent cost report filed before November 15, 2004.

Although we are concerned about the accuracy of the information reported in the cost report, including the number of FTE residents reported on Wkst. S-3, Part 1, Column 7, it is, foremost, the hospital's responsibility to report this data accurately. An official of the hospital certifies that the information on all the worksheets in the cost report is correct to the best of his or her knowledge and belief.

Although the instructions for Column 7 of Wkst. S-3, Part I contain an outdated reference to § 412.105(g) (that is, this reference was changed in the Code of Federal Regulations to § 412.105(f) in 1997 but the Wkst. S-3, Part I instructions were not updated accordingly), these instructions specify that the FTE resident count to be reported in Column 7 is determined in accordance with the policies for IME adjustment. We do not believe the redesignation of the relevant regulation should have caused confusion.

If the hospitals believe that the FTE resident counts on the base year cost report are incorrect, they have an option of submitting an amended cost report or requesting a reopening.

Comment: One commenter indicated a discrepancy between the reference to the regulation regarding the base period for determining the IPF's FTE resident in the RY 2007 IPF PPS proposed rule (71 FR 3653) and the reference to that regulation in the current Code of Federal Regulations (CFR). The commenter stated that the RY 2007 IPF PPS proposed rule cited § 412.424(d)(1)(iii)(C) as the relevant regulation, while the current CFR reference can be found at § 412.424(d)(1)(iii)(B)(1).

Response: The existing regulation at § 412.424(d)(1)(iii)(C) implements the FTE resident cap for purposes of the IPF teaching status adjustment. The FTE resident cap is established in the base period as specified in the November 2004 IPF PPS final rule (69 FR 66979), and codified in regulations at § 412.424(d)(1)(iii)(B)(1). The reference in the RY 2007 IPF PPS proposed rule (71 FR 3653) reflects the proposal to redesignate portions of the reference to the teaching status adjustment. In this final rule, we will finalize the reference (and all other changes as proposed) to the base period to be § 412.424(d)(1)(iii)(C) and will replace § 412.424(d)(1)(iii)(B)(1) currently in the CFR.

Comment: One commenter requested clarification about application of the FTE resident cap for those IPFs that begin training residents after November 15, 2004.

Response: As we indicated in the RY 2007 proposed rule, IPFs that did not train interns and residents during the time period of the IPF's most recent cost report filed before November 15, 2005 would receive an FTE cap of “zero”. As a result, we would not apply a teaching adjustment to claims submitted by the IPF. However, if the IPF (whether it is new or existing) begins training residents in a new medical residency training program after that date, the IPF will begin to receive the teaching adjustment under the IPF PPS in the next cost reporting period based on the FTE intern and resident count in accordance with the policies applicable under the IPPS.

In this case, the FTE resident cap would not be revised until the beginning of the fourth year of the new training program. The cap is set based on a review of the number of interns and residents in each of the first three program years. Before the completion of the third year of the new training program, the actual intern and resident count is reported on the cost report and used for the calculation of the teaching adjustment for the first three years of the new teaching program. After the third year of the new program, we revise the IPF's FTE resident cap to reflect the new training program. The revised cap is calculated by multiplying the highest number of interns and residents in any program year by the number of years in which residents are expected to complete the program.

For subsequent years, we compare the actual number of interns and residents trained in the IPF that year to the revised FTE resident cap and base the teaching adjustment on the lower number.

Final Rule Action: In summary, we are retaining the coefficient value of 0.5150 for the teaching adjustment. In § 412.402, we are providing a definition for “new graduate medical education program” to mean a medical education program that receives initial accreditation by the appropriate accrediting body or begins training residents on or after November 15, 2004.

We are also clarifying at § 412.424(d)(1)(iii)(E) that the teaching adjustment is made on a claim basis as an interim payment, and the final payment in full for the claim is made during the final settlement of the cost report.

The IPF PPS includes a payment adjustment for IPFs located in Alaska and Hawaii based upon the county in which the IPF is located. As we explained in the November 2004 IPF PPS final rule, the FY 2002 data demonstrated that IPFs in Alaska and Hawaii had per diem costs that were disproportionately higher than other IPFs. Other Medicare PPSs (for example, IPPS and IRF PPS) have adopted a cost of living adjustment (COLA) to account for the cost differential of care furnished in Alaska and Hawaii. We analyzed the effect of applying a COLA to payments for IPFs located in Alaska and Hawaii. The results of our analysis demonstrated that a COLA for IPFs located in Alaska and Hawaii would improve payment equity for these facilities. As a result of this analysis, we provided a COLA adjustment in the November 2004 IPF PPS final rule. We are also adopting the same COLA adjustment in this final rule.

In general, the COLA accounts for the higher costs in the IPF and eliminates the projected loss that IPFs in Alaska and Hawaii would experience absent the COLA. A COLA factor for IPFs located in Alaska and Hawaii is made by multiplying the non-labor share of the Federal per diem base rate by the applicable COLA factor based on the county in which the IPF is located.

Table 15 below lists the specific COLA for Alaska and Hawaii IPFs. The COLA factors were obtained from the U.S. Office of Personnel Management (OPM). The COLA factors are published on the U.S. Office of Personnel Management (OPM) Web site ( http://www.opm.gov/oca/cola/rates.asp ). As proposed and in this final rule, we are adopting the COLA adjustments obtained from OPM. We will update the COLA factors if OPM updates them and as updated by OPM. Any change in the COLA factors will be made in one of our IPF PPS RY update documents. We are also amending § 412.428 to enable us to update the COLA factors if appropriate.

Final Rule Action: In summary, we did not receive any public comments on the proposed COLA for IPFs located in Alaska and Hawaii. We are adopting the COLA adjustments obtained from OPM currently in effect, and as shown in Table 15 above. We will update the COLA factors as updated by OPM. In addition, we are amending § 412.428 to enable us to update the COLA factors, if appropriate.

Currently, the IPF PPS includes a facility-level adjustment for IPFs with qualifying EDs. As explained in the November 2004 IPF PPS final rule, we provide an adjustment to the standardized Federal per diem base rate to account for the costs associated with maintaining a full-service ED. The adjustment is intended to account for ED costs allocated to the hospital's distinct part psychiatric unit for preadmission services otherwise payable under Medicare Part B furnished to a beneficiary during the day immediately preceding the date of admission to the IPF (see § 413.40(c)) and the overhead cost of maintaining the ED. This payment is a facility-level adjustment that applies to all IPF admissions (with the one exception as described below), regardless of whether a particular patient receives preadmission services in the hospital's ED.

The ED adjustment is incorporated into the variable per diem adjustment for the first day of each stay for IPFs with a qualifying ED. That is, IPFs with a qualifying ED receive a 31 percent adjustment as the variable per diem adjustment for day 1 of each stay. If an IPF does not have a qualifying ED, it receives a 19 percent adjustment as the variable per diem adjustment for day 1 of each patient stay.

While any IPF with a qualifying ED receives the adjustment, the adjustment is paid most often to IPFs that are psychiatric units of acute care hospitals or critical access hospitals because these providers are more likely to have an ED that meets the definition of a qualified ED in § 412.424(d)(1)(v). We defined a qualifying ED in order to avoid providing the ED adjustment to an intake unit that is not comparable to a full-service ED with respect to the array of emergency services available or cost. We defined a qualifying ED as one that is staffed and equipped to furnish a comprehensive array of emergency services and that meets the definition of a “dedicated emergency department” as specified in § 489.24(b) and the definition of “provider-based status” as specified in § 413.65. We intended that a qualifying ED provide a comprehensive array of medical and psychiatric services. In order to clarify that a comprehensive array of emergency services includes medical as well as psychiatric services, we proposed to amend § 412.424(d)(1)(v)(A).

As specified in § 489.24, a dedicated ED means “any department or facility of the hospital, regardless of whether it is located on or off the main hospital campus, that meets at least one of the following requirements:

• It is licensed by the State in which it is located under applicable State law as an emergency room or emergency department;

• It is held out to the public (by name, posted signs, advertising, or other means) as a place that provides care for emergency medical conditions on an urgent basis without requiring a previously scheduled appointment; or

• During the calendar year immediately preceding the calendar year in which a determination under this section is being made, based on a representative sample of patient visits that occurred during the calendar year, it provides at least one-third of all its outpatient visits for the treatment of emergency medical conditions on an urgent basis without requiring a previously scheduled appointment.”

As specified in § 413.65, provider-based status means “the relationship between a main provider and a provider-based entity or a department of a provider, remote location of a hospital, or satellite facility that complies with the provisions.” Including provider-based status in the definition of a qualifying ED reflects the common ownership of the hospital and the distinct part psychiatric unit.

As discussed in the November 2004 IPF PPS final rule, three steps were involved in the calculation of the ED adjustment factor.

Step 1: We estimated the proportion by which the ED costs of a case would increase the cost of the first day of the stay. Using the IPFs with ED admissions in FY 2002, we divided their average ED cost per stay admitted through the ED ($198) by their average cost per day ($715), which equals 0.28.

Step 2: We adjusted the factor estimated in step 1 to account for the fact that we would pay the higher first day adjustment for all cases in the qualifying IPFs, not just the cases admitted through the ED. Since on average, 44 percent of the cases in IPFs with ED admissions are admitted through the ED, we multiplied 0.28 by 0.44, which equals 0.12.

Step 3: We added the adjusted factor calculated in the previous 2 steps to the variable per diem adjustment derived from the regression equation that we used to derive our other payment adjustment factors. The first day payment factor from this regression is 1.19. Adding the 0.12, we obtained a first day variable per diem adjustment for IPFs with a qualifying ED equal to 1.31.

The ED adjustment is made on every qualifying claim except as described below. As specified in § 412.424(d)(1)(v)(B), the ED adjustment is not made where a patient is discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit. An ED adjustment is not made in this case because the costs associated with ED services are reflected in the DRG payment to the acute care hospital or through the reasonable cost payment made to the CAH. As we explained in the November 2004 IPF PPS final rule, if we provided the ED adjustment in these cases, the hospital would be paid twice for the overhead costs of the ED (69 FR 66960).

Therefore, when patients are discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit, the IPF receives the 1.19 adjustment factor as the variable per diem adjustment for the first day of the patient's stay in the IPF. We do not intend to conduct a new regression analysis for this IPF PPS update. Rather, we plan to wait until we analyze IPF PPS data. Therefore, we are retaining the 1.31 adjustment factor for IPFs with qualifying EDs for the RY beginning July 1, 2006.

As we indicated in the November 2004 IPF PPS final rule, in FY 2002, one third of the IPFs admissions were through the ED. In the November 2003 IPF proposed rule (68 FR 66920) the percentage of admissions through the ED were understated. We plan to monitor claims data to determine the number of IPF admissions admitted through the ED.

Public comments and our responses on the proposed adjustment for IPFs with qualifying EDs are summarized below:

Comment: A few commenters questioned whether IPFs would have to reapply for the ED adjustment annually. Specifically, commenters asked whether it is necessary to re-submit verification of a qualifying ED each year.

Other commenters asked for clarification as to whether the ED adjustment can still be applied based on the date the attestation letter is received or would the IPFs lose the adjustment for the entire cost reporting year.

Response: We indicated in instructions ( Transmittal 384, CR 3541 dated December 1, 2004 and Transmittal 444, CR 3678 dated January 21, 2005) that IPFs should notify their FIs 30 days before the beginning of their cost reporting period regarding if they have a qualifying ED. FIs have the discretion as to how they wish to be notified and as to the type of documentation they require. Once the FI is satisfied that the IPF has a qualifying ED, the FI should enter the information in the provider-specific file within a reasonable timeframe so that the IPF can begin to receive the ED adjustment. This is a one-time verification. Application of the ED adjustment is prospective.

FIs may also use the date the documentation was received from the IPF to implement the ED adjustment. The provider-specific file can be updated from the date of the attestation and claims processed from that date will receive the ED adjustment. We do not intend that IPFs would have to wait until the beginning of their next cost report period to receive the ED adjustment.

However, if an IPF no longer meets the definition of a qualified ED, the IPF must notify their FI. The FI would immediately remove the flag from the provider-specific file and the provider will not receive the ED adjustment. If the provider should once again meet the definition of a qualified ED, they should contact their FI immediately in order to update their file.

Comment: One commenter asked what criteria CMS would use to determine what constitutes a “comprehensive” array of medical as well as psychiatric services. In addition, the commenter asked if the criteria are appropriate and would ensure high-quality care for psychiatric patients.

Response: In most cases, the FI would be familiar enough with the providers they service to know if the hospital has a qualifying ED. In those rare cases where the FI does not know whether the hospital's ED meets our definition of a qualifying ED (for example, new IPFs), the FI will establish that the IPF's ED is staffed and equipped to furnish a comprehensive array of emergency services. In response to the comment, we are clarifying in § 412.424(d)(1)(v)(A) that a qualifying ED is staffed and equipped to furnish both medical as well as psychiatric emergency services.

Final Rule Action: We are retaining the 1.31 percent adjustment factor for IPFs with qualifying EDs for the RY 2007.

In order to ensure that the ED adjustment is not paid for patients who are discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit, we directed IPFs to enter source of admission code “4” (transfers from hospital inpatient) on those claims. The source of admission code is a required field on Medicare claims and indicates the source of the patient admissions. However, as we implemented the IPF PPS, we realized that admission code “4” is too broad to distinguish these claims because it reflects transfers from any acute care hospital or CAH. Currently, where admission code “4” is entered on a claim, the ED adjustment is not paid, even if the patient is transferred from a different acute hospital or CAH.

In order to pay these IPF claims appropriately, CMS requested a new source of admission code from the National Uniform Billing Committee to identify transfers from the same hospital or CAH. On June 07, 2005, the National Uniform Billing Committee granted our request to establish a new source of admission code to indicate transfers from the same hospital or CAH. The new source of admission code “D” is effective April 1, 2006. As proposed and in this final rule, the new code will be used by IPFs to identify IPF patients who have been transferred to the IPF from the same hospital or CAH. Claims with source of admission code “D” will not receive the ED adjustment.

Public comments and our response on the proposed new source of admission code to implement the ED adjustment are summarized below:

Comment: Several commenters indicated that CMS should not penalize IPFs if they receive a transfer from the acute care medical-surgical units of the same hospital. A commenter stated that there may only be one hospital with a psychiatric emergency department in a particular area. The commenter believes that to penalize the transfers is unfair; each facility whether it is the ED, surgical unit, medical unit or psychiatric unit is doing their job and should be appropriately compensated.

Response: As stated in the November 2004 final rule and the RY 2007 proposed rule, in § 412.424(d)(1)(v)(B) we specify that the ED adjustment is not made when a patient is discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit. The ED adjustment is not made in this case because the costs associated with the ED services are already reflected in the DRG payment paid to the acute care hospital or through the reasonable cost payment made to the CAH. As explained in the November 2004 IPF PPS final rule and in the RY 2007 proposed rule, if we provided the ED adjustment in these cases, the hospital would be paid twice for overhead costs of the ED (see 69 FR 66960 and 71 FR 3641 respectively).

We note that the ED adjustment is a facility-level adjustment, rather than a patient-level adjustment. This facility-level adjustment applies to psychiatric hospitals and acute care hospitals with distinct part units, and CAHs that maintain a qualifying ED. We are providing the adjustment to psychiatric units in acute care hospitals or CAHs, and psychiatric hospitals because the costs of the ED are allocated to all hospital departments, including the psychiatric units. Also, the adjustment is intended to account for ED costs allocated to the distinct part psychiatric unit for preadmission services otherwise payable under Medicare Part B furnished to a beneficiary during the day immediately preceding the date of admission to the IPF and the overhead cost of maintaining the ED.

In order to ensure that Medicare does not pay twice for these types of transfers, we proposed that admission code “D” be used by IPFs to identify IPF patients who have been transferred to the IPF from the same hospital or CAH. Claims with source of admission code “D” will not receive the ED adjustment.

Final Rule Action: We are finalizing our decision to adopt the new source of admission code “D”. Claims with source of admission code “D” will not receive the ED adjustment.

The BBA created the CAH program, designed to represent a separate provider type to provide acute care services in rural areas. Generally, in order to qualify as a CAH, a hospital must—

• Be located in a rural area;

• Provide 24-hour emergency care services;

• Have an average LOS of 96 hours or less;

• Operate up to 25 beds for inpatient critical access care;

• Be located more than 35 miles from a hospital or another CAH or more than 15 miles in mountainous terrain or only secondary roads;

• Or be certified by the State as of December 31, 2005 as being a “necessary provider” of health care services to residents in the area.

Section 405(g) of the MMA authorizes CAHs to establish distinct part psychiatric and rehabilitation units of up to 10 beds effective for cost reporting periods beginning on or after October 1, 2004. Services in these units are paid under the payment methodology that would apply if the services were provided in a distinct part psychiatric or rehabilitation unit of a hospital. As a result, IPFs that are distinct part units of CAHs are paid the same as if they were a distinct part unit of a hospital. Otherwise, the CAH is paid on a reasonable cost basis for inpatient critical access services.

In the November 2004 IPF PPS final rule, we amended § 413.70(e) to clarify that payments for services of distinct part psychiatric units in CAHs are made in accordance with the IPF PPS. In order to pay CAHs the same as other IPFs, CAHs would be subject to the 1-day preadmission services bundling provision specified in § 413.40(c)(2) for patients who are admitted to the CAH's IPF. As a result, the cost of preadmission services, including ED services furnished to CAH IPF patients would be allocated to the IPF.

The IPF PPS includes the following payment adjustments: (1) An outlier policy to promote access to IPF care for those patients who require expensive care and to limit the financial risk of IPFs treating unusually costly patients; (2) a stop-loss provision, applicable during the transition period, to reduce financial risk to IPFs projected to experience substantial reductions in Medicare payments under the IPF PPS; (3) an interrupted stay policy to avoid overpaying stays that include a brief absence from the IPF followed by readmission to the IPF; and (4) a payment for patients who receive ECT. As proposed, we are updating those policies in this final rule. We are also making clarifications to the physician certification and recertification requirements in order to ensure consistent practices across IPFs. In addition, we are clarifying coverage of recreation therapy.

In the November 2004 IPF PPS final rule, we implemented regulations at § 412.424(d)(3)(i) to provide a payment adjustment for IPF stays that have extraordinarily high costs. Providing additional payments for outlier cases to IPFs that are beyond the IPF's control strongly improves the accuracy of the IPF PPS in determining resource costs at the patient and facility level because facilities receive additional compensation over and above the adjusted Federal prospective payment amount for uniquely high-cost cases. These additional payments reduce the financial losses that would otherwise be caused by treating patients who require more costly care and, therefore, reduce the incentives to under-serve these patients.

Under the IPF PPS, outlier payments are made on a per case basis rather than on a per diem basis because it is the overall financial “gain” or “loss” of the case, and not of individual days, that determines an IPF's financial risk. In addition, because patient-level charges (from which costs are estimated) are typically aggregated for the entire IPF stay, they are not reported in a manner that would permit accurate accounting on a daily basis.

Currently, we make outlier payments for discharges in which an IPF's estimated total cost for a case exceeds a fixed dollar loss threshold amount (multiplied by the IPF's facility-level adjustments) plus the Federal per diem payment amount for the case.

In instances when the case qualifies for an outlier payment, we pay 80 percent of the difference between the estimated cost for the case and the adjusted threshold amount for days 1 through 9 of the stay (consistent with the median length of stay for IPFs in FY 2002), and 60 percent of the difference for day 10 and thereafter. We established the 80 percent and 60 percent loss sharing ratios because we were concerned that a single ratio established at 80 percent (like other Medicare hospital PPSs) might provide an incentive under the IPF per diem payment system to increase length of stay in order to receive additional payments. After establishing the loss sharing ratios, we determined the current fixed dollar loss threshold amount of $5,700 through payment simulations designed to compute a dollar loss beyond which payments are estimated to meet the 2 percent outlier spending target.

As indicated in section II.A. of this final rule, in accordance with the update methodology described in § 412.428(d), we are updating the fixed dollar loss threshold amount used under the IPF PPS outlier policy. Based on the regression analysis and payment simulations used to develop the IPF PPS, we established a 2 percent outlier policy to make an appropriate balance between protecting IPFs from extraordinarily costly cases while ensuring the adequacy of the Federal per diem base rate for all other cases that are not outlier cases.

We continue to believe a 2 percent outlier policy is an appropriate target percentage and proposed to retain the 2 percent outlier policy. However, we believe it is necessary to update the fixed dollar loss threshold amount because analysis of the latest available data and rate increases indicates adjusting the fixed dollar loss amount is necessary in order to maintain an outlier percentage that equals 2 percent of total estimated IPF PPS payments. We intend to continue to analyze estimated outlier payments for subsequent years using the best available data in order to maintain estimated outlier payments at 2 percent of total estimated IPF PPS payments.

We have determined that in certain sections of the November 2004 IPF PPS final rule, we used the phrase “Fixed-dollar loss threshold” and, in other sections, we used the phrase “Fixed-dollar loss amount” to describe the dollar amount by which the costs of a case exceed payment in order to qualify for an outlier payment. In order to avoid confusion regarding these phrases, we are using the term “fixed-dollar loss threshold amount” when we are referring to the dollar amount by which the costs of a case exceed payment in order to qualify for an outlier payment.

As a result of this clarification, in § 412.402, we are revising the term “Fixed dollar loss threshold” to “Fixed dollar loss threshold amount.” We are also making clarifying changes to § 412.424(d)(3)(i) and § 412.424(d)(3)(i)(A) to state that we will provide an outlier payment if an IPF's estimated total cost for a case exceeds a “fixed dollar loss threshold amount” plus the total IPF adjusted payment amount for the stay, and that it is the fixed dollar loss threshold amount that is adjusted by the IPF's facility-level adjustments.

Aside from updating the terminology “fixed dollar loss threshold amount” and making the conforming changes to the regulation text described above, we did not propose to make any other changes to the outlier policy. Therefore, we will continue to adjust the fixed dollar loss threshold amount by the applicable facility-level payment adjustments and add this amount to the IPF PPS payment amount in order to determine if a case qualifies for an outlier payment. For cases that meet the threshold amount, we will pay 80 percent for days 1 through 9 and 60 percent for day 10 and thereafter.

In the November 2004 IPF PPS final rule, we described the process by which we calculate the outlier fixed dollar loss threshold amount. We will continue to use this process in this final rule. We begin by simulating aggregate payments with and without an outlier policy, and applying an iterative process to a fixed dollar loss amount that will result in outlier payments being equal to 2 percent of total simulated payments under the simulation. Based on this process, we proposed a fixed dollar loss threshold amount of $6200 for RY 2007. In this final rule, we are finalizing this amount. For RY 2007, IPF PPS will use $6200 as the fixed dollar loss threshold amount in the outlier calculation in order to maintain the proposed 2 percent outlier policy.

We note that the simulation analysis used to calculate the $6200 fixed dollar loss threshold amount includes all of the changes to the IPF PPS discussed in this final rule.

Public comments and our responses to changes to the outlier fixed dollar loss threshold amount are summarized below.

Comment: Several commenters requested that CMS use FY 2005 claims data to ensure that the fixed dollar loss threshold amount is correctly set, and if that data are not available, the commenters recommended that CMS keep the threshold at its current level.

Other commenters suggested that since CMS is not making any other changes to the major adjustments, changes should not be made to adjust the fixed dollar loss threshold amount. They felt that an increase in the threshold is unnecessary and might lead to a financial burden on IPFs. One commenter asked how CMS could accurately determine that 2 percent is the best outlier percentage and that the threshold amounts are appropriate.

Response: A complete set of FY 2005 claims data will not be available until later in the year, therefore we will not be able to analyze this data in time for publication of this final rule. It is necessary to update the fixed dollar loss threshold amount because we are increasing the Federal per diem base rate and the ECT payment rate. We are using the best available data to compute the updated fixed dollar loss threshold amount in our payment simulations. As stated above, we believe 2 percent is the optimal outlier percentage because it strikes an appropriate balance between protecting IPFs from extraordinarily costly cases while ensuring the adequacy of the Federal per diem base rate for all other cases that are not outlier cases. In the future, as IPF PPS data becomes available, we can analyze the accuracy of the fixed dollar loss threshold amount.

Comment: Several commenters recommended that CMS provide a detailed description of the methodology used in calculating the fixed dollar loss threshold amount.

Response: We estimate the cost of each case and inflate these costs to RY 2007 dollars in our simulations. We used FY 2002 claims and cost report data to estimate the cost per stay. We calculated these costs by taking routine per diem costs from the cost report (for the routine costs) and by taking departmental charges and cost-to-charge ratios (for the ancillary costs). These are the costs we then inflated to RY 2007 dollars in our payment simulations. We then applied RY 2007 rates and policies in our payment simulations to compute the updated fixed dollar loss threshold amount.

Comment: Several commenters requested that CMS use the same methodology as IPPS to calculate the threshold.

Response: The cost-to-charge ratio applied to charges provides Medicare the most accurate measure of a provider's per-case cost for the purpose of paying for high-cost outlier cases at the point that we process the initial claim. The cost-to-charge ratio is based on the providers' own cost and charge information as reported by the providers. In this final rule, we have applied the cost-to-charge ratios to the reported charges to estimate the cost per case, and inflated the costs to current dollars. In the future, when more recent data is available, we will consider whether using the IPPS methodology of inflating the charges and applying the latest cost-to-charge ratios to estimate the cost per case is an even more accurate method of calculating the threshold amount.

Comment: One commenter suggested that CMS investigate the possibility and legality of carrying over any unused outlier money from year to year.

Response: We have responded to similar comments a number of times in the context of other PPS regulations, ((70 FR 24168), (70 FR 24196 through 24197), (57 FR 39784), (58 FR 46347), (59 FR 45408), (60 FR 45856), (61 FR 27496), (56 FR 43227), and (61 FR 46229 through 46230)). As we have explained before and as explained below, we do not make adjustments to PPS payment rates to account for differences between projected and actual outlier payments in a previous year.

We implemented the IPF PPS outlier policy at § 412.424(d)(3)(i). We set outlier criteria so that outlier payments are projected to equal 2 percent of estimated total IPF PPS payments. In doing so, we use the best available data at the time to make our estimates.

Outlier payments are “funded” through a prospective adjustment to the base rate. We do not set money aside into a discrete “pool” dedicated solely for outlier payments. Outlier payments are based on estimates. If outlier payments for a given year are greater than projected, we do not recoup money from IPFs; if outlier payments for a given year are lower than projected, we do not make an adjustment to account for the difference. If estimates turn out to be inaccurate, we believe the more appropriate action is to continue to examine the outlier policy and to try to refine the methodology for setting outlier thresholds. Thus, consistent with this approach, for this final rule we are finalizing our decision to update the outlier threshold amount to $6200 for RY 2007 to make estimated outlier payments equal to 2 percent of total estimated IRF PPS payments in RY 2007.

Final Rule Action: In this final rule, we are adopting $6200 as the fixed dollar loss threshold amount for RY 2007.

As stated previously, under the IPF PPS, an outlier payment is made if an IPF's cost for a stay exceeds a fixed dollar loss threshold amount. In order to establish an IPF's cost for a particular case, we multiply the IPF's reported charges on the discharge bill by their overall cost to charge ratio (CCR). This approach to determining a provider's cost is consistent with the approach used under the IPPS and other prospective payment systems. In FY 2004, we implemented changes to the IPPS outlier policy used to determine CCRs for acute care hospitals because we became aware that payment vulnerabilities resulted in inappropriate outlier payments. Under the IPPS, we established a statistical measure of accuracy for CCRs in order to ensure that aberrant CCR data did not result in inappropriate outlier payments. As we indicated in the November 2004 IPF PPS final rule, because we believe the IPF outlier policy is susceptible to the same payment vulnerabilities as the IPPS, we adopted an approach to ensure the statistical accuracy of CCRs under the IPF PPS. Therefore, we adopted the following in the November 2004 IPF PPS final rule:

• We calculated two national ceilings, one for IPFs located in rural areas and one for IPFs located in urban areas. We computed the ceilings by first calculating the national average and the standard deviation of the CCR for both urban and rural IPFs.

To determine the rural and urban ceilings, we multiplied each of the standard deviations by 3 and added the result to the appropriate national CCR average (either rural or urban). The upper threshold CCR for IPFs in RY 2007 is 1.7447 for rural IPFs, and 1.7179 for urban IPFs, based upon CBSA-based geographic designations. If an IPF's CCR is above the applicable ceiling, the ratio is considered statistically inaccurate and we assign the appropriate national (either rural or urban) median CCR to the IPF.

Additional information regarding the national median CCRs is included in the November 2004 IPF PPS final rule (69 FR 66961).

• We do not apply the applicable national median CCR when an IPF's CCR falls below a floor. We made this decision because using the national median CCR in place of the provider's actual CCR would overstate the IPF's costs. We are applying the national CCRs to the following situations:

++ New IPFs that have not yet submitted their first Medicare cost report.

++ IPFs whose operating or capital CCR is in excess of 3 standard deviations above the corresponding national geometric mean (that is, above the ceiling).

++ Other IPFs for whom the fiscal intermediary obtains inaccurate or incomplete data with which to calculate either an operating or capital CCR or both.

For new facilities, we are using these national ratios until the facility's actual CCR can be computed using the first tentatively settled or final settled cost report, which will then be used for the subsequent cost report period.

We are not making any changes to the procedures for ensuring the statistical accuracy of CCRs in RY 2007. However, we are updating the national urban and rural CCRs (ceilings and medians) for IPFs for RY 2007 based on the full CY 2005 CCRs entered in the provider-specific file. In addition, we are updating the ceilings and national median CCRs will be based on CBSA-based geographic designations because the CBSAs are the geographic designations we are adopting for purposes of computing the proposed wage index adjustment to IPF payments beginning July 1, 2006. The national CCRs for RY 2007 were estimated to be 0.7100 for rural IPFs and 0.5500 for urban IPFs and will be used in each of the three situations cited above. These estimates were based on the IPF's location (either urban or rural) using the CBSA-based geographic designations.

In this final rule, we are finalizing our decision to update the national urban and rural CCRs (median and ceilings) based on the previous full CYs' provider-specific file. These CCRs will be announced in each year's annual notice of prospective payment rates published in the Federal Register . We are adding a new paragraph (g) to § 412.428 to clarify that we intend to update the national urban and rural ceilings and medians as part of the annual update of the IPF PPS and to specify when the national median urban and rural CCRs will be used.

Comment: One commenter asked that a provision be added to the national median CCR policy that an exception to the computed CCR be allowed to be filed with the FI if using the national median CCR overstates the IPF's costs.

Response: CMS believes that the actual CCR reported on the cost report should be used to calculate outlier payments. In the vast majority of cases, the IPF's CCR will be updated within a year, when the next cost report is filed. An interim cost report can be filed for special cases, in which case the updated CCR can be used. However, allowing IPFs to continually submit cost and charge data could create a burden for Fiscal Intermediaries. Finally, if the IPF is dissatisfied with the amount of payment, they can invoke existing appeal rights.

In the November 2004 IPF PPS final rule, we implemented a stop-loss policy to reduce financial risk for those facilities expected to experience substantial reductions in Medicare payments during the IPF PPS transition period. This stop-loss policy guarantees that each facility receives total IPF PPS payments that are no less than 70 percent of its TEFRA payments, had the IPF PPS not been implemented.

This policy is applied to the IPF PPS portion of Medicare payments during the 3-year transition. Hence, during year 1, when three-quarters of the payment were based on TEFRA and one-quarter on the IPF PPS; stop loss payments guarantee payments which are at least 70 percent of the TEFRA payments. The resulting 92.5 percent of TEFRA payments in year 1 is the sum of 75 percent and 25 percent times 70 percent.

In year 2, one-half of the payment will be based on TEFRA and one-half on the IPF PPS. In year 3, one-quarter of the payment will be based on TEFRA and three-quarters on the IPF PPS. In year 4 of the IPF PPS, Medicare payments are based 100 percent on the IPF PPS.

The combined effects of the transition and the stop-loss policies will be to ensure that the total estimated IPF PPS payments are no less than 92.5 percent in year 1, 85 percent in year 2, and 77.5 percent in year 3. We are not making any changes to the Stop-Loss provision.

In developing the IPF PPS, we received numerous public comments recommending that we include a payment adjustment for patients who receive ECT treatments during their IPF stay because furnishing ECT treatment, either directly or under arrangements, adds significantly to the cost of these stays. When we analyzed the FY 2002 MedPAR data, we found that ECT cases comprised about 6 percent of all cases and that almost 95 percent of ECT cases were treated in IPFs that are psychiatric units of acute care hospitals. Even among psychiatric units, ECT cases are concentrated among a relatively small number of facilities. Overall, approximately 450 facilities had cases with ECT. Among these facilities, we estimated the mean number of ECT cases per facility to be approximately 25. In addition, approximately one-half of the IPFs providing ECT had no more than 15 cases in FY 2002.

Our analysis confirmed that cases with ECT are substantially more costly than cases without ECT. We found that on a per case basis, ECT cases are approximately twice as expensive as non-ECT cases ($16,287 compared to $7,684). Most of this difference is due to variation in LOS (20.5 days for ECT cases compared to 11.6 days for non-ECT cases). In addition, the ancillary costs per case for ECT cases are $2,740 higher than those for non-ECT cases.

Although we are able to determine the cost of stays with ECT, we are unable to develop an ECT cost per treatment using the FY 2002 IPF claims data because the claims do not include the number of treatments. As a result, in the November 2004 IPF PPS final rule, we established the following methodology for calculating the IPF PPS ECT payment adjustment.

We established an ECT base rate using the pre-scaled and pre-adjusted median hospital cost for CPT procedure code 90870 used for payment under hospital outpatient PPS (OPPS), based on hospital claims data. The median cost for all OPPS services are posted after publication of the OPPS proposed rule at the following address: http://www.cms.hhs.gov/hospitaloutpatientPPS . We used unadjusted hospital claims data under the OPPS, that is, the pre-scaled and pre-adjusted median hospital cost per treatment, to establish the ECT base rate because we did not want the ECT payment under the IPF PPS to be affected by factors that are relevant to OPPS but not specifically applicable to IPFs. The median cost ($311.88) was then standardized and adjusted for budget neutrality, resulting in an ECT payment adjustment of $247.96 per treatment. The ECT base rate is adjusted for wage and COLA differences in the same manner that we adjust the Federal per diem base rate.

In order to receive the payment adjustment, IPFs must indicate on their claims the revenue code for ECT (901), along with the total number of units (ECT treatments) provided to the patient during their IPF stay. In addition, IPFs must include the ICD-9-CM procedure code for ECT (94.27) and the date of the last ECT treatment the patient received.

As we stated in the November 2004 IPF PPS final rule, although we established the ECT adjustment as a distinct payment under the IPF PPS, our preferred approach would be to include a patient level adjustment as a component of the model (for example, determined through the regression analyses) to account for the higher costs associated with ECT (69 FR 66951). We believe the approach will better control incentives towards over-utilization and be more consistent with the approach used for other patient level adjustments under the PPS. During the transition period we expect to collect more data on the number of ECT treatments per stay, and associated costs. We will utilize these data to evaluate alternative approaches for incorporating an adjustment for ECT in the payment system. To the extent that we change the payment methodology, we would propose the change first in a future rulemaking. Although our analysis will continue, we do not plan to redo the regression analysis until we analyze IPF PPS data.

It is important to note that since ECT treatment is a specialized procedure, not all providers are equipped to provide the treatment. Therefore, many patients who need ECT treatment during their IPF stay must be referred to other providers to receive the ECT treatments, and then return to the IPF. In accordance with § 412.404(d)(3), in these cases where the IPF is not able to furnish necessary treatment directly, the IPF would furnish ECT under arrangements with another provider. While a patient is an inpatient of the IPF, the IPF is responsible for all services furnished, including those furnished under arrangements by another provider. As a result, the IPF claim for these cases should reflect the services furnished under arrangements by other providers.

Public comments and our responses on the proposed ECT payment policy are summarized below.

Comment: Several commenters asked why CMS was continuing to adjust the ECT rate by the standardization factor, behavioral offset, stop-loss adjustment, and outlier adjustment when the IPF PPS is no longer budget neutral after the implementation year.

Response: We proposed to treat the ECT rate in a similar manner to the Federal per diem base rate. Specifically, we proposed to adjust the CY 2006 OPPS median rate for ECT by the standardization factor, behavioral offset, stop-loss adjustment, and outlier adjustment in addition to applying the wage index budget neutrality factor. This way, all of the adjustments that are incorporated into the Federal per diem base rate would be incorporated into the ECT rate. However, based on the comments we received, and in order to improve consistency and give more predictability in the ECT rate from year to year, we believe it is more appropriate to use the CY 2005 ECT rate as a base, and then update that amount by the market basket each rate year.

This methodology, we believe, will be even more consistent with the methodology we use to update the Federal per diem base rate because we will use the RPL market basket increase to increase both rates. Exactly as the standardization factor, behavioral offset, stop-loss adjustment, and outlier adjustment are already built into the Federal per diem base rate before we apply the market basket and the wage index budget neutrality factor, the implementation year ECT rate of $247.96 includes the standardization factor, behavioral offset, stop-loss adjustment, and outlier adjustment. Then, just as we updated the federal per diem base rate, we will then apply the corrected standardization factor (please see section V.B for a discussion of how we adjust this factor on Federal per diem base rate), the market basket increase of 4.3 percent, and the wage index budget neutrality factor of 1.0042 to compute a RY 2007 ECT rate of $256.20.

We will monitor ECT payments and usage under the IPF PPS and the OPPS to ensure that the increased payments for ECT do not lead to changes in the frequency of utilization by reviewing the FY 2005 MedPAR claims data.

Comment: One commenter stated that CMS should ensure that the ECT amount adequately reflects the cost of providing the treatment.

Response: We believe using the CY 2005 median cost for ECT under the OPPS as a basis for our ECT payment rate is the best option at this time to ensure the most appropriate payment for ECT. We will continue to monitor ECT payments as new data become available, and will make changes, if warranted.

Final Rule Action: In summary, we will finalize the update methodology for the ECT rate by using the CY 2005 ECT rate as a base and then updating that amount by the market basket increase each rate year. We will also continue to monitor ECT payments under the IPF PPS and the OPPS.

Since the publication of the November 2004 IPF PPS final rule, we have received inquiries related to physician certification and recertification. It appears that some psychiatric units in acute care hospitals have been following the timeframes that are applicable to the acute care hospital of which they are a part (as specified in § 424.13) rather than those that apply to psychiatric hospitals (as specified in § 424.14).

To eliminate the confusion that we believe may be caused by the titles of § 424.13 and § 424.14 and to ensure consistency in compliance with the requirements among all IPFs, in the RY 2007 proposed rule (71 FR 3616), we proposed to revise the title of § 424.14 from “Requirements for inpatient services of psychiatric hospitals” to “Requirements for inpatient services of inpatient psychiatric facilities.” In addition, we proposed that for the purposes of payment under the IPF PPS, all IPFs would follow the physician certification and recertification requirements as specified in § 424.14.

In the November 28, 2003 IPF PPS proposed rule (68 FR 66920), we proposed to—(1) amend § 424.14 to state that in recertifying a patient's need for continued inpatient care in an IPF, a physician must indicate that the patient continues to need, on a daily basis, inpatient psychiatric care (furnished directly by or requiring the supervision of IPF personnel) or other professional services that, as a practical matter, can be provided only on an inpatient basis; and (2) revise § 424.14(d) to require that a physician recertify a patient's continued need for inpatient psychiatric care on the 10th day following admission to the IPF rather than the 18th day following admission to the IPF (68 FR 66939).

However, in the November 2004 IPF PPS final rule, we did not include the proposed physician recertification requirement changes because most of the public comments we received on this issue did not support the proposed changes and indicated that there are inconsistencies in the timeframes currently required for IPFs that warranted additional analysis. Instead, we stated that we would continue to require that a physician recertify a patient's continued need for inpatient psychiatric care on the 18th day following admission to the IPF.

Since publication of the November 2004 IPF PPS final rule, we have received additional inquiries related to the physician certification and recertification timeframes that currently apply to IPFs. As noted above, it appears that some psychiatric units in acute care hospitals have continued to follow the timeframes that are applicable to the acute care hospital of which they are a part (as specified in § 424.13) rather than those that apply to psychiatric hospitals (as specified in § 424.14). Section 424.13(d) requires the initial certification no later than as of the 12th day of hospitalization and the first recertification is required no later than as of the 18th day of hospitalization. Section § 424.14(d) requires certification at the time of admission or as soon thereafter as is reasonable and practicable and the first recertification is required as of the 18th day of hospitalization.

In order to clarify requirements and establish further consistency among provider types, for purposes of payment under the IPF PPS, we proposed that all IPFs (distinct part units of acute care hospitals and CAHs and psychiatric hospitals) meet the physician certification and recertification timeframes in § 424.14.

As proposed, we are revising § 424.14(d) to provide that the initial physician certification will be required at the time of admission or as soon thereafter as is reasonable and practicable and the first recertification will be required as of the 12th day of hospitalization. Subsequent recertifications will be required at intervals established by the hospital's UR committee (on a case-by-case basis if desired), but no less frequently then every 30 days.

We chose to propose the 12th day because it is more in line with the median LOS and it is current practice for certification in psychiatric units.

In addition, we received inquiries from FIs requesting guidance on the content requirement of physician certifications at § 424.14(c), relating to the medical necessity of continued inpatient psychiatric care. As a result, we are adding language to clarify that for purposes of payment under the IPF PPS, the physician will also recertify that the patient continues to need, on a daily basis, active treatment furnished directly by or requiring the supervision of inpatient psychiatric facility personnel.

We received several comments related to the various changes we proposed making to the Certification and Plan of Treatment Requirements of § 424.14.

Commenters were silent with respect to our proposed title revision to § 424.14 from “Requirements for inpatient services of psychiatric hospitals” to “Requirements for inpatient services of inpatient psychiatric facilities.” We are finalizing the title revision for § 424.14 as “Requirements for inpatient services of inpatient psychiatric facilities.”

Overall, commenters supported making the physician certification requirements consistent among distinct part psychiatric units of acute care hospitals and CAHs and psychiatric hospitals. Therefore, for the purposes of payment under the IPF PPS, we are requiring that all IPFs (distinct part psychiatric units of acute care hospitals and CAHs and psychiatric hospitals) follow the physician certification and recertification requirements as specified in § 424.14.

We received mixed responses from commenters concerning our proposed physician certification and recertification timeframes.

Specific comments and our responses on the proposed changes implementing physician certification and recertification requirements are summarized below.

Comment: One hospital association expressed support for a 12-day recertification requirement, finding it preferable to 18 days. Other commenters requested the current requirement of 18 days for the initial recertification remain in place, citing added administrative burden since most patients are discharged before the 18th day. A couple of the commenters recommended maintaining the 18-day recertification requirement since it is part of the original language for § 424.14 and further believe it is the established practice in psychiatric hospitals.

Response: When § 424.14(d)(2) was developed in the 1980s, the average LOS for inpatient psychiatric hospitalization was much longer than the current median LOS of 9 days, thereby necessitating a parallel recertification requirement of 18 days, which was reflective of current treatment practice at that time. However, as inpatient psychiatric treatment has evolved with the development of new medications and therapies, so has the average length of inpatient care.

According to the MedPar 2002 claims data, the median LOS for Medicare beneficiaries in IPFs is 9 days. Since the duration of inpatient psychiatric hospitalization stays have shortened, the certification and recertification timeframe and practices need to be updated in order to remain consistent with current practice. Thus, an earlier recertification timeframe is indicated by the shorter LOS for inpatient psychiatric hospitalization. Therefore, we continue to believe that an 18-day recertification requirement is outdated and not reflective of current inpatient psychiatric treatment.

As a result, we are finalizing that for § 424.14(d)(2), the first recertification is required as of the 12th day of hospitalization. Subsequent recertifications will be required at intervals established by the hospital's Utilization Review committee (on a case-by-case basis if desired), but no less frequently then every 30 days.

Comment: In general, commenters were silent concerning our proposal to modify the certification and recertification language of § 424.14(c), relating to the medical necessity of continued inpatient psychiatric care. However, a couple of commenters requested that the language required for certification and recertification remain consistent with § 424.14(b) and § 424.14(c). Another commenter requested clarification on the proposed language requiring “the physician would recertify that the patient continues to need, on a daily basis* * *”. The commenter questioned whether physicians would need to chart daily in the patient's record that the patient continues to need active treatment.

Response: We proposed only one modification to § 424.14(c), “Content of recertification”, by adding language requiring that the physician would also recertify that the patient continues to need, on a daily basis, active treatment furnished directly by or requiring the supervision of inpatient psychiatric facility personnel. This means, the patient continues to need daily, active treatment that is furnished directly by or requiring the supervision of inpatient psychiatric facility personnel. To clarify, physician certification and recertification, under § 424.14, are not the same as progress notes. A physician must certify the necessity of the services and, in some instances, recertify the continued need for those services to ensure that Medicare pays only for services of the type appropriate for Medicare coverage. Progress notes, under § 412.27(c)(4), must also be recorded by the patient's physician, in addition to a nurse, social worker, and when appropriate, others significantly involved in active treatment modalities, but are used to document the progress of the patient's treatment, and are more frequent than the certification and recertification timelines. In addition to the purpose of clarifying the recertification content requirements, this modification is consistent with the medical necessity requirement for continued inpatient psychiatric care.

As a result, for purposes of payment under the IPF PPS, the physician would also recertify that the patient continues to need, on a daily basis, active treatment furnished directly by or requiring the supervision of inpatient psychiatric facility personnel.

Final Rule Action: In summary, we are changing the title for § 424.14 from “Requirements for inpatient services of psychiatric hospitals” to “Requirements for inpatient services of inpatient psychiatric facilities.”

In addition, for the purposes of payment under the IPF PPS, we are requiring that all IPFs (distinct part psychiatric units of acute care hospitals and CAHs and psychiatric hospitals) follow the physician certification and recertification requirements as specified in § 424.14.

Furthermore, § 424.14(d)(2) will require the first recertification as of the 12th day of hospitalization. Subsequent recertifications will be required at intervals established by the hospital's UR committee (on a case-by-case basis if desired), but no less frequently than every 30 days.

We are also finalizing the content requirement of physician certifications at § 424.14(c)(iii) by adding the following language, “the physician will also recertify that the patient continues to need, on a daily basis, active treatment furnished directly by or requiring the supervision of inpatient psychiatric facility personnel.”

Before the implementation of the IPPS payment methodology, Medicare coverage guidelines gave specific recognition to therapeutic recreation in inpatient psychiatric hospitals. The guidelines in § 3102.1.A of the Medicare Intermediary Manual, Part 3 (MIM-3), and in § 212.1 of the Medicare Hospital Manual (which now appear in the CMS Internet Online Manual at Pub. 100-02, Chapter 2, § 20.1ff.) specifically identify therapeutic recreation as one of the services that can constitute “active treatment” in this setting when they are—

• Provided under an individualized treatment or diagnostic plan;

• Reasonably expected to improve the patient's condition or for the purpose of diagnosis; and

• Supervised and evaluated by a physician.

However, these guidelines refer to therapeutic recreation in terms of being an “adjunctive” therapy, indicating that even in this setting, it will not independently serve as a patient's sole or primary form of therapeutic treatment, but rather, will be furnished in support of (but subordinate to) some other, primary form of therapy.

When the IPPS was developed in 1983, to the extent that therapeutic recreation and other services had been furnished during the IPPS base period, the bundled IPPS payment for that setting would reflect these costs. However, during the IPPS rulemaking process, we received public comments concerned that, “the cost-saving incentives of the PPS would lead hospitals paid under the system to stop providing recreational therapy services.” In response, in the January 3, 1984 IPPS final rule (49 FR 242) we indicated that implementation of the IPPS would not, in fact, prohibit the provision of recreational therapy services, and that “these services will continue to be covered to the same extent they always have been under existing Medicare policies”.

In implementing the IPPS regulations, we included criteria for identifying certain types of institutions (for example, psychiatric hospitals) that would be excluded from the IPPS and, thus, would continue to be paid under some other methodology. The regulations also introduced criteria for identifying an IPPS-excluded inpatient psychiatric unit housed within a larger acute-care hospital that would itself be subject to the IPPS. One of these identifying criteria at 42 CFR 405.471(c)(4)(ii)(B) (later recodified at 42 CFR 412.27(b)) was the provision, through the use of qualified personnel, of a number of specified types of services, including psychological services, social work services, psychiatric nursing, occupational therapy, and recreational therapy.

As we explained in the IPPS interim final rule published on September 1, 1983 (48 FR 39758), the regulations designated these particular services because their provision “is typical of units which treat patients whose characteristics are like those in psychiatric hospitals. Consequently, the provision of these services is an identifier of such a patient population”. We note that the designation of these particular services in this context did not serve to define the scope of their coverage under Medicare, nor to mandate their provision in this setting, but merely to identify them as being characteristic of the type of psychiatric unit that would qualify for exclusion from the IPPS.

At the same time the IPPS was being developed, a parallel evolution was taking place in the certification requirements that facilities must meet in order to participate in the Medicare program: a shift from primarily “process-oriented” requirements to more “outcome-oriented” requirements, which focus more on direct indicators of the quality of care actually being furnished to the facility's patients (as reflected in the presence of positive results and the absence of negative ones), and less on the specific “process” through which the facility achieves the desired outcome.

In order to participate in the Medicare program, psychiatric hospitals not only had to meet the conditions of participation (COPs) that apply to general, acute-care hospitals, but additionally had to meet special conditions related to medical records and staffing. Consistent with the recognition of therapeutic recreation as constituting active treatment in this one particular setting (as discussed above), the original COPs for psychiatric hospitals at 42 CFR 405.1038(g) mandated the presence of qualified therapists, assistants, or aides “sufficient in number to provide comprehensive therapeutic activities, including at least occupational, recreational and physical therapy, as needed, to assure that appropriate treatment is rendered for each patient, and to establish and maintain a therapeutic milieu.” Furthermore, 42 CFR 405.1038(g)(3) specified that “recreational or activity therapy services are available under the direct supervision of a member of the staff who has demonstrated competence in therapeutic recreation programs,” and § 405.1038(g)(4) and § 405.1038(g)(5) went on to prescribe additional standards regarding therapy assistants or aides and overall staffing for recreational and activity therapy.

However, when the special medical record and staffing COPs for psychiatric hospitals were subsequently recodified at § 482.62(g), the specific references to recreation therapy were deleted and replaced with a more general requirement to provide a therapeutic activities program. In response to public comments that recommended us to restore the deleted requirements, we indicated that we believe that the deleted requirements concerning therapeutic activities were overly and unnecessarily prescriptive and that the hospital should have the flexibility to determine which activities are most appropriate to its patient population and to determine the criteria to be met by employees providing these services. (See the IPPS PPS rule published on June 17, 1986 (51 FR 22032)).

However, when the 1986 COP changes applicable to psychiatric hospitals were made, we inadvertently retained specific references to recreation therapy in § 412.27. Since the intent of § 412.27(b) is to identify services provided in psychiatric units that are characteristic of services furnished in psychiatric hospitals, we believe it is no longer appropriate to include references to specific therapies in § 412.27. Therefore, in order to have consistent requirements among IPFs, in the RY 2007 IPF PPS proposed rule, we proposed removing recreational therapy from § 412.27(b).

We went on to further explain in the RY 2007 IPF PPS proposed rule that in addition to being consistent with current provisions, we believe the IPF PPS base rate which was developed using FY 2002 data, already reflects the provision of recreation therapy.

We received a few public comments concerning our proposal to remove reference to recreational therapy in § 412.27(b). Overall the commenters recommended that we not delete the reference to recreational therapy.

Public comments and our responses on the proposed changes for removing the reference to recreational therapy are summarized below:

Comment: An industry organization suggested that if CMS'; goal is to maintain consistency, CMS should adopt the language as specified in § 482.62 from the COPs for § 412.27(b).

Response: We believe that this commenter raises a valid concern in terms of maintaining consistency. We also agree with the suggestion of applying the same language to both § 482.62 and § 412.27(b), thereby maintaining consistent requirements among IPFs. Since § 482.62 refers to “therapeutic activities,” we are revising § 412.27(b), to be consistent with § 482.62, by replacing the reference to recreational and occupational therapy with the term “therapeutic activities.”

Comment: Several commenters stated that the inclusion of recreational therapy in § 412.27(b), is no more specific than the references included for social work or occupational therapy.

Response: As we indicated in the RY 2007 IPF PPS proposed rule, since the intent of § 412.27(b) is to identify services provided in psychiatric units that are characteristic of services furnished in psychiatric hospitals, we believe it is essential to maintain consistency among the provisions for § 482.62 and § 412.27(b). Therefore, we are removing the reference to both recreational and occupational therapy from § 412.27(b) and replacing them with the more general reference to therapeutic activities which is currently used in § 482.62.

However, we believe it is important to maintain the reference to social work services in § 412.27, since it is currently included in § 482.62.

Comment: One commenter requested that CMS continue to pay for recreational therapy. Other commenters were concerned that if the reference to recreational therapy is removed, people may not know that Medicare has traditionally recognized recreational therapy as an adjunctive therapy in psychiatric facilities.

Response: As we discussed in the RY 2007 IPF PPS proposed rule, we believe the IPF PPS base rate, which was developed using FY 2002 data, reflects the provision of recreation and occupational therapy. Even though we are removing the specific reference to recreation and occupational therapy in § 412.27(b), both recreational and occupational therapy services will continue to be covered to the same extent they always have been under existing Medicare policies.

In addition, although we are removing the specific references to recreational and occupational therapy from § 412.27(b), we want to emphasize that both therapies are, and continue to be, valuable therapeutic interventions in psychiatric treatment.

Final Rule Action: In summary, for consistency, we are adopting the language as specified in § 482.62 from the COPs for § 412.27(b). Specifically, 412.27(b) will state—“Furnish, through the use of qualified personnel, psychological services, social work services, psychiatric nursing services and therapeutic activities.”

Currently, when a transfer, discharge, or death occurs on the same day as an admission to an IPF, the IPF PPS PRICER does not recognize any covered IPF days and the IPF claims are suspended. Based on review of a limited sample of the IPF and subsequent IPPS claims, it appears that many of these patients are first seen in a hospital's ED, are admitted to the hospital's psychiatric unit and, later the same day, determined to be too medically compromised to be managed in the psychiatric unit. This scenario may occur because the patient presents at the ED and is admitted to the psychiatric unit in the middle of the night, and when the patient's admission to the unit is reviewed by a psychiatrist the next morning, the physician determines that the patient should be discharged for acute care. In other cases, a patient may have been admitted to a freestanding psychiatric hospital based on the information furnished by an ED of an acute care hospital. However, after admission, the psychiatric hospital staff evaluates the patient and determines that the patient has medical needs that they are not staffed or equipped to meet.

The Provider Reimbursement Manual addresses the same day transfer issue from the perspective of counting Medicare days for the purpose of Medicare cost reporting. Section 2205 indicates that only full patient days may be used to apportion inpatient routine care service costs and that a day begins at midnight and ends 24 hours later. However, section 2205.1 explains how to count a day if the day of admission and the day of discharge are the same. Section 2205.1 indicates that when a patient is admitted and then transferred from one participating provider to another before midnight of the same day, a day (except for utilization purposes) is counted at both providers. A day of Medicare utilization is charged only for the admission to the second provider. This distinction is important for psychiatric admissions because IPF stays are subject to the 190-day lifetime limit on inpatient psychiatric care.

Section 1812(b) of the Act and 42 CFR 409.62 indicate that payment is not available for inpatient psychiatric hospital services furnished beyond the 190-day lifetime limit. Thus, Medicare coverage of IPF services, specifically IPF services furnished in freestanding psychiatric hospitals is limited to 190 days. In consideration of the limit on coverage of IPF services, where there is a same day transfer between Medicare participating providers, we only count the second admission for utilization purposes. Therefore, the initial admission to the IPF does not count against a beneficiary's lifetime psychiatric services limit.

We have some concerns regarding same day transfers from an IPF. Under TEFRA, a hospital receives its cost up to the hospital's TEFRA limit. The TEFRA limit is based on the hospital's average cost per discharge in a base period. When an admission and discharge occur on the same day, the hospital's cost is unlikely to exceed the TEFRA limit, so the hospital receives its cost for the day. These same day transfers also improve the hospital's payment under TEFRA by slightly reducing its cost per discharge. We are also concerned that when the transfer occurs in the same hospital, this practice circumvents bundling rules under the IPPS, in that it unbundles the ED charges from the IPPS claim and allocates the ED costs to the psychiatric unit even though the patient may have been inappropriately admitted to the unit.

Based on the review of IPF PPS claims we conducted, it did not appear that the admissions to the IPF were medically reasonable and necessary. However, we believe it is important to base a decision regarding coverage of these days on a comprehensive review of the claims. Therefore, in the RY 2007 IPF PPS proposed rule, we did not propose a change in payment policy. However, we did consider several alternative methods for addressing same day transfers under the IPF PPS which are described below. Any change to treatment of same day transfers would be made prospectively.

We could treat these days as covered days under the IPF PPS. However, under the IPF PPS, a 19 percent adjustment to the base rate is applied to day 1 of the stay to reflect the additional administrative and clinical costs associated with admission and the day 1 adjustment is increased to 31 percent when the IPF has a qualifying ED. The IPF may also receive, for example, a teaching adjustment or rural adjustment, for these partial days of care. Several of the claims in our analysis indicate a stay of 2 hours. We are concerned that this approach would overpay IPFs and encourage inappropriate admissions and transfers.

Another option would be to make no PPS payment, but continue making TEFRA payments during the IPF PPS transition period. For example, for cost reporting periods beginning in 2006, IPFs would receive a blended payment consisting of 50 percent PPS and 50 percent TEFRA. Therefore, under this approach we would allow some payment for these days for cost reporting periods in 2006 and 2007, but once the IPF PPS transition period is over, the IPFs would receive no payment for these days. We think this approach would encourage changes in admission practices in order to avoid the need to transfer patients. However, once the IPF PPS transition is over, there would be no payment mechanism to pay IPFs for stays in which there is a circumstance, not reasonably foreseeable by the admitting IPF, for example, a serious change in health status on the day of admission.

We could treat these same day transfer cases as covered days under the IPF PPS but limit payment to the Federal per diem base rate or some other payment amount, for example, half the Federal per diem base rate. This approach would limit payment to IPFs in order to provide an incentive for IPFs to make medical clearance determinations as early in the IPF stay as possible. However, we are concerned that this approach would not lead to changes in admission practices to avoid inappropriate admissions and the need for subsequent transfers.

It is important to note that the cost for these days was included in the cost reports used to develop the IPF PPS, and, as a result, the average cost per day that was used to establish the Federal per diem base rate is higher than it would otherwise have been had those days not been included.

We specifically request public comment from IPFs on this issue to help us to develop a payment policy that pays IPFs appropriately for these days and provides an incentive to avoid same day transfers wherever possible.

Public comments and our responses on the proposed changes for implementing the same day transfers are summarized below.

Comment: We received several comments concerning the issue of an appropriate payment for same day transfers. Many commenters indicated that CMS should conduct a thorough examination of the 2005 claims because they do not believe that same day transfers would be found to be prevalent occurrences. The same commenters also stated that if CMS decides to investigate other options, the agency should convene the field through an open-door forum or other such venue to discuss the possibilities.

In addition, several commenters requested that when sufficient data is available to fully evaluate same day transfers, CMS should request input from the field before making any changes to current policy. Other commenters also indicated that CMS should continue to reimburse same day transfers as 1-day stays unless it can demonstrate empirically that the cost of the former is sufficiently less than the cost of the latter to justify a partial payment.

Another commenter requested that CMS release a version of the MedPar with relevant information to qualified researchers who would be pleased to conduct an empirical analysis for the agency.

Many commenters supported CMS' instructions for its payment methodology for the suspended IPF PPS same day transfer claims from January 1, 2005. The instructions counted these days as covered for cost reporting purposes if the day of admission and the day of discharge are the same. Other commenters indicated that CMS should not penalize provider's evaluation and treatment efforts, stating that the work was done, therefore providers should be compensated.

Furthermore, commenters support the way section 2205.1 of the Provider Reimbursement Manual instructs FIs to count a day if the day of admission and the day of discharge are the same. The majority of the commenters recommended paying the PPS per diem for these transfers.

Response: We will take all comments into consideration as we develop a payment policy that not only pays appropriately for these days, but will also provide an incentive to avoid same day transfers wherever possible.

Final Rule Action: In summary, we received multiple comments on the same day transfer. We will take all comments into consideration as we develop a payment policy for same day transfers. We will develop the policy for same day transfers in the future, after we analyze IPF PPS data.

Comment: A commenter requested an inner-city adjustment, indicating that the difficulties of inner-city IPFs are related to a high volume of non-payment in contrast to the more likely rural under use and low volume costs. The commenter suggested a 20 percent adjustment at least, for inner-city IPFs.

Response: We did not include an explicit payment adjustment for inner city facilities in the November 2004 IPF PPS final rule nor did we propose an urban adjustment in the RY 2007 proposed rule. As indicated in the November 2004 IPF PPS final rule (69 FR 66954), we did not include an adjustment for urban IPFs because the regression analysis we conducted did not indicate that urban IPFs were more costly on a per diem basis.

As previously stated, we do not plan to rerun the regression analysis until we analyze IPF PPS data (that is no earlier than FY 2008). When we rerun the regression analysis, we will test for the need for an urban or inner city adjustment.

Comment: A commenter objected to CMS not posting the proposed rule to the CMS Web site until January 18, 2006 while the rule actually went on public display January 13, 2006 and was not published in the Federal Register until January 23, 2006. The commenter stated that if CMS chooses to start the comment period based on the date of display, CMS must ensure that the display copy is promptly posted on the Web site to provide interested parties sufficient time to review the rule and draft comments before the comment period ends.

Response: It is our general practice to post Federal Register documents on our website as soon as practicable after the documents are on public display at the Office of the Federal Register. When we chose to start the comment period from the day of public display, while we are not required to do so, it was our intent to post the proposed rule on CMS website immediately. However, due to circumstances out of our control, we were unable to immediately do so because our Web site at http://www.cms.hhs.gov was being redesigned. However, we did publish a press release on January 13, 2006, announcing the IPF PPS proposed rule went on public display at the Federal Register on January 13, 2006 and that it would be published in the Federal Register on January 23, 2006. In addition, we posted the rule as soon as was practicable for us to do so, on Wednesday, January 18, 2006.

This final rule essentially incorporates the provisions of the proposed rule, in which we proposed to update the IPF PPS for RY 2007 applicable to IPF discharges occurring during the RY beginning July 1, 2006 through June 30, 2007. In addition, we proposed to adopt the new OMB labor market area definitions for our geographic classifications. The provisions of this final rule that differ from the proposed rule are as follows.

In the RY 2007 IPF PPS proposed rule, we proposed to update the ECT base rate using the pre-scaled pre-adjusted hospital median cost for ECT used for the CY 2006 update of the OPPS. The median cost would then be standardized, adjusted for budget neutrality, and adjusted for wage and COLA differences in the same manner that we adjust the per diem rate.

However, based on the public comments, we are changing the methodology used for calculating the ECT policy payment rate. In order to improve consistency with our updates to the Federal per diem base rate and provide IPFs more predictability for the ECT rate from year to year, we will use the CY 2005 ECT rate as a base, and then update that amount by the market basket increase each rate year.

In § 412.402, we are adding the definition of “New GME education program” to mean a medical education program that receives initial accreditation by the appropriate accrediting body or begins training residents on or after November 15, 2004.

In § 412.27, we are amending paragraph (b) to remove the specific reference to “occupational therapy, and recreational therapy.” We are adding in its place “therapeutic activities” in order to maintain consistency with current provisions and since the IPF PPS base rate already reflects the provision of recreational therapy.

In § 412.428, we are revising paragraph (b)(3) to reflect that the rate of increase factor is revised as of October 1 of each year.

In the Inpatient Prospective Payment System proposed rule, published April 25, 2006 (71 FR 23996), we discussed in detail the Health Care Information Transparency Initiative and our efforts to promote effective use of health information technology (HIT) as a means to help improve health care quality and improve efficiency. Specifically, with regard to the transparency initiative, we discuss several potential options for making pricing and quality information available to the public (71 FR 24120 through 24121). We solicited comments on ways the Department can encourage transparency in health care quality and pricing whether through its leadership on voluntary initiatives or through regulatory requirements. We also are seeking comment on the Department's statutory authority to impose such requirements.

In addition, we discussed the potential for HIT to facilitate improvements in the quality and efficiency of health care services (71 FR 24100 through 24101). We solicited comments on our statutory authority to encourage the adoption and use of HIT. The 2007 Budget states that “the Administration supports the adoption of health information technology (IT) as a normal cost of doing business to ensure patients receive high quality care.” We also are seeking comments on the appropriate role of HIT in potential value-based purchasing program, beyond the intrinsic incentives of a PPS to provide efficient care, encourage the avoidance of unnecessary costs, and increase quality of care. In addition, we are seeking comments on promotion of the use of effective HIT through Medicare conditions of participation.

We intend to consider both the health care information transparency initiative and the use of health information technology as we refine and update all Medicare payment systems. Therefore, while these initiatives are not included in this final rule, we are in the process of seeking input on these initiatives in various proposed Medicare payment rules being issued this year and may pursue these policies in future rulemaking for the IPF PPS.

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.

We have examined the impact of this final 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 (UMRA) (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).

Based on the impact analysis, we estimate the expenditures from the IPF PPS implementation year to the 2007 IPF PPS RY will be increased by $160 million. The updates to the IPF labor-related share and wage indices are made in a budget neutral manner and thus have no effect on estimated costs to the Medicare program. Therefore, the estimated increased cost to the Medicare program is the result of a combination of the updated IPF market baskets, which is offset by the transition blend and the revision of the standardization factor. The IPF PPS was budget neutral in the implementation year, but it is not budget neutral in RY 2007. As discussed in section V.B.2 of this final rule, the standardization factor and budget neutrality factors (behavioral offset, stop-loss adjustment, and outlier adjustment) are built into the Federal per diem base rate and the ECT rate. We are increasing these rates by the market basket, resulting in a $160 million increase in payments from the implementation year to RY 2007.

We note that aspects of the transition, including the stop-loss policy and the transition to the 50/50 percent blend in RY 2007 and the transition to the 75/25 percent blend in the 2008 IPF PPS RY, were included in the November 2004 IPF PPS final rule and thus are not incremental to this rule. Nevertheless, it is essential to analyze the impact of the transition blend in order to calculate the increase in cost to the Medicare program.

The impact of the transition blend is an approximately 0.2 percent (about $10 million) decrease in overall payments in RY 2007 and the distribution of that impact is summarized in Table 15. Therefore, the impact attributable to the policy changes finalized in this rulemaking, primarily the market basket update and the standardization correction, is approximately $170 million in the IPF PPS RY 2007.

Since costs to the Medicare program are estimated to be greater than $100 million, this final rule is considered a major economic rule, as defined in 5 U.S.C. 40(2).

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 governmental jurisdictions. Most IPFs and most other providers and suppliers are considered small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year. (For details, see the Small Business Administration's regulation that set forth size standards for health care industries at (65 FR 69432).)

HHS considers that a substantial number of entities are affected if the rule impacts more than 5 percent of the total number of small entities as it does in this rule. We included all freestanding psychiatric hospitals (79 are non-profit hospitals) in the analysis since their total revenues do not exceed the $29 million threshold. We also included psychiatric units of small hospitals, that is, those hospitals with fewer than 100 beds. We did not include psychiatric units within larger hospitals in the analysis because we believe this final rule would not significantly impact total revenues of the entire hospital that supports the unit. We have provided the following RFA analysis in section V.B to emphasize that, although the final rule will impact a substantial number of IPFs that were identified as small entities, we do not believe it will have a significant economic impact. Based on the analysis of the 1063 psychiatric facilities that were classified as small entities as described above, we estimate the combined impact of the IPF PPS will be a 4.2 percent increase in payments in RY 2007 relative to their payments in the implementation year of the IPF PPS. Based on the information available, we believe that Medicare payments may constitute a small portion of governmental IPFs' revenue stream. We have prepared the impact analysis in section X.B.2 to describe the impact of the final rule in order to provide a factual basis for our conclusions regarding small business impact.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a final 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. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we previously defined a small rural hospital as a hospital with fewer than 100 beds that is located outside of a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA). However, under the new labor market definitions, we will no longer employ NECMAs to define urban areas in New England. Therefore, for purposes of this analysis, we now define a small rural hospital as a hospital with fewer than 100 beds that is located outside of an MSA. We have determined that this final rule will have a substantial impact on hospitals classified as located in rural areas. As discussed earlier in this preamble, we will continue to provide a payment adjustment of 17 percent for IPFs located in rural areas. In addition, we have established a 3-year transition to the new system to allow IPFs an opportunity to adjust to the new system. Therefore, the impacts shown in Table 15 below reflect the adjustments that are designed to minimize or eliminate any potentially significant negative impact that the IPF PPS may otherwise have on small rural IPFs.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any final 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. This final rule will not mandate any requirements for State, local, or tribal governments, nor would it affect private sector costs.

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 final rule under the criteria set forth in Executive Order 13132 and have determined that the final rule will not have any substantial impact on the rights, roles, and responsibilities of State, local, or tribal governments.

We discuss below the impact of this final rule on the Federal Medicare budget and on IPFs.

As discussed in detail in the IPF PPS proposed rule and summarized in section V.B. of this final rule, we applied a budget neutrality factor to the Federal per diem and ECT base rates to ensure that total payments under the IPF PPS in the implementation period would equal the amount that would have been paid if the IPF PPS had not been implemented. The budget neutrality factor includes the following components: outlier adjustment, stop-loss adjustment, and the behavioral offset. We do not plan to change any of these adjustment factors or projections until we analyze IPF PPS data. In accordance with § 412.424(c)(3)(ii), we will evaluate the accuracy of the budget neutrality adjustment within the first 5 years after implementation of the payment system. We may make a one-time prospective adjustment to the Federal per diem and ECT base rates to account for differences between the historical data on cost-based TEFRA payments (the basis of the budget neutrality adjustment) and estimates of TEFRA payments based on actual data from the first year of the IPF PPS. As part of that process, we will re-assess the accuracy of all of the factors impacting budget neutrality.

In addition, as discussed in section VI.C.1 of this final rule, we are adopting the new CBSAs and labor market share in a budget neutral manner by applying a wage index budget neutrality factor to the Federal per diem and ECT base rates. Thus, the budgetary impact to the Medicare program by the update of the IPF PPS will be the combination of the market basket updates (see section V.C of this final rule), the revision of the standardization factor (see section V.B.3 of this final rule), and the planned update of the payment blend discussed below.

To understand the impact of the changes to the IPF PPS discussed in this final rule on providers, it is necessary to compare estimated payments under the IPF PPS rates and factors for the RY 2007 to estimated payments under the IPF PPS rates and factors for the IPF PPS implementation year. The estimated payments for the IPF implementation year are a blend of: 75 percent of the facility-specific TEFRA payment and 25 percent of the IPF PPS payment with stop loss payment. The estimated payments for the IPF PPS RY 2007 are a blend of: 50 percent of the facility-specific TEFRA payment and 50 percent of the IPF PPS payment with stop loss payment. We determined the percent change of estimated 2007 IPF PPS RY payments to estimated IPF PPS implementation year payments for each category of IPFs. In addition, for each category of IPFs, we have included the estimated percent change in payments resulting from the revision of the standardization factor (as discussed in section V.B.3 of this final rule, the ratio of estimated total TEFRA payments to estimated total PPS payments in the implementation year was overestimated and therefore needed to be reduced. We will apply the revised standardization factor prospectively to the Federal per diem base rate and ECT amount), the wage index changes for the IPF PPS RY 2007, the market basket update to IPF PPS payments, and the transition blend for the IPF PPS RY 2007 payment and the facility-specific TEFRA payment.

To illustrate the impacts of the final RY 2007 changes, our analysis begins with an implementation year baseline simulation model based on FY 2002 IPF payments inflated to 2005 with market baskets; the estimated outlier payments in 2005; the estimated stop-loss payments in 2005; the MSA designations for IPFs based on OMB's MSA definitions before June 2003; the 2005 MSA wage index; the implementation year labor-market share; and the implementation year percentage amount of the rural adjustment. During the simulation, the outlier payment is maintained at the target of 2 percent of total PPS payments.

Each of the following changes is added incrementally to this baseline model in order for us to isolate the effects of each change:

• IPF PPS payments adjusted by the revised standardization factor.

• The new CBSAs based on new geographic area definitions announced by OMB in June 2003 and the RY 2007 final budget-neutral labor-related share and wage index adjustment.

• A blended market basket update of 4.5 percent resulting in an update to the hospital-specific TEFRA target amount and an update to the IPF PPS base rates as discussed below.

++ In the IPPS final rule published August 12, 2005 (70 FR 47707), we established an update factor of 3.8 percent effective for cost reporting periods beginning on or after October 1, 2005 using the 2002-based excluded hospital market basket. The 3.8 percent update is applied to the IPF's established TEFRA target amount for cost reporting periods beginning on or after October 1, 2005. However, since the midpoints of the RY 2007 and the IPF PPS implementation period are 15 months apart, the TEFRA payment increase is projected to be 4.6 percent.

++ An update to the Federal per diem base rate of 4.3 percent based on the 2002-based RPL market basket (see section V.C.1.b of this final rule). The market basket update is based on a 15-month time period (from the midpoint of the IPF PPS implementation period to the midpoint of the RY 2007).

• The transition to 50 percent IPF PPS payment and 50 percent facility-specific TEFRA payment.

Our final comparison illustrates the percent change in payments from the IPF PPS implementation year (that is, January 1, 2005 to June 30, 2006) to RY 2007 (that is, July 1, 2006 to June 30, 2007).

Table 15 above displays the results of our analysis. The table groups IPFs into the categories listed below based on characteristics provided in the Online Survey and Certification and Reporting (OSCAR) file and the FY 2002 cost report data from HCRIS:

• Facility Type

• Location

• Teaching Status Adjustment

• Census Region

• Size

The top row of the table shows the overall impact on the 1,806 IPFs included in the analysis.

In column 3, we present the effects of the revised standardization factor (see section V.B.3 of this final rule for a discussion of this revision). This is defined to be the comparison of the simulated implementation year payments under the revised standardization factor to the simulated implementation year payments under the original standardization factor. In aggregate, the revision is projected to result in a 0.3 percent decrease in overall payments to IPFs. There are small distributional effects among different categories of IPFs. For example, urban and rural government psychiatric hospitals and psychiatric hospitals with over 75 beds will receive the largest decrease of 0.5 percent, while rural for-profit psychiatric hospitals and psychiatric hospitals with fewer than 12 beds will receive the smallest decrease of 0.2 percent.

In column 4, we present the effects of the budget-neutral update to the labor-related share and the wage index adjustment under the new CBSA geographic area definitions announced by OMB in June 2003. This is a comparison of the simulated implementation year payments under revised budget neutral factor and labor-related share and wage index under CBSA classification to the simulated implementation year payments under revised budget neutral factor and labor-related share and wage index under current MSA classifications. There is no projected change in aggregate payments to IPFs, as indicated in the first row of column 4. There would, however, be small distributional effects among different categories of IPFs. For example, several categories of IPFs, such as IPFs located in the South Atlantic and West North Central regions, and psychiatric hospitals with between 12 and 25 beds, will experience a 0.2 percent decrease in payments. Rural non-profit hospitals and hospitals located in the Pacific region will receive the largest increase of 0.3 percent.

In column 5, we present the effects of the market basket update to the IPF PPS payments by applying the TEFRA and PPS updates to payments under revised budget neutral factor and labor-related share and wage index under CBSA classification. In the aggregate this update is projected to be a 4.5 percent increase in overall payments to IPFs. This 4.5 percent reflects the current blend of the 4.6 percent update for IPF TEFRA payments and the 4.3 percent update for the IPF PPS payments.

In column 6, we present the effects of the payment change in transition blend percentages to transition year 2 (TEFRA Rate Percentage = 50 percent, IPF PPS Federal Rate Percentage = 50 percent) from transition year 1 (TEFRA Rate Percentage = 75 percent, IPF PPS Federal Rate Percentage = 25 percent) of the IPF PPS under revised budget neutral factor, labor-related share and wage index under CBSA classification, and TEFRA and PPS updates to RY 2007. The overall aggregate effect, across all hospital groups, is projected to be a 0.2 percent decrease in payments to IPFs. There are distributional effects of these changes among different categories of IPFs. The largest increases will be among government psychiatric hospitals, with rural government hospitals receiving a 12.0 percent increase and urban government hospitals receiving a 10.9 percent increase. Alternatively, psychiatric hospitals and units with fewer than 12 beds will receive the largest decreases of 3.8 percent and 4.5 percent, respectively.

Column 7 compares our estimates of the changes reflected in this final rule for RY 2007, to our estimates of payments in the implementation year (without these changes). This column reflects all RY 2007 changes relative to the implementation year (as shown in columns 3 through 6). The average increase for all IPFs is approximately 4.0 percent. This increase includes the effects of the market basket updates resulting in a 4.5 percent increase in total RY 2007 payments. It also includes a 0.3 percent decrease in RY 2007 payments for the standardization factor revision and a 0.2 percent decrease in RY 2007 payments for the transition blend.

Overall, the largest payment increase is projected to be among government IPFs. Urban government psychiatric hospitals will receive a 15.4 percent increase and rural government psychiatric hospitals will receive a 16.3 percent increase. Psychiatric hospitals with fewer than 12 beds will receive a 0.6 percent increase and psychiatric units with fewer than 12 beds will receive a 0.5 percent decrease.

Based on actuarial projections resulting from our experience with other PPSs, we estimate that Medicare spending (total Medicare program payments) for IPF services over the next 5 years would be as follows:

These estimates are based on the current estimate of increases in the excluded hospital with capital market basket as follows:

• 3.4 percent for RY 2007;

• 3.1 percent for RY 2008;

• 2.8 percent for RY 2009;

• 2.3 percent for RY 2010; and

• 2.7 percent for RY 2011.

We estimate that there would be a change in fee-for-service Medicare beneficiary enrollment as follows:

• −0.3 percent in RY 2007;

• 0.1 percent in RY 2008;

• 0.2 percent in RY 2009;

• −0.3 percent in RY 2010; and

• −0.2 percent in RY 2011.

In the implementation year we estimated aggregate payments under the IPF PPS to equal the estimated aggregate payments that would be made if the IPF PPS were not implemented. Our methodology for estimating payments for purposes of the budget-neutrality calculations uses the best available data.

We will evaluate the accuracy of the assumptions used to compute the budget-neutrality calculation in the implementation year. We intend to analyze claims and cost report data from the implementation year of the IPF PPS to determine whether the factors used to develop the Federal per diem base rate are not significantly different from the actual results experienced in that year. We plan to compare payments under the final IPF PPS (which relies on an estimate of cost-based TEFRA payments using historical data from a base year and assumptions that trend the data to the initial implementation period) to estimated cost-based TEFRA payments based on actual data from the first year of the IPF PPS. If we find that an adjustment is necessary, the percent difference (either positive or negative) would be applied prospectively to the established prospective payment rates to ensure the rates accurately reflect the payment levels intended by the statute.

Section 124 of Pub. L. 106-113 provides the Secretary broad authority to make an adjustment. We intend to perform this analysis within the first 5 years of the implementation of the IPF PPS.

Under the IPF PPS, IPFs will receive payment based on the average resources consumed by patients for each day. We do not expect changes in the quality of care or access to services for Medicare beneficiaries under the IPF PPS. In fact, we believe that access to IPF services will be enhanced due to the patient and facility level adjustment factors, all of which are intended to adequately reimburse IPFs for expensive cases. Finally, the stop-loss policy is intended to assist IPFs during the transition. In addition, we expect that setting payment rates prospectively for IPF services would enhance the efficiency of the Medicare program.

We do not anticipate that IPFs would incur additional systems operating costs in order to effectively participate in the IPF PPS. We believe that IPFs and CAHs possess the computer hardware capability to handle the billing requirements under the IPF PPS. Our belief is based on indications that approximately 99 percent of hospital inpatient claims are submitted electronically. In addition, we are not adopting significant changes in claims processing.

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf ), in Table 17 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 IPF PPS as a result of the changes presented in this final rule based on the data for 1,806 IPFs in our database. All expenditures are classified as transfers to Medicare providers (that is, IPFs).

We considered the following alternatives in developing the update to the IPF PPS:

One option we considered was incorporating a transition from MSA-based labor market definitions to CBSA-based labor market definitions for the purpose of applying the area wage index. As stated in section VI.C.1.e of this final rule, we are not adopting a transition policy here because IPFs are already in a transition from reasonable cost based reimbursement to IPF PPS payments. In addition, as evident in Table 15 above, the wage index change does not appear to have a large impact on IPFs.

We also considered increasing our outlier percentage so that outlier payments would be projected to be 3 percent (or higher) of total PPS payments. However, this approach would not target the truly costly cases. Instead, implementing such a policy would have the effect of lowering the fixed dollar loss threshold amount, therefore spreading outlier payments across more IPFs. In addition, the Federal per diem base rate would have to be reduced by another percentage point.

In this final rule, we used the best available complete data set (that is, FY 2002 claims and cost report data) to assess the impact of the various policy changes. As previously stated, we will not know the true impact of the wage index changes, the transition blend period, or the market basket increases until we analyze IPF PPS data.

We considered alternative policies in order to reduce financial risk to facilities in the event that they experience substantial reductions in Medicare payments during the period of transition to the IPF PPS. The stop-loss adjustment is applied to the IPF PPS portion of Medicare payments during the transition. We estimate that about 10 percent of IPFs would receive additional payments under the stop-loss policy.

The 70 percent of TEFRA stop-loss policy required a reduction in the per diem rate to make the stop-loss policy budget neutral during the implementation year. As a result, in the November 2004 IPF PPS final rule, we made a reduction to the Federal per diem base rate of 0.4 percent for budget neutrality.

In developing this final rule, we again considered an 80 percent stop-loss policy for RY 2007. Adopting an 80 percent policy would require a reduction in the Federal per diem base rate of over 2.5 percent, and we estimate that about 29 percent of IPFs would receive additional payments. We chose to stay with the 70 percent policy for the same reasons discussed in the November 2004 IPF PPS final rule. Specifically, the 70 percent stop-loss policy targets the IPFs that experience the greatest impact relative to current payments, and it limits the size of the reduction to the Federal per diem base rate.

In accordance with the provisions of Executive Order 12866, this rule was previously reviewed by OMB.