[Federal Register: July 31, 1998 (Volume 63, Number 147)]
[Rules and Regulations]
[Page 41003-41052]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy98-26]

[[pp. 41003-41052]] Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 1999 Rates

[[Continued from page 41002]]

[[Page 41003]]

incurred by the nonhospital site for the educational activities
associated with patient care services of an approved program, subject
to the redistribution and community support principles in
Sec. 413.85(c).
    (i) The following costs are allowable direct graduate medical
education costs to the extent that they are reasonable--
    (A) The costs of the residents' salaries and fringe benefits
(including travel and lodging expenses where applicable).
    (B) The portion of teaching physicians' salaries and fringe
benefits that are related to the time spent teaching and supervising
residents.
    (C) Facility overhead costs that are allocated to direct graduate
medical education.
    (ii) The following costs are not allowable graduate medical
education costs--
    (A) Costs associated with training, but not related to patient care
services.
    (B) Normal operating and capital-related costs.
    (C) The marginal increase in patient care costs that the RHC or
FQHC experiences as a result of having an approved program.
    (D) The costs associated with activities described in
Sec. 413.85(d) of this chapter.
    (7) Payment is equal to the product of--
    (i) The RHC's or the FQHC's allowable direct graduate medical
education costs; and
    (ii) Medicare's share, which is equal to the ratio of Medicare
visits to the total number of visits (as defined in Sec. 405.2463).
    (8) Direct graduate medical education payments to RHCs and FQHCs
made under this section are made from the Federal Supplementary Medical
Insurance Trust Fund.
    B. Part 412 is amended as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL
SERVICES

    1. The authority citation for part 412 continues to read as
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1895hh).

Subpart A--General Provisions

    2. Section 412.4 is revised to read as follows:

Sec. 412.4  Discharges and transfers.

    (a) Discharges. Subject to the provisions of paragraphs (b) and (c)
of this section, a hospital inpatient is considered discharged from a
hospital paid under the prospective payment system when--
    (1) The patient is formally released from the hospital; or
    (2) The patient dies in the hospital.
    (b) Transfer--Basic rule. A discharge of a hospital inpatient is
considered to be a transfer for purposes of payment under this part if
the discharge is made under any of the following circumstances:
    (1) From a hospital to the care of another hospital that is--
    (i) Paid under the prospective payment system; or
    (ii) Excluded from being paid under the prospective payment system
because of participation in an approved Statewide cost control program
as described in subpart C of part 403 of this chapter.
    (2) From one inpatient area or unit of a hospital to another
inpatient area or unit of the hospital that is paid under the
prospective payment system.
    (c) Transfers--Special 10 DRG rule. For discharges occurring on or
after October 1, 1998, a discharge of a hospital inpatient is
considered to be a transfer for purposes of this part when the
patient's discharge is assigned, as described in Sec. 412.60(c), to one
of the qualifying diagnosis-related groups (DRGs) listed in paragraph
(d) of this section and the discharge is made under any of the
following circumstances--
    (1) To a hospital or distinct part hospital unit excluded from the
prospective payment system under subpart B of this part.
    (2) To a skilled nursing facility.
    (3) To home under a written plan of care for the provision of home
health services from a home health agency and those services begin
within 3 days after the date of discharge.
    (d) Qualifying DRGs. The qualifying DRGs for purposes of paragraph
(c) of this section are DRGs 14, 113, 209, 210, 211, 236, 263, 264,
429, and 483.
    (e) Payment for discharges. The hospital discharging an inpatient
(under paragraph (a) of this section) is paid in full, in accordance
with Sec. 412.2(b).
    (f) Payment for transfers. (1) General rule. Except as provided in
paragraph (f)(2) or (f)(3) of this section, a hospital that transfers
an inpatient under the circumstances described in paragraph (b) or (c)
of this section, is paid a graduated per diem rate for each day of the
patient's stay in that hospital, not to exceed the amount that would
have been paid under subparts D and M of this part if the patient had
been discharged to another setting. The per diem rate is determined by
dividing the appropriate prospective payment rate (as determined under
subparts D and M of this part) by the geometric mean length of stay for
the specific DRG to which the case is assigned. Payment is graduated by
paying twice the per diem amount for the first day of the stay, and the
per diem amount for each subsequent day, up to the full DRG payment.
    (2) Special rule for DRGs 209, 210, and 211. A hospital that
transfers an inpatient under the circumstances described in paragraph
(c) of this section and the transfer is assigned to DRGs 209, 210 or
211 is paid as follows:
    (i) 50 percent of the appropriate prospective payment rate (as
determined under subparts D and M of this part) for the first day of
the stay; and
    (ii) 50 percent of the amount calculated under paragraph (f)(1) of
this section for each day of the stay, up to the full DRG payment.
    (3) Transfer assigned to DRG 385. If a transfer is classified into
DRG 385 (Neonates, died or transferred) the transferring hospital is
paid in accordance with Sec. 412.2(e).
    (4) Outliers. Effective with discharges occurring on or after
October 1, 1984, a transferring hospital may qualify for an additional
payment for extraordinarily high-cost cases that meet the criteria for
cost outliers as described in subpart F of this part.

Subpart F--Payment for Outlier Cases

    3. In Sec. 412.80, paragraph (b) is revised to read as follows:

Sec. 412.80  General provisions

* * * * *
    (b) Outlier cases in transferring hospitals. HCFA provides cost
outlier payments to a transferring hospital for cases paid in
accordance with Sec. 412.4(f), if the hospital's charges for covered
services furnished to the beneficiary, adjusted to costs by applying
cost-to-charge ratios as described in Sec. 412.84(h), exceed the DRG
payment for the case plus a fixed dollar amount (adjusted for
geographic variation in costs) as specified by HCFA, divided by the
geometric mean length of stay for the DRG, and multiplied by an
applicable factor determined as follows:
    (1) For transfer cases paid in accordance with Sec. 412.4(f)(1),
the applicable factor is equal to the length of stay plus 1 day.
    (2) For transfer cases paid in accordance with Sec. 412.4(f)(2),
the applicable factor is equal to 0.5 plus the product of the length of
stay plus 1 day multiplied by 0.5.
* * * * *

[[Page 41004]]

Subpart G--Special Treatment of Certain Facilities Under the
Prospective Payment System for Inpatient Operating Costs

Sec. 412.105  [Amended]

    4. In Sec. 412.105(f)(1)(ii)(C), the reference to
``413.86(f)(1)(iii)'' is revised to read ``413.86(f)(4).''
    5. In Sec. 412.106, paragraph (b)(4) is revised to read as follows:

Sec. 412.106  Special treatment: Hospitals that serve a
disproportionate share of low-income patients.

* * * * *
    (b) * * *
    (4) Second computation. The fiscal intermediary determines, for the
same cost reporting period used for the first computation, the number
of the hospital's patient days of service for which patients were
eligible for Medicaid but not entitled to Medicare Part A, and divides
that number by the total number of patient days in the same period. For
purposes of this second computation, the following requirements apply:
    (i) A patient is deemed eligible for Medicaid on a given day if the
patient is eligible for medical assistance under an approved State
Medicaid plan on such day, regardless of whether particular items or
services were covered or paid under the State plan.
    (ii) The hospital has the burden of furnishing data adequate to
prove eligibility for each Medicaid patient day claimed under this
paragraph, and of verifying with the State that a patient was eligible
for Medicaid during each claimed patient hospital day.
* * * * *

Subpart M--Prospective Payment System for Inpatient Hospital
Capital Costs

    6. In Sec. 412.322, paragraph (a)(3) is revised to read as follows:

Sec. 412.322  Indirect medical education adjustment factor.

    (a) * * *
    (3) The measurement of teaching activity is the ratio of the
hospital's full-time equivalent residents to average daily census. This
ratio cannot exceed 1.5.
* * * * *
    7. In Sec. 412.331, paragraphs (a) and (b) are redesignated as
paragraphs (b) and (c) respectively, a new paragraph (a) is added and
the first sentence of the introductory text of newly redesignated
paragraph (b) is revised to read as follows:

Sec. 412.331  Determining hospital-specific rates in cases of hospital
merger, consolidation, or dissolution.

    (a) New hospital merger or consolidation. If, after a new hospital
accepts its first patient but before the end of its base year, it
merges with one or more existing hospitals, and two or more separately
located hospital campuses are maintained, the hospital-specific rate
and payment determination for the merged entity are determined as
follows--
    (1) Post-merger base year payment methodology. The new campus is
paid based on reasonable costs until the end of its base year. The
existing campus remains on its previous payment methodology until the
end of the new campus' base year. Effective with the first cost
reporting period beginning after the the end of the new campus' base
year, the intermediary determines a hospital-specific rate applicable
to the new campus in accordance with Sec. 412.328, and then determines
a revised hospital-specific rate for the merged entity in accordance
with paragraph (a)(2) of this section.
    (2) Revised hospital-specific rate. Using each hospital's base
period data, the intermediary determines a combined average discharge-
weighted hospital-specific rate.
    (3) Post-base year payment determination. To determine the
applicable payment methodology under Sec. 412.336 and for payment
purposes under Sec. 412.340 or Sec. 412.344, the discharge-weighted
hospital-specific rate determined by the intermediary is compared to
the Federal rate. The revised payment methodology is effective on the
first day of the cost reporting period beginning after the end of the
new campus' base year.
    (b) Existing hospital merger or consolidation. If, after the base
year, two or more hospitals merge or consolidate into one hospital as
provided for under Sec. 413.134(k) of this chapter and the provisions
of paragraph (a) of this section do not apply, the intermediary
determines a revised hospital-specific rate applicable to the combined
facility under Sec. 412.328, which is effective beginning with the date
of merger or consolidation. * * *
* * * * *
    C. Part 413 is amended as set forth below:

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED
PAYMENT FOR SKILLED NURSING FACILITIES

    1. The authority citation for part 413 is revised to read as
follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i) and
(n), 1861(v), 1871, 1881, 1883, and 1866 of the Social Security Act
(42 U.S.C. 1302, 1395f(b), 1395g, 1395l, 1395l(a), (i) and (n),
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

Subpart C--Limits on Cost Reimbursement

    2. In Sec. 413.40, paragraph (c)(4)(iv) is redesignated as
paragraph (c)(4)(v), a new paragraph (c)(4)(iv) is added, and paragraph
(g)(1) is revised to read as follows:

Sec. 413.40  Ceiling on the rate of increase in hospital inpatient
costs.

* * * * *
    (c) * * *
    (4) * * *
    (iv) For purposes of the limits on target amounts established under
paragraph (c)(4)(iii) of this section, each hospital or unit that
qualifies for exclusion as a member of only one class of excluded
facility (psychiatric hospital or unit, rehabilitation hospital or
unit, or long-term care hospital) will be subject to the limit
applicable to that class. If a hospital or unit qualifies to be
classified in more than one way under the exclusion criteria in subpart
B of part 412 of this chapter, the hospital's or unit's target amount
may not exceed the lowest applicable limit.
* * * * *
    (g) Adjustments--(1) General rule. HCFA may adjust the amount of
the operating costs considered in establishing the rate-of-increase
ceiling for one or more cost reporting periods, including both periods
subject to the ceiling and the hospital's base period, under the
circumstances specified in paragraphs (g)(2), (g)(3), and (g)(4) of
this section. When an adjustment is requested by the hospital, HCFA
makes an adjustment only to the extent that the hospital's operating
costs are reasonable, attributable to the circumstances specified
separately identified by the hospital, and verified by the
intermediary. HCFA may grant an adjustment requested by the hospital
only if the hospital's operating costs exceed the rate-of-increase
ceiling imposed under this section. In the case of a psychiatric
hospital or unit,

[[Page 41005]]

rehabilitation hospital or unit, or long-term care hospital, the amount
of payment made to a hospital after an adjustment under paragraph
(g)(3) of this section may not exceed the applicable limit based on
75th percentile of the target amounts for hospitals of the same class
as described in Sec. 413.40(c)(4)(iii).
* * * * *

Subpart F--Specific Categories of Costs

    3. In Sec. 413.80, paragraph (h) is redesignated as paragraph (i),
and a new paragraph (h) is added to read as follows:

Sec. 413.80  Bad debts, charity, and courtesy allowances.

* * * * *
    (h) Limitations on bad debts. In determining reasonable costs for
hospitals, the amount of bad debts otherwise treated as allowable costs
(as defined in paragraph (e) of this section) is reduced--
    (1) For cost reporting periods beginning during fiscal year 1998,
by 25 percent;
    (2) For cost reporting periods beginning during fiscal year 1999,
by 40 percent; and
    (3) For cost reporting periods beginning during a subsequent fiscal
year, by 45 percent.
* * * * *
    4. In Sec. 413.85, a new paragraph (h) is added to read as follows:

Sec. 413.85  Cost of educational activities.

* * * * *
    (h) Medicare+Choice organizations. (1) Effective January 1, 1999,
Medicare+Choice organizations may receive direct graduate medical
education payments for the time that residents spend in nonhospital
provider settings such as freestanding clinics, nursing homes, and
physicians' offices in connection with approved programs.
    (2) Medicare+Choice organizations may receive direct graduate
medical education payments if all of the following conditions are met:
    (i) The resident spends his or her time in patient care activities.
    (ii) The Medicare+Choice organization incurs ``all or substantially
all'' of the costs for the training program in the nonhospital setting
as defined in Sec. 413.86(b).
    (iii) There is a written agreement between the Medicare+Choice
organization and the nonhospital site that indicates the
Medicare+Choice organization will incur the costs of the resident's
salary and fringe benefits and provide reasonable compensation to the
nonhospital site for teaching activities.
    (3) A Medicare+Choice organization's allowable direct graduate
medical education costs, subject to the redistribution and community
support principles in Sec. 413.85(c), consist of--
    (i) Residents' salaries and fringe benefits (including travel and
lodging where applicable); and
    (ii) Reasonable compensation to the nonhospital site for teaching
activities related to the training of medical residents.
    (4) The direct graduate medical education payment is equal to the
product of--
    (i) The lower of--
    (A) The Medicare+Choice organization's allowable direct graduate
medical education costs per resident as defined in paragraph (h)(3) of
this section; or
    (B) The national average per resident amount; and
    (ii) Medicare's share, which is equal to the ratio of the number of
Medicare beneficiaries enrolled to the total number of individuals
enrolled in the Medicare+Choice organization.
    (5) Direct graduate medical education payments made to
Medicare+Choice organizations under this section are made from the
Federal Supplementary Medical Insurance Trust Fund.
    5. In Sec. 413.86, the introductory text of paragraph (b) is
republished, a new definition in alphabetical order is added to
paragraph (b), paragraphs (i) and (j) are redesignated as paragraphs
(j)and (k) respectively, paragraph (f)(2) is redesignated as new
paragraph (i), paragraphs (f)(2)(i) through (vii) are redesignated as
paragraphs (i)(1) through (7) respectively, the introductory text of
paragraph (f)(1) is redesignated as the introductory text of paragraph
(f), paragraphs (f)(1)(i) through (iii) are redesignated as paragraphs
(f)(1) through (3) respectively, paragraphs (f)(1)(iii)(A) and (B) are
redesignated as (f)(3)(i) and (ii) respectively, new paragraphs (f)(2)
and (f)(3) introductory text are revised, and a new paragraph (f)(4) is
added to read as follows:

Sec. 413.86  Direct graduate medical education payments.

* * * * *
    (b) Definitions. For purposes of this section, the following
definitions apply:
* * * * *
    All or substantially all of the costs for the training program in
the nonhospital setting means the residents' salaries and fringe
benefits (including travel and lodging where applicable) and the
portion of the cost of teaching physicians' salaries and fringe
benefits attributable to direct graduate medical education.
* * * * *
    (f) * * *
    (2) No individual may be counted as more than one FTE. Except as
provided in paragraphs (f)(3) and (4) of this section, if a resident
spends time in more than one hospital or, in a nonprovider setting, the
resident counts as partial FTE based on the proportion of time worked
at the hospital to the total time worked. A part-time resident counts
as a partial FTE based on the proportion of allowable time worked
compared to the total time necessary to fill a full-time internship or
residency slot.
    (3) On or after July, 1, 1987 and for portions of cost reporting
periods occurring before January 1, 1999, the time residents spend in
nonprovider settings such as freestanding clinics, nursing homes, and
physicians' offices in connection with approved programs is not
excluded in determining the number of FTE residents in the calculation
of a hospital's resident count if the following conditions are met--
* * * * *
    (4) For portions of cost reporting periods occurring on or after
January 1, 1999, the time residents spend in nonprovider settings such
as freestanding clinics, nursing homes, and physicians' offices in
connection with approved programs may be included in determining the
number of FTE residents in the calculation of a hospital's resident
count if the following conditions are met--
    (i) The resident spends his or her time in patient care activities.
    (ii) The written agreement between the hospital and the nonhospital
site must indicate that the hospital will incur the cost of the
resident's salary and fringe benefits while the resident is training in
the nonhospital site and the hospital is providing reasonable
compensation to the nonhospital site for supervisory teaching
activities. The agreement must indicate the compensation the hospital
is providing to the nonhospital site for supervisory teaching
activities.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance)

[[Page 41006]]

    Dated: July 23, 1998.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: July 27, 1998.
Donna E. Shalala,
Secretary.
    [Editorial Note: The following addendum and appendixes will not
appear in the Code of Federal Regulations.]

Addendum--Schedule of Standardized Amounts Effective With
Discharges Occurring On or After October 1, 1998, Payment Amounts
for Blood Clotting Factor Effective for Discharges Occurring On or
After October 1, 1998, and Update Factors and Rate-of-Increase
Percentages Effective With Cost Reporting Periods Beginning On or
After October 1, 1998

I. Summary and Background

    In this addendum, we set forth the amounts and factors for
determining prospective payment rates for Medicare inpatient operating
costs and Medicare inpatient capital-related costs. In addition, we set
forth the updated add-on payment amounts for blood clotting factors. We
also set forth rate-of-increase percentages for updating the target
amounts for hospitals and hospital units excluded from the prospective
payment system.
    For discharges occurring on or after October 1, 1998, except for
sole community hospitals, Medicare-dependent, small rural hospitals,
and hospitals located in Puerto Rico, each hospital's payment per
discharge under the prospective payment system will be based on 100
percent of the Federal national rate.
    Sole community hospitals are paid based on whichever of the
following rates yield the greatest aggregate payment: the Federal
national rate, the updated hospital-specific rate based on FY 1982 cost
per discharge, or the updated hospital-specific rate based on FY 1987
cost per discharge. Medicare-dependent, small rural hospitals are paid
based on the Federal national rate or, if higher, the Federal national
rate plus 50 percent of the difference between the Federal national
rate and the updated hospital-specific rate based on FY 1982 or FY 1987
cost per discharge, whichever is higher. For hospitals in Puerto Rico,
the payment per discharge is based on the sum of 50 percent of a Puerto
Rico rate and 50 percent of a national rate.
    As discussed below in section II, we are making changes in the
determination of the prospective payment rates for Medicare inpatient
operating costs. The changes, to be applied prospectively, affect the
calculation of the Federal rates. In section III, we are updating the
payments per unit for blood clotting factor provided to hospital
inpatients who have hemophilia. In section IV of this addendum, we
discuss our changes for determining the prospective payment rates for
Medicare inpatient capital-related costs. Section V of this addendum
sets forth our changes for determining the rate-of-increase limits for
hospitals excluded from the prospective payment system. The tables to
which we refer in the preamble to this final rule are presented at the
end of this addendum in section VI.

II. Changes to Prospective Payment Rates For Inpatient Operating
Costs for FY 1999

    The basic methodology for determining prospective payment rates for
inpatient operating costs is set forth at Sec. 412.63 for hospitals
located outside of Puerto Rico. The basic methodology for determining
the prospective payment rates for inpatient operating costs for
hospitals located in Puerto Rico is set forth at Secs. 412.210 and
412.212. Below, we discuss the factors used for determining the
prospective payment rates. The Federal and Puerto Rico rate changes
will be effective with discharges occurring on or after October 1,
1998. As required by section 1886(d)(4)(C) of the Act, we must also
adjust the DRG classifications and weighting factors for discharges in
FY 1999.
    In summary, the standardized amounts set forth in Tables 1A and 1C
of section VI of this addendum reflect--
    <bullet> Updates of 0.5 percent for all areas (that is, the market
basket percentage increase of 2.4 percent minus 1.9 percentage points);
    <bullet> An adjustment to ensure budget neutrality as provided for
in sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act by applying new
budget neutrality adjustment factors to the large urban and other
standardized amounts;
    <bullet> An adjustment to ensure budget neutrality as provided for
in section 1886(d)(8)(D) of the Act by removing the FY 1998 budget
neutrality factor and applying a revised factor; and
    <bullet> An adjustment to apply the revised outlier offset by
removing the FY 1998 outlier offset and applying a new offset.
    The standardized amounts set forth in Tables 1E and 1F of section
VI of this addendum, which apply to ``temporary relief'' hospitals (see
62 FR 46001 for a discussion of these hospitals), reflect updates of
0.8 percent for all areas but otherwise reflect the same adjustments as
the national standardized amounts. As described in Sec. 412.107, these
hospitals receive an update that is 0.3 percentage points more than the
update factor applicable to all other prospective payment hospitals for
FY 1999.

A. Calculation of Adjusted Standardized Amounts

1. Standardization of Base-Year Costs or Target Amounts
    Section 1886(d)(2)(A) of the Act required the establishment of
base-year cost data containing allowable operating costs per discharge
of inpatient hospital services for each hospital. The preamble to the
September 1, 1983 interim final rule (48 FR 39763) contains a detailed
explanation of how base-year cost data were established in the initial
development of standardized amounts for the prospective payment system
and how they are used in computing the Federal rates.
    Section 1886(d)(9)(B)(i) of the Act required that Medicare target
amounts be determined for each hospital located in Puerto Rico for its
cost reporting period beginning in FY 1987. The September 1, 1987 final
rule contains a detailed explanation of how the target amounts were
determined and how they are used in computing the Puerto Rico rates (52
FR 33043, 33066).
    The standardized amounts are based on per discharge averages of
adjusted hospital costs from a base period or, for Puerto Rico,
adjusted target amounts from a base period, updated and otherwise
adjusted in accordance with the provisions of section 1886(d) of the
Act. Sections 1886(d)(2) (B) and (C) of the Act required that the base-
year per discharge costs be updated for FY 1984 and then standardized
in order to remove from the cost data the effects of certain sources of
variation in cost among hospitals. These include case mix, differences
in area wage levels, cost of living adjustments for Alaska and Hawaii,
indirect medical education costs, and payments to hospitals serving a
disproportionate share of low-income patients.
    Under sections 1886(d)(2)(H) and (d)(3)(E) of the Act, in making
payments under the prospective payment system, the Secretary estimates
from time to time the proportion of costs that are wages and wage-
related costs. Since October 1, 1997, when the market basket was last
revised, we have considered 71.1 percent of costs to be labor-related
for purposes of the prospective payment system. For the Puerto Rico
standardized amounts, the labor share is 71.3 percent. We are revising
the discharge-weighted national standardized amount for Puerto Rico to
reflect the proportion of discharges in large urban and other areas
from the FY 1997 MedPAR file.

[[Page 41007]]

2. Computing Large Urban and Other Area Averages
    Sections 1886(d)(2)(D) and (3) of the Act require the Secretary to
compute two average standardized amounts for discharges occurring in a
fiscal year: one for hospitals located in large urban areas and one for
hospitals located in other areas. In addition, under sections
1886(d)(9)(B)(iii) and (C)(i) of the Act, the average standardized
amount per discharge must be determined for hospitals located in urban
and other areas in Puerto Rico. Hospitals in Puerto Rico are paid a
blend of 50 percent of the applicable Puerto Rico standardized amount
and 50 percent of a national standardized payment amount.
    Section 1886(d)(2)(D) of the Act defines ``urban area'' as those
areas within a Metropolitan Statistical Area (MSA). A ``large urban
area'' is defined as an urban area with a population of more than
1,000,000. In addition, section 4009(i) of Public Law 100-203 provides
that a New England County Metropolitan Area (NECMA) with a population
of more than 970,000 is classified as a large urban area. As required
by section 1886(d)(2)(D) of the Act, population size is determined by
the Secretary based on the latest population data published by the
Bureau of the Census. Urban areas that do not meet the definition of a
``large urban area'' are referred to as ``other urban areas.'' Areas
that are not included in MSAs are considered ``rural areas'' under
section 1886(d)(2)(D) of the Act. Payment for discharges from hospitals
located in large urban areas will be based on the large urban
standardized amount. Payment for discharges from hospitals located in
other urban and rural areas will be based on the other standardized
amount.
    Based on 1997 population estimates published by the Bureau of the
Census, 61 areas meet the criteria to be defined as large urban areas
for FY 1999. These areas are identified by a footnote in Table 4A. We
note that on June 23, 1998, the Office of Management and Budget
announced the designation of the Missoula, Montana MSA. We have
incorporated this change in this final rule.
3. Updating the Average Standardized Amounts
    Under section 1886(d)(3)(A) of the Act, we update the area average
standardized amounts each year. In accordance with section
1886(d)(3)(A)(iv) of the Act, we are updating the large urban and the
other areas average standardized amounts for FY 1999 using the
applicable percentage increases specified in section 1886(b)(3)(B)(i)
of the Act. Section 1886(b)(3)(B)(i)(XIV) of the Act specifies that,
for hospitals in all areas, the update factor for the standardized
amounts for FY 1999 is equal to the market basket percentage increase
minus 1.9 percentage points. The ``temporary relief'' provision under
section 4401 of Public Law 105-33 provides for an update equal to the
market basket percentage increase minus 1.6 percentage points for
hospitals that are not Medicare-dependent, small rural hospitals, that
receive no IME or DSH payments, that are located in a state in which
aggregate Medicare operating payments for such hospitals were less than
their aggregate allowable Medicare operating costs for their cost
reporting periods beginning during FY 1995, and whose Medicare
operating payments are less than their allowable Medicare operating
costs for their cost reporting period beginning during FY 1999.
    The percentage change in the market basket reflects the average
change in the price of goods and services purchased by hospitals to
furnish inpatient care. The most recent forecast of the hospital market
basket increase for FY 1999 is 2.4 percent. Thus, for FY 1999, the
update to the average standardized amounts equals 0.5 percent (0.8
percent for those hospitals qualifying under the ``temporary relief''
provision of Public Law 105-33).
    As in the past, we are adjusting the FY 1998 standardized amounts
to remove the effects of the FY 1998 geographic reclassifications and
outlier payments before applying the FY 1999 updates. That is, we are
increasing the standardized amounts to restore the reductions that were
made for the effects of geographic reclassification and outliers. We
then apply the new offsets to the standardized amounts for outliers and
geographic reclassifications for FY 1999.
    Although the update factor for FY 1999 is set by law, we are
required by section 1886(e)(4)(A) of the Act to report to Congress on
our final recommendation of update factors for FY 1999 for both
prospective payment hospitals and hospitals excluded from the
prospective payment system. We have included our final recommendations
in Appendix C to this final rule.
4. Other Adjustments to the Average Standardized Amounts
    a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment. Section 1886(d)(4)(C)(iii) of the Act specifies
that beginning in FY 1991, the annual DRG reclassification and
recalibration of the relative weights must be made in a manner that
ensures that aggregate payments to hospitals are not affected. As
discussed in section II of the preamble, we normalized the recalibrated
DRG weights by an adjustment factor, so that the average case weight
after recalibration is equal to the average case weight prior to
recalibration.
    Section 1886(d)(3)(E) of the Act specifies that the hospital wage
index must be updated on an annual basis beginning October 1, 1993.
This provision also requires that any updates or adjustments to the
wage index must be made in a manner that ensures that aggregate
payments to hospitals are not affected by the change in the wage index.
    To comply with the requirement of section 1886(d)(4)(C)(iii) of the
Act that DRG reclassification and recalibration of the relative weights
be budget neutral, and the requirement in section 1886(d)(3)(E) of the
Act that the updated wage index be budget neutral, and the requirement
in section 4410 of Public law 105-33 that application of the floor on
the wage index be budget neutral, we used historical discharge data to
simulate payments and compared aggregate payments using the FY 1998
relative weights and wage index to aggregate payments using the FY 1999
relative weights and wage index. The same methodology was used for the
FY 1998 budget neutrality adjustment. (See the discussion in the
September 1, 1992 final rule (57 FR 39832).) Based on this comparison,
we computed a budget neutrality adjustment factor equal to 0.999006. We
adjust the Puerto Rico-specific standardized amounts for the effect of
DRG reclassification and recalibration. We computed a budget neutrality
adjustment factor for Puerto Rico-specific standardized amounts equal
to 0.998912. These budget neutrality adjustment factors are applied to
the standardized amounts without removing the effects of the FY 1998
budget neutrality adjustments. We do not remove the prior budget
neutrality adjustment because estimated aggregate payments after the
changes in the DRG relative weights and wage index should equal
estimated aggregate payments prior to the changes. If we removed the
prior year adjustment, we would not satisfy this condition.
    In addition, we will continue to apply the same FY 1999 adjustment
factor to the hospital-specific rates that are effective for cost
reporting periods beginning on or after October 1, 1998, in

[[Page 41008]]

order to ensure that we meet the statutory requirement that aggregate
payments neither increase nor decrease as a result of the
implementation of the FY 1999 DRG weights and updated wage index. (See
the discussion in the September 4, 1990 final rule (55 FR 36073).)
    b. Reclassified hospitals--budget neutrality adjustment. Section
1886(d)(8)(B) of the Act provides that certain rural hospitals are
deemed urban effective with discharges occurring on or after October 1,
1988. In addition, section 1886(d)(10) of the Act provides for the
reclassification of hospitals based on determinations by the Medicare
Geographic Classification Review Board (MGCRB). Under section
1886(d)(10) of the Act, a hospital may be reclassified for purposes of
the standardized amount or the wage index, or both.
    Under section 1886(d)(8)(D) of the Act, the Secretary is required
to adjust the standardized amounts so as to ensure that total aggregate
payments under the prospective payment system after implementation of
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the
Act are equal to the aggregate prospective payments that would have
been made absent these provisions. To calculate this budget neutrality
factor, we used historical discharge data to simulate payments, and
compared total prospective payments (including IME and DSH payments)
prior to any reclassifications to total prospective payments after
reclassifications. In the proposed rule, we applied an adjustment
factor of 0.994019 to ensure that the effects of reclassification are
budget neutral. The final budget neutrality adjustment factor is
0.993433.
    The adjustment factor is applied to the standardized amounts after
removing the effects of the FY 1998 budget neutrality adjustment
factor. We note that the proposed FY 1999 adjustment reflected wage
index and standardized amount reclassifications approved by the MGCRB
or the Administrator as of February 27, 1998. The effects of any
additional reclassification changes resulting from appeals and reviews
of the MGCRB decisions for FY 1999 or from a hospital's request for the
withdrawal of a reclassification request are reflected in the final
budget neutrality adjustment that is required under section
1886(d)(8)(D) of the Act and that is published in this final rule.
    c. Outliers. Section 1886(d)(5)(A) of the Act provides for payments
in addition to the basic prospective payments for ``outlier'' cases,
cases involving extraordinarily high costs (cost outliers). Section
1886(d)(3)(B) of the Act requires the Secretary to adjust both the
large urban and other area national standardized amounts by the same
factor to account for the estimated proportion of total DRG payments
made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act
requires the Secretary to adjust the large urban and other standardized
amounts applicable to hospitals in Puerto Rico to account for the
estimated proportion of total DRG payments made to outlier cases.
Furthermore, under section 1886(d)(5)(A)(iv) of the Act, outlier
payments for any year must be projected to be not less than 5 percent
nor more than 6 percent of total payments based on DRG prospective
payment rates.
    i. FY 1999 Outlier Thresholds. For FY 1998, the fixed loss cost
outlier threshold is equal to the prospective payment for the DRG plus
the IME and DSH payments plus $11,050 ($10,080 for hospitals that have
not yet entered the prospective payment system for capital-related
costs). The marginal cost factor for cost outliers (the percent of
costs paid after costs for the case exceed the threshold) is 80
percent. We applied an outlier adjustment to the FY 1998 standardized
amounts of 0.948840 for the large urban and other areas rates and
0.9382 for the capital Federal rate.
    We proposed to establish a fixed loss cost outlier threshold for FY
1999 equal to the prospective payment rate for the DRG plus the IME and
DSH payments plus $11,350 ($10,355 for hospitals that have not yet
entered the prospective payment system for capital-related costs). In
addition, we proposed to maintain the marginal cost factor for cost
outliers at 80 percent. In setting the final FY 1999 outlier
thresholds, we used updated data and a revised cost inflation factor.
In this final rule, we are establishing a fixed loss cost outlier
threshold for FY 1999 equal to the prospective payment rate for the DRG
plus IME and DSH payments plus $11,100 ($10,129 for hospitals that have
not yet entered the prospective payment system for capital-related
costs). In addition, we are maintaining the marginal cost factor for
cost outliers at 80 percent. In FY 1994, we began using a cost
inflation factor rather than a charge inflation factor to update billed
charges for purposes of estimating outlier payments. This refinement
was made to improve our estimation methodology. For FY 1998, we used a
cost inflation factor of minus 2.005 percent (a cost per case decrease
of 2.005 percent). In the proposed rule, based on data then available,
we used a cost inflation factor of minus 1.831 percent to set outlier
thresholds for FY 1999. Based on the most recent data available, we are
using a cost inflation factor of minus 1.724 percent to set the final
FY 1999 outlier thresholds.
    ii. Other changes concerning outliers. In accordance with section
1886(d)(5)(A)(iv) of the Act, we calculated outlier thresholds so that
outlier payments are projected to equal 5.1 percent of total payments
based on DRG prospective payment rates. In accordance with section
1886(d)(3)(E), we reduced the FY 1999 standardized amounts by the same
percentage to account for the projected proportion of payments paid to
outliers.
    As stated in the September 1, 1993 final rule (58 FR 46348), we
establish outlier thresholds that are applicable to both inpatient
operating costs and inpatient capital-related costs. When we modeled
the combined operating and capital outlier payments, we found that
using a common set of thresholds resulted in a higher percentage of
outlier payments for capital-related costs than for operating costs. We
project that the thresholds for FY 1999 will result in outlier payments
equal to 5.1 percent of operating DRG payments and 6.1 percent of
capital payments based on the Federal rate.
    The proposed outlier adjustment factors applied to the standardized
amounts for FY 1999 were as follows:

------------------------------------------------------------------------
                                                   Operating    Capital
                                                 standardized   federal
                                                    amounts       rate
------------------------------------------------------------------------
National.......................................      0.948819     0.9378
Puerto Rico....................................      0.972962     0.9626
------------------------------------------------------------------------

    The final outlier adjustment factors applied to the standardized
amounts for FY 1999 are as follows:

------------------------------------------------------------------------
                                                   Operating    Capital
                                                 standardized   federal
                                                    amounts       rate
------------------------------------------------------------------------
National.......................................      0.948740     0.9392
Puerto Rico....................................      0.972959     0.9634
------------------------------------------------------------------------

    As in the proposed rule, we apply the outlier adjustment factors
after removing the effects of the FY 1998 outlier adjustment factors on
the standardized amounts.
    Table 8A in section VI of this addendum contains the updated
Statewide average operating cost-to-charge ratios for urban hospitals
and for rural hospitals to be used in calculating cost outlier payments
for those hospitals for which the intermediary is unable to compute a
reasonable hospital-specific cost-to-charge ratio. These Statewide

[[Page 41009]]

average ratios would replace the ratios published in the August 29,
1997 final rule with comment period (62 FR 46113), effective October 1,
1998. Table 8B contains comparable Statewide average capital cost-to-
charge ratios. These average ratios would be used to calculate cost
outlier payments for those hospitals for which the intermediary
computes operating cost-to-charge ratios lower than 0.217484 or greater
than 1.27282 and capital cost-to-charge ratios lower than 0.01313 or
greater than 0.17490. This range represents 3.0 standard deviations
(plus or minus) from the mean of the log distribution of cost-to-charge
ratios for all hospitals. We note that the cost-to-charge ratios in
Tables 8A and 8B will be used during FY 1999 when hospital-specific
cost-to-charge ratios based on the latest settled cost report are
either not available or outside the three standard deviations range.
    iii. FY 1997 and FY 1998 outlier payments. In the August 29, 1997
final rule with comment period (62 FR 46041), we stated that, based on
available data, we estimated that actual FY 1997 outlier payments would
be approximately 4.8 percent of actual total DRG payments. This was
computed by simulating payments using actual FY 1996 bill data
available at the time. That is, the estimate of actual outlier payments
did not reflect actual FY 1997 bills but instead reflected the
application of FY 1997 rates and policies to available FY 1996 bills.
Our current estimate, using available FY 1997 bills, is that actual
outlier payments for FY 1997 were approximately 5.5 percent of actual
total DRG payments. We note that the MedPAR file for FY 1997 discharges
continues to be updated.
    We currently estimate that actual outlier payments for FY 1998 will
be approximately 5.4 percent of actual total DRG payments, slightly
higher than the 5.1 percent we projected in setting outlier policies
for FY 1998. This estimate is based on simulations using the March 1998
update of the provider-specific file and the March 1998 update of the
FY 1997 MedPAR file (discharge data for FY 1997 bills). We used these
data to calculate an estimate of the actual outlier percentage for FY
1998 by applying FY 1998 rates and policies to available FY 1997 bills.
    We received one comment on outliers, which commended us for
improving our outlier estimation methodology.
5. FY 1999 Standardized Amounts
    The adjusted standardized amounts are divided into labor and
nonlabor portions. Table 1A (Table 1E for ``temporary relief''
hospitals) contains the two national standardized amounts that are
applicable to all hospitals, except for hospitals in Puerto Rico. Under
section 1886(d)(9)(A)(ii) of the Act, the Federal portion of the Puerto
Rico payment rate is based on the discharge-weighted average of the
national large urban standardized amount and the national other
standardized amount (as set forth in Table 1A and 1E). The labor and
nonlabor portions of the national average standardized amounts for
Puerto Rico hospitals are set forth in Table 1C (Table 1F for
``temporary relief'' hospitals). These tables also include the Puerto
Rico standardized amounts.

B. Adjustments for Area Wage Levels and Cost of Living

    Tables 1A, 1C, 1E and 1F, as set forth in section VI of this
addendum, contain the labor-related and nonlabor-related shares used to
calculate the prospective payment rates for hospitals located in the 50
States, the District of Columbia, and Puerto Rico. This section
addresses two types of adjustments to the standardized amounts that are
made in determining the prospective payment rates as described in this
addendum.
1. Adjustment for Area Wage Levels
    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require
that an adjustment be made to the labor-related portion of the
prospective payment rates to account for area differences in hospital
wage levels. This adjustment is made by multiplying the labor-related
portion of the adjusted standardized amounts by the appropriate wage
index for the area in which the hospital is located. In section III of
the preamble, we discuss certain revisions we are making to the wage
index. The wage index is set forth in Tables 4A through 4F of this
addendum.
2. Adjustment for Cost of Living in Alaska and Hawaii
    Section 1886(d)(5)(H) of the Act authorizes an adjustment to take
into account the unique circumstances of hospitals in Alaska and
Hawaii. Higher labor-related costs for these two States are taken into
account in the adjustment for area wages described above. For FY 1999,
we are adjusting the payments for hospitals in Alaska and Hawaii by
multiplying the nonlabor portion of the standardized amounts by the
appropriate adjustment factor contained in the table below.

 Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals
------------------------------------------------------------------------

------------------------------------------------------------------------
Alaska--All areas.............................................     1.25
Hawaii:                                                         ........
  County of Honolulu..........................................     1.225
  County of Hawaii............................................     1.15
  County of Kauai.............................................     1.225
  County of Maui..............................................     1.225
  County of Kalawao...........................................     1.225
------------------------------------------------------------------------

    (The above factors are based on data obtained from the U.S.
Office of Personnel Management.)

C. DRG Relative Weights

    As discussed in section II of the preamble, we have developed a
classification system for all hospital discharges, assigning them into
DRGs, and have developed relative weights for each DRG that reflect the
resource utilization of cases in each DRG relative to Medicare cases in
other DRGs. Table 5 of section VI of this addendum contains the
relative weights that we will use for discharges occurring in FY 1999.
These factors have been recalibrated as explained in section II.C of
the preamble.

D. Calculation of Prospective Payment Rates for FY 1999 General Formula
for Calculation of Prospective Payment Rates for FY 1999

    Prospective payment rate for all hospitals located outside of
Puerto Rico except sole community hospitals and Medicare-dependent,
small rural hospitals = Federal rate.
    Prospective payment rate for sole community hospitals = Whichever
of the following rates yields the greatest aggregate payment: 100
percent of the Federal rate, 100 percent of the updated FY 1982
hospital-specific rate, or 100 percent of the updated FY 1987 hospital-
specific rate.
    Prospective payment rate for Medicare-dependent, small rural
hospitals = 100 percent of the Federal rate plus, if the greater of the
updated FY 1982 hospital-specific rate or the updated FY 1987 hospital-
specific rate is higher than the Federal rate, 50 percent of the
difference between the applicable hospital-specific rate and the
Federal rate.
    Prospective payment rate for Puerto Rico = 50 percent of the Puerto
Rico rate + 50 percent of a discharge-weighted average of the national
large urban standardized amount and the national other standardized
amount.
1. Federal Rate
    For discharges occurring on or after October 1, 1998 and before
October 1,

[[Page 41010]]

1999, except for sole community hospitals, Medicare-dependent, small
rural hospitals, and hospitals in Puerto Rico, the hospital's payment
is based exclusively on the Federal national rate.
    The payment amount is determined as follows:
    Step 1--Select the appropriate national standardized amount
considering the type of hospital and designation of the hospital as
large urban or other (see Table 1A or 1E, in section VI of this
addendum).
    Step 2--Multiply the labor-related portion of the standardized
amount by the applicable wage index (see Tables 4A, 4B, and 4C in
section VI of this addendum).
    Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount (adjusted if appropriate under Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative
weight corresponding to the appropriate DRG (see Table 5 in section VI
of this addendum).
2. Hospital-Specific Rate (Applicable Only to Sole Community Hospitals
and Medicare-Dependent, Small Rural Hospitals)
    Sections 1886(d)(5)(D)(i) and (b)(3)(C) of the Act provide that
sole community hospitals are paid based on whichever of the following
rates yields the greatest aggregate payment: the Federal rate, the
updated hospital-specific rate based on FY 1982 cost per discharge, or
the updated hospital-specific rate based on FY 1987 cost per discharge.
    Sections 1886(d)(5)(G) and (b)(3)(D) of the Act provide that
Medicare-dependent, small rural hospitals are paid based on whichever
of the following rates yields the greatest aggregate payment: the
Federal rate or the Federal rate plus 50 percent of the difference
between the Federal rate and the greater of the updated hospital-
specific rate based on FY 1982 and FY 1987 cost per discharge.
    Hospital-specific rates have been determined for each of these
hospitals based on both the FY 1982 cost per discharge and the FY 1987
cost per discharge. For a more detailed discussion of the calculation
of the FY 1982 hospital-specific rate and the FY 1987 hospital-specific
rate, we refer the reader to the September 1, 1983 interim final rule
(48 FR 39772); the April 20, 1990 final rule with comment (55 FR
15150); and the September 4, 1990 final rule (55 FR 35994).
    a. Updating the FY 1982 and FY 1987 hospital-specific rates for FY
1999. We are increasing the hospital-specific rates by 0.5 percent (the
hospital market basket percentage increase of 2.4 percent minus 1.9
percentage points) for sole community hospitals and Medicare-dependent,
small rural hospitals located in all areas for FY 1999. Section
1886(b)(3)(C)(iv) of the Act provides that the update factor applicable
to the hospital-specific rates for sole community hospitals equals the
update factor provided under section 1886(b)(3)(B)(iv) of the Act,
which, for FY 1999, is the market basket rate of increase minus 1.9
percentage points. Section 1886(b)(3)(D) of the Act provides that the
update factor applicable to the hospital-specific rates for Medicare-
dependent, small rural hospitals equals the update factor provided
under section 1886(b)(3)(B)(iv) of the Act, which, for FY 1999, is the
market basket rate of increase minus 1.9 percentage points.
    b. Calculation of hospital-specific rate. For sole community
hospitals and Medicare-dependent, small rural hospitals, the applicable
FY 1999 hospital-specific rate would be calculated by increasing the
hospital's hospital-specific rate for the preceding fiscal year by the
applicable update factor (0.5 percent), which is the same as the update
for all prospective payment hospitals except ``temporary relief''
hospitals. In addition, the hospital-specific rate would be adjusted by
the budget neutrality adjustment factor (that is, 0.999006) as
discussed in section II.A.4.a of this Addendum. This resulting rate
would be used in determining under which rate a sole community hospital
or Medicare-dependent, small rural hospital is paid for its discharges
beginning on or after October 1, 1998, based on the formula set forth
above.
3. General Formula for Calculation of Prospective Payment Rates for
Hospitals Located in Puerto Rico Beginning on or After October 1, 1998
and Before October 1, 1999
    a. Puerto Rico rate. The Puerto Rico prospective payment rate is
determined as follows:
    Step 1--Select the appropriate adjusted average standardized amount
considering the large urban or other designation of the hospital (see
Table 1C or 1F of section VI of this addendum).
    Step 2--Multiply the labor-related portion of the standardized
amount by the appropriate Puerto Rico-specific wage index (see Table 4F
in section VI of this addendum).
    Step 3--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount.
    Step 4--Multiply the result in Step 3 by 50 percent.
    Step 5--Multiply the amount from Step 4 by the appropriate DRG
relative weight (see Table 5 in section VI of this addendum).
    b. National rate. The national prospective payment rate is
determined as follows:
    Step 1--Multiply the labor-related portion of the national average
standardized amount (see Table 1C or 1F of section VI of the addendum)
by the appropriate national wage index (see Tables 4A and 4B in section
VI of this addendum).
    Step 2--Add the amount from Step 1 and the nonlabor-related portion
of the national average standardized amount.
    Step 3--Multiply the result in Step 2 by 50 percent.
    Step 4--Multiply the amount from Step 3 by the appropriate DRG
relative weight (see Table 5 in section VI of this addendum).
    The sum of the Puerto Rico rate and the national rate computed
above equals the prospective payment for a given discharge for a
hospital located in Puerto Rico.

III. Changes to the Payment Rates for Blood Clotting Factor for
Hemophilia Inpatients

    As discussed in our August 29, 1997 final rule with comment period
(62 FR 46002) and our May 12, 1998 final rule (63 FR 26327), section
4452 of Public Law 105-33 amended section 6011(d) of Public Law 101-239
to reinstate the add-on payment for the costs of administering blood
clotting factor to Medicare beneficiaries who have hemophilia and who
are hospital inpatients for discharges occurring on or after October 1,
1997.
    We are calculating the add-on payment for FY 1999 using the same
methodology we described in the August 29, 1997 and May 12, 1998 final
rules. That is, we are establishing a price per unit of clotting factor
based on the average wholesale price (AWP). To identify the AWP, we are
using the most recent data available from First Databank. The add-on
payment amount for each clotting factor, as described by HCFA's Common
Procedure Coding System (HCPCS), is based on the median AWP of the
several products available in that category of factor, discounted by 15
percent.

[[Page 41011]]

    Based on this methodology, the prices per unit of factor for FY
1999 are as follows:

J7190 Factor VIII (antihemophilic factor, human)...............     0.78
J7192 Factor VIII (antihemophilic factor, recombinant).........     1.00
J7194 Factor IX (complex)......................................     0.38
J7196 Other hemophilia clotting factors (e.g., anti-inhibitors)     1.10
Q0160 Factor IX (antihemophilic factor, purified,
 nonrecombinant)...............................................     0.93
Q0161 Factor IX (antihemophilic factor, purified, recombinant).     1.00

    These prices for blood clotting factor administered to inpatients
who have hemophilia will be effective for discharges beginning on or
after October 1, 1998 through September 30, 1999. Payment will be made
for blood clotting factor only if there is an ICD-9-CM diagnosis code
for hemophilia included on the bill.

IV. Changes to Payment Rates for Inpatient Capital-Related Costs
for FY 1999

    The prospective payment system for hospital inpatient capital-
related costs was implemented for cost reporting periods beginning on
or after October 1, 1991. Effective with that cost reporting period and
during a 10-year transition period extending through FY 2001, hospital
inpatient capital-related costs are paid on the basis of an increasing
proportion of the capital prospective payment system Federal rate and a
decreasing proportion of a hospital's historical costs for capital.
    The basic methodology for determining Federal capital prospective
rates is set forth at Secs. 412.308 through 412.352. Below we discuss
the factors that we used to determine the Federal rate and the
hospital-specific rates for FY 1999. The rates will be effective for
discharges occurring on or after October 1, 1998.
    For FY 1992, we computed the standard Federal payment rate for
capital-related costs under the prospective payment system by updating
the FY 1989 Medicare inpatient capital cost per case by an actuarial
estimate of the increase in Medicare inpatient capital costs per case.
Each year after FY 1992 we update the standard Federal rate, as
provided in Sec. 412.308(c)(1), to account for capital input price
increases and other factors. Also, Sec. 412.308(c)(2) provides that the
Federal rate is adjusted annually by a factor equal to the estimated
proportion of outlier payments under the Federal rate to total capital
payments under the Federal rate. In addition, Sec. 412.308(c)(3)
requires that the Federal rate be reduced by an adjustment factor equal
to the estimated proportion of payments for exceptions under
Sec. 412.348. Furthermore, Sec. 412.308(c)(4)(ii) requires that the
Federal rate be adjusted so that the annual DRG reclassification and
the recalibration of DRG weights and changes in the geographic
adjustment factor are budget neutral. For FYs 1992 through 1995,
Sec. 412.352 required that the Federal rate also be adjusted by a
budget neutrality factor so that aggregate payments for inpatient
hospital capital costs were projected to equal 90 percent of the
payments that would have been made for capital-related costs on a
reasonable cost basis during the fiscal year. That provision expired in
FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to
the rate made in FY 1994, and Sec. 412.308(b)(3) describes the 0.28
percent reduction to the rate made in FY 1996 as a result of the
revised policy of paying for transfers. In the FY 1998 final rule with
comment period (62 FR 45966) we implemented section 4402 of the BBA,
which required that for discharges occurring on or after October 1,
1997 and before October 1, 2002, the unadjusted standard Federal rate
is reduced by 17.78 percent. A small part of that reduction will be
restored effective October 1, 2002.
    For each hospital, the hospital-specific rate was calculated by
dividing the hospital's Medicare inpatient capital-related costs for a
specified base year by its Medicare discharges (adjusted for
transfers), and dividing the result by the hospital's case mix index
(also adjusted for transfers). The resulting case-mix adjusted average
cost per discharge was then updated to FY 1992 based on the national
average increase in Medicare's inpatient capital cost per discharge and
adjusted by the exceptions payment adjustment factor and the budget
neutrality adjustment factor to yield the FY 1992 hospital-specific
rate. Since FY 1992, the hospital-specific rate has been updated
annually for inflation and for changes in the exceptions payment
adjustment factor. For FYs 1992 through 1995, the hospital-specific
rate was also adjusted by a budget neutrality adjustment factor. In the
FY 1998 final rule with comment period (62 FR 46012) we implemented
section 4402 of the BBA, which required that for discharges occurring
on or after October 1, 1997 and before October 1, 2002, the unadjusted
hospital-specific rate is reduced by 17.78 percent. A small part of
that reduction will also be restored effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor
and the exceptions payment adjustment factor, we developed a dynamic
model of Medicare inpatient capital-related costs, that is, a model
that projects changes in Medicare inpatient capital-related costs over
time. With the expiration of the budget neutrality provision, the model
is still used to estimate the exceptions payment adjustment and other
factors. The model and its application are described in greater detail
in Appendix B of this final rule.
    In accordance with section 1886(d)(9)(A) of the Act, under the
prospective payment system for inpatient operating costs, hospitals
located in Puerto Rico are paid for operating costs under a special
payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a
blended rate that consisted of 75 percent of the applicable
standardized amount specific to Puerto Rico hospitals and 25 percent of
the applicable national average standardized amount. However, effective
October 1, 1997, as a result of section 4406 of the BBA, operating
payments to hospitals in Puerto Rico are based on a blend of 50 percent
of the applicable standardized amount specific to Puerto Rico hospitals
and 50 percent of the applicable national average standardized amount.
In conjunction with this change to the operating blend percentage,
effective with discharges on or after October 1, 1997, we compute
capital payments to hospitals in Puerto Rico based on a blend of 50
percent of the Puerto Rico rate and 50 percent of the Federal rate.
Section 412.374 provides for the use of this blended payment system for
payments to Puerto Rico hospitals under the prospective payment system
for inpatient capital-related costs. Accordingly, for capital-related
costs we compute a separate payment rate specific to Puerto Rico
hospitals using the same methodology used to compute the national
Federal rate for capital.

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

    For FY 1998, the Federal rate was $371.51. In the proposed rule, we
stated that the proposed FY 1999 Federal rate was $377.25. In this
final rule, we are establishing a FY 1999 Federal rate of $378.05.
    In the discussion that follows, we explain the factors that were
used to determine the FY 1999 Federal rate. In particular, we explain
why the FY 1999 Federal rate has increased 1.76 percent compared to the
FY 1998 Federal rate. Even though we estimate that Medicare hospital
inpatient discharges will decline by approximately 2.25 percent between
FY 1998 and FY 1999, we also estimate that aggregate capital payments

[[Page 41012]]

will increase by 2.78 percent during this same period. This aggregate
increase is primarily due to the change in the federal rate blend
percentage from 70 percent to 80 percent, the 1.76 percent increase in
the rate, and a projected increase in case mix.
    The major factor contributing to the increase in the capital
Federal rate for FY 1999 relative to FY 1998 is that the FY 1999
exceptions reduction factor is 1.28 percent higher than the factor for
FY 1998. The exceptions reduction factor equals 1 minus the projected
percentage of exceptions payments. We estimate that the projected
percentage of exceptions payments for FY 1999 will be lower than the
projected percentage for FY 1998; accordingly, the FY 1999 rate
reflects less of a reduction to account for exceptions than the FY 1998
rate.
    Total payments to hospitals under the prospective payment system
are relatively unaffected by changes in the capital prospective
payments. Since capital payments constitute about 10 percent of
hospital payments, a 1 percent change in the capital Federal rate
yields only about 0.1 percent change in actual payments to hospitals.
Aggregate payments under the capital prospective payment transition
system are estimated to increase in FY 1999 compared to FY 1998.
1. Standard Federal Rate Update
    a. Description of the update framework. Under section
412.308(c)(1), the standard Federal rate is updated on the basis of an
analytical framework that takes into account changes in a capital input
price index (CIPI) and other factors. The update framework consists of
a CIPI and several policy adjustment factors. Specifically, we have
adjusted the projected CIPI rate of increase as appropriate each year
for case-mix index related changes, for intensity, and for errors in
previous CIPI forecasts. The proposed rule reflected an update factor
of 0.2 percent, based on data available at that time. Under the update
framework the final update factor for FY 1999 is 0.1 percent. This
update factor is based on a projected 0.7 percent increase in the CIPI,
policy adjustment factors of -0.2, and a forecast error correction of
-0.4 percent. We explain the basis for the FY 1999 CIPI projection in
section D of this addendum. Here we describe the policy adjustments
that have been applied.
    The case-mix index is the measure of the average DRG weight for
cases paid under the prospective payment system. Because the DRG weight
determines the prospective payment for each case, any percentage
increase in the case-mix index corresponds to an equal percentage
increase in hospital payments.
    The case-mix index can change for any of several reasons:
    <bullet> The average resource use of Medicare patients changes
(``real'' case-mix change);
    <bullet> Changes in hospital coding of patient records result in
higher weight DRG assignments (``coding effects''); and
    <bullet> The annual DRG reclassification and recalibration changes
may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and
resource requirements) of Medicare patients as opposed to changes in
coding behavior that result in assignment of cases to higher-weighted
DRGs but do not reflect higher resource requirements. In the update
framework for the prospective payment system for operating costs, we
adjust the update upwards to allow for real case-mix change, but remove
the effects of coding changes on the case-mix index. We also remove the
effect on total payments of prior changes to the DRG classifications
and relative weights, in order to retain budget neutrality for all
case-mix index-related changes other than patient severity. (For
example, we adjusted for the effects of the FY 1992 DRG
reclassification and recalibration as part of our FY 1994 update
recommendation.) The operating adjustment consists of a reduction for
total observed case-mix change, an increase for the portion of case-mix
change that we determine is due to real case-mix change rather than
coding modifications, and an adjustment for the effect of prior DRG
reclassification and recalibration changes. We have adopted this case-
mix index adjustment in the capital update framework as well.
    For FY 1999, we are projecting a 1.0 percent increase in the case-
mix index. We estimate that real case-mix increase will equal 0.8
percent in FY 1999. Therefore, the net adjustment for case-mix change
in FY 1999 is--0.2 percentage points.
    We estimate that DRG reclassification and recalibration result in a
0.0 percent change in the case mix when compared with the case-mix
index that would have resulted if we had not made the reclassification
and recalibration changes to the DRGs.
    The capital update framework contains an adjustment for forecast
error. The input price index forecast is based on historical trends and
relationships ascertainable at the time the update factor is
established for the upcoming year. In any given year there may be
unanticipated price fluctuations that may result in differences between
the actual increase in prices faced by hospitals and the forecast used
in calculating the update factors. In setting a prospective payment
rate under the framework, we make an adjustment for forecast error only
if our estimate of the capital input price index rate of increase for
any year is off by 0.25 percentage points or more. There is a 2-year
lag between the forecast and the measurement of the forecast error. We
estimate a forecast error of -0.4 percentage points in the update for
FY 1997. That is, current data indicate that the FY 1997 CIPI used in
calculating the FY 1997 update factor overstated price increases by 0.4
percent. Therefore we are making a -0.4 percent adjustment for forecast
error in the update for FY 1999.
    Under the capital prospective payment system framework, we also
make an adjustment for changes in intensity. We calculate this
adjustment using the same methodology and data as in the framework for
the operating prospective payment system. The intensity factor for the
operating update framework reflects how hospital services are utilized
to produce the final product, that is, the discharge. This component
accounts for changes in the use of quality-enhancing services, changes
in within-DRG severity, and expected modification of practice patterns
to remove cost-ineffective services.
    We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI
hospital component), and changes in real case mix. The use of total
charges in the calculation of the intensity factor makes it a total
intensity factor, that is, charges for capital services are already
built into the calculation of the factor. We have, therefore,
incorporated the intensity adjustment from the operating update
framework into the capital update framework. Without reliable estimates
of the proportions of the overall annual intensity increases that are
due, respectively, to ineffective practice patterns and to the
combination of quality-enhancing new technologies and within-DRG
complexity, we assume, as in the revised operating update framework,
that one-half of the annual increase is due to each of these factors.
The capital update framework thus provides an add-on to the input price
index rate of increase of one-half of the estimated annual increase in
intensity to allow for within-DRG severity increases and the adoption
of quality-enhancing technology.

[[Page 41013]]

    For FY 1999, we have developed a Medicare-specific intensity
measure based on a 5-year average using FY 1993-1997 data. In
determining case-mix constant intensity, we found that observed case-
mix increase was 0.9 percent in FY 1993, 0.8 percent in FY 1994, 1.7
percent in FY 1995, 1.6 percent in FY 1996, and 0.3 percent in FY 1997.
For FY 1995 and FY 1996, we estimate that real case-mix increase was
1.0 to 1.4 percent each year. The estimate for those years is supported
by past studies of case-mix change by the RAND Corporation. The most
recent study was ``Has DRG Creep Crept Up? Decomposing the Case Mix
Index Change Between 1987 and 1988'' by G. M. Carter, J. P. Newhouse,
and D. A. Relles, R-4098-HCFA/ProPAC (1991). The study suggested that
real case-mix change was not dependent on total change, but was usually
a fairly steady 1.0 to 1.5 percent per year. We use 1.4 percent as the
upper bound because the RAND study did not take into account that
hospitals may have induced doctors to document medical records more
completely in order to improve payment. Following that study, we
consider up to 1.4 percent of observed case-mix change as real for FY
1992 through FY 1997. Based on this analysis, we believe that all of
the observed case-mix increase for FY 1993, FY 1994 and FY 1997 is
real.
    We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI
hospital component), and changes in real case-mix. Given estimates of
real case mix of 0.9 percent for FY 1993, 0.8 percent for FY 1994, 1.0
percent for FY 1995, and 1.0 percent for FY 1996, and 0.3 percent for
FY 1997, we estimate that case-mix constant intensity declined by an
average 1.5 percent during FYs 1993 through 1997, for a cumulative
decrease of 7.3 percent. If we assume that real case-mix increase was
0.9 percent for FY 1993, 0.8 percent for FY 1994, 1.4 percent for FY
1995, 1.4 percent for FY 1996 and 0.3 percent for FY 1997, we estimate
that case-mix constant intensity declined by an average 1.6 percent
during FYs 1993 through 1997, for a cumulative decrease of 7.7 percent.
Since we estimate that intensity has declined during that period, we
are making a 0.0 percent intensity adjustment for FY 1999.
    In summary, the FY 1999 final update under our framework is 0.1
percent. This update factor is based on a projected 0.7 percent
increase in the CIPI, policy adjustment factors of -0.2, and a forecast
error correction of -0.4 percent.
    b. Comparison of HCFA and MedPAC update recommendations. As
discussed in the proposed rule, MedPAC recommended a 0.0 to 0.7 percent
update to the standard Federal rate and we recommended a 0.2 percent
update. (See the May 8, 1998 proposed rule for a discussion of the
differences between the MedPAC and HCFA update frameworks (63 FR
25615)). In this final rule, as discussed in the previous section, we
are implementing a 0.1 percent update to the capital Federal rate.
    Comment: MedPAC noted our update recommendation of 0.2 percent was
within the range of the 0.0 percent to 0.7 percent update which they
had recommended. They also restated a comment from their March report,
that although the operating and capital payment rates are determined
separately, they are related to the costs generated by providing
hospital services to the same Medicare patients, and distinguishing
between them for payment purposes is arbitrary and does not foster
efficient hospital decision-making about resource allocation. Since the
transition to fully prospective payment for capital will end on
September 30, 2001, the objective of combining the two payment systems
should be kept in mind.
    Response: Several years ago ProPAC made a similar comment
recommending the adoption of a single update framework for adjusting
operating and capital prospective payment rates when the transition to
full Federal rate capital payments is complete. In the September 1,
1995 prospective payment system final rule (60 FR 45816) we responded
that our long term goal was to develop a single update framework and
that we would begin development of a unified framework. We stated that
in the meantime we would maintain as much consistency as possible with
the current operating framework in order to facilitate the eventual
development of a unified framework. We believe that because of the
similarities in the operating and capital update frameworks, they could
be combined without too much difficulty. We maintain our goal of
combining the update frameworks at the end of the capital transition
period and may examine combining the payment systems post transition.
2. Outlier Payment Adjustment Factor
    Section 412.312(c) establishes a unified outlier methodology for
inpatient operating and inpatient capital-related costs. A single set
of thresholds is used to identify outlier cases for both inpatient
operating and inpatient capital-related payments. Outlier payments are
made only on the portion of the Federal rate that is used to calculate
the hospital's inpatient capital-related payments (for example, 80
percent for cost reporting periods beginning in FY 1999 for hospitals
paid under the fully prospective methodology). Section 412.308(c)(2)
provides that the standard Federal rate for inpatient capital-related
costs be reduced by an adjustment factor equal to the estimated
proportion of outlier payments under the Federal rate to total
inpatient capital-related payments under the Federal rate. The outlier
thresholds are set so that operating outlier payments are projected to
be 5.1 percent of total operating DRG payments. The inpatient capital-
related outlier reduction factor reflects the inpatient capital-related
outlier payments that would be made if all hospitals were paid 100
percent of the Federal rate. For purposes of calculating the outlier
thresholds and the outlier reduction factor, we model payments as if
all hospitals were paid 100 percent of the Federal rate because, as
explained above, outlier payments are made only on the portion of the
Federal rate that is included in the hospital's inpatient capital-
related payments.
    In the August 29, 1997 final rule with comment period, we estimated
that outlier payments for capital in FY 1998 would equal 6.18 percent
of inpatient capital-related payments based on the Federal rate.
Accordingly, we applied an outlier adjustment factor of 0.9382 to the
Federal rate. For FY 1999, we estimate that outlier payments for
capital will equal 6.08 percent of inpatient capital-related payments
based on the Federal rate. We are, therefore, establishing an outlier
adjustment factor of 0.9392 to the Federal rate. Thus, estimated
capital outlier payments for FY 1999 represent a smaller percentage of
total capital standard payments than in FY 1998.
    The outlier reduction factors are not built permanently into the
rates; that is, they are not applied cumulatively in determining the
Federal rate. Therefore, the net change in the outlier adjustment to
the Federal rate for FY 1999 is 1.0011 (0.9392/0.9382). Thus, the
outlier adjustment increases the FY 1999 Federal rate by 0.11 percent
(1.0011-1) compared with the FY 1998 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the Geographic Adjustment Factor
    Section 412.308(c)(4)(ii) requires that the Federal rate be
adjusted so that

[[Page 41014]]

aggregate payments for the fiscal year based on the Federal rate after
any changes resulting from the annual DRG reclassification and
recalibration and changes in the GAF are projected to equal aggregate
payments that would have been made on the basis of the Federal rate
without such changes. We use the actuarial model, described in Appendix
B, to estimate the aggregate payments that would have been made on the
basis of the Federal rate without changes in the DRG classifications
and weights and in the GAF. We also use the model to estimate aggregate
payments that would be made on the basis of the Federal rate as a
result of those changes. We then use these figures to compute the
adjustment required to maintain budget neutrality for changes in DRG
weights and in the GAF.
    For FY 1998, we calculated a GAF/DRG budget neutrality factor of
0.9989. In the proposed rule for FY 1999, we proposed a GAF/DRG budget
neutrality factor of 1.0032. In this final rule, based on calculations
using updated data, we are applying a factor of 1.0027. The GAF/DRG
budget neutrality factors are built permanently into the rates; that
is, they are applied cumulatively in determining the Federal rate. This
follows from the requirement that estimated aggregate payments each
year be no more than they would have been in the absence of the annual
DRG reclassification and recalibration and changes in the GAF. The
incremental change in the adjustment from FY 1998 to FY 1999 is 1.0027.
The cumulative change in the rate due to this adjustment is 1.0028 (the
product of the incremental factors for FY 1993, FY 1994, FY 1995, FY
1996, FY 1997, FY 1998, and FY 1999: 0.9980 x 1.0053 x 0.9998 x 0.9994
x 0.9987 x 0.9989 x 1.0027 = 1.0028).
    This factor accounts for DRG reclassifications and recalibration
and for changes in the GAF. It also incorporates the effects on the GAF
of FY 1999 geographic reclassification decisions made by the MGCRB
compared to FY 1998 decisions. However, it does not account for changes
in payments due to changes in the disproportionate share and indirect
medical education adjustment factors or in the large urban add-on.
4. Exceptions Payment Adjustment Factor
    Section 412.308(c)(3) requires that the standard Federal rate for
inpatient capital-related costs be reduced by an adjustment factor
equal to the estimated proportion of additional payments for exceptions
under Sec. 412.348 relative to total payments under the hospital-
specific rate and Federal rate. We use an actuarial model described in
Appendix B to determine the exceptions payment adjustment factor.
    For FY 1998, we estimated that exceptions payments would equal 3.41
percent of aggregate payments based on the Federal rate and the
hospital-specific rate. Therefore, we applied an exceptions reduction
factor of 0.9659 (1--0.0341) in determining the Federal rate. In the
May 8, 1998 proposed rule, we estimated that exceptions payments for FY
1999 would equal 2.39 percent of aggregate payments based on the
Federal rate and the hospital-specific rate. Therefore, we proposed an
exceptions payment reduction factor of 0.9761 to the Federal rate for
FY 1999. For this final rule, based on updated data, we estimate that
exceptions payments for FY 1999 will equal 2.17 percent of aggregate
payments based on the Federal rate and the hospital-specific rate. We
are, therefore, applying an exceptions payment reduction factor of
0.9783 (1--0.0217) to the Federal rate for FY 1999. The final
exceptions reduction factor for FY 1999 is 1.28 percent higher than the
factor for FY 1998 and .23 percent higher than the factor in the FY
1999 proposed rule.
    The exceptions reduction factors are not built permanently into the
rates; that is, the factors are not applied cumulatively in determining
the Federal rate. Therefore, the net adjustment to the FY 1999 Federal
rate is 0.9783/0.9659, or 1.0128.
5. Standard Capital Federal Rate for FY 1999
    For FY 1998, the capital Federal rate was $371.51. With the changes
we proposed to the factors used to establish the Federal rate, we
proposed that the FY 1999 Federal rate would be $377.25. In this final
rule, we are establishing a FY 1999 Federal rate of $378.05. The
Federal rate for FY 1999 was calculated as follows:
    <bullet> The FY 1999 update factor is 1.0010, that is, the update
is 0.10 percent.
    <bullet> The FY 1999 budget neutrality adjustment factor that is
applied to the standard Federal payment rate for changes in the DRG
relative weights and in the GAF is 1.0027.
    <bullet> The FY 1999 outlier adjustment factor is 0.9392.
    <bullet> The FY 1999 exceptions payments adjustment factor is
0.9783.
    Since the Federal rate has already been adjusted for differences in
case mix, wages, cost of living, indirect medical education costs, and
payments to hospitals serving a disproportionate share of low-income
patients, we have made no additional adjustments in the standard
Federal rate for these factors other than the budget neutrality factor
for changes in the DRG relative weights and the GAF.
    We are providing a chart that shows how each of the factors and
adjustments for FY 1999 affected the computation of the FY 1999 Federal
rate in comparison to the FY 1998 Federal rate. The FY 1999 update
factor has the effect of increasing the Federal rate by 0.10 percent
compared to the rate in FY 1998, while the final geographic and DRG
budget neutrality factor has the effect of increasing the Federal rate
by 0.27 percent. The FY 1999 outlier adjustment factor has the effect
of increasing the Federal rate by 0.11 percent compared to FY 1998. The
FY 1999 exceptions reduction factor has the effect of increasing the
Federal rate by 1.27 percent compared to the exceptions reduction
factor for FY 1998. The combined effect of all the changes is to
increase the Federal rate by 1.76 percent compared to the Federal rate
for FY 1998.

              Comparison of Factors and Adjustments--FY 1998 Federal Rate and FY 1999 Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                                                                       Percent
                                                                FY 98         FY 99        Change       change
----------------------------------------------------------------------------------------------------------------
Update factor \1\.........................................        1.0090        1.0010       1.0010         0.10
GAF/DRG Adjustment Factor \1\.............................        0.9989        1.0027       1.0027         0.27
Outlier Adjustment Factor \2\.............................        0.9382        0.9392       1.0011         0.11
Exceptions Adjustment Factor \2\..........................        0.9659        0.9783       1.0128         1.28
Federal Rate..............................................     $371.51       $378.05         1.0176        1.76
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the rates. Thus, for
  example, the incremental change from FY 1998 to FY 1999 resulting from the application of the GAF/DRG budget
  neutrality factor for FY 1999 is 1.0027.

[[Page 41015]]

\2\ The outlier reduction factor and the exceptions reduction factor are not built permanently into the rates;
  that is, these factors are not applied cumulatively in determining the rates. Thus, for example, the net
  change resulting from the application of the FY 1999 outlier reduction factor is 0.9392/0.9382, or 1.0011.

    We are also providing a chart that shows how the final FY 1999
Federal rate differs from the proposed FY 1999 Federal rate.

       Comparison of Factors and Adjustments--FY 1999 Proposed Federal Rate and FY 1999 Final Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                             Proposed FY                               Percent
                                                                 99        Final FY 99     Change       change
----------------------------------------------------------------------------------------------------------------
Update factor.............................................        1.0020        1.0010       0.9990        -0.10
GAF/DRG Adjustment Factor.................................        1.0032        1.0027       0.9995        -0.05
Outlier Adjustment Factor.................................        0.9378        0.9392       1.0015         0.15
Exceptions Adjustment Factor..............................        0.9761        0.9783       1.0023         0.23
Federal Rate..............................................     $377.25       $378.05         1.0021         0.21
----------------------------------------------------------------------------------------------------------------

6. Special Rate for Puerto Rico Hospitals
    As explained at the beginning of this section, hospitals in Puerto
Rico are paid based on 50 percent of the Puerto Rico rate and 50
percent of the Federal rate. The Puerto Rico rate is derived from the
costs of Puerto Rico hospitals only, while the Federal rate is derived
from the costs of all acute care hospitals participating in the
prospective payment system (including Puerto Rico). To adjust
hospitals' capital payments for geographic variations in capital costs,
we apply a geographic adjustment factor (GAF) to both portions of the
blended rate. The GAF is calculated using the operating PPS wage index
and varies depending on the MSA or rural area in which the hospital is
located. We use the Puerto Rico wage index to determine the GAF for the
Puerto Rico part of the capital blended rate and the national wage
index to determine the GAF for the national part of the blended rate.
    Since we implemented a separate GAF for Puerto Rico, we applied
separate budget neutrality adjustments for the national GAF and for the
Puerto Rico GAF. We applied the same budget neutrality factor for DRG
reclassifications and recalibration nationally and for Puerto Rico.
Separate adjustments were unnecessary for FY 1998 since the Puerto Rico
specific GAF was implemented that year. For FY 1999 the Puerto Rico GAF
budget neutrality factor is 0.9988, while the DRG adjustment is 1.0034,
for a combined cumulative adjustment of 1.0022. (For a more detailed
explanation of this change see Appendix B.)
    In computing the payment for a particular Puerto Rico hospital, the
Puerto Rico portion of the rate (50%) is multiplied by the Puerto Rico-
specific GAF for the MSA in which the hospital is located, and the
national portion of the rate (50%) is multiplied by the national GAF
for the MSA in which the hospital is located (which is computed from
national data for all hospitals in the United States and Puerto Rico).
In FY 1998, we implemented a 17.78 percent reduction to the Puerto Rico
rate as a result of the BBA.
    For FY 1998, before application of the GAF, the special rate for
Puerto Rico hospitals was $177.57. With the changes we proposed to the
factors used to determine the rate, the proposed FY 1999 special rate
for Puerto Rico was $180.73. In this final rule, the FY 1999 capital
rate for Puerto Rico is $181.10.

B. Determination of Hospital-Specific Rate Update

    Section 412.328(e) of the regulations provides that the hospital-
specific rate for FY 1999 be determined by adjusting the FY 1998
hospital-specific rate by the following factors:
1. Hospital-Specific Rate Update Factor
    The hospital-specific rate is updated in accordance with the update
factor for the standard Federal rate determined under
Sec. 412.308(c)(1). For FY 1999, we are updating the hospital-specific
rate by a factor of 1.0010.
2. Exceptions Payment Adjustment Factor
    For FYs 1992 through FY 2001, the updated hospital-specific rate is
multiplied by an adjustment factor to account for estimated exceptions
payments for capital-related costs under Sec. 412.348, determined as a
proportion of the total amount of payments under the hospital-specific
rate and the Federal rate. For FY 1999, we estimated in the proposed
rule that exceptions payments would be 2.39 percent of aggregate
payments based on the Federal rate and the hospital-specific rate.
Therefore, we proposed that the updated hospital-specific rate be
adjusted by a factor of 0.9761. In this final rule, we estimate that
exceptions payments will be 2.17 percent of aggregate payments based on
the Federal rate and the hospital-specific rate. Accordingly, for FY
1999, we are applying an exceptions reduction factor of 0.9783 to the
hospital-specific rate. The exceptions reduction factors are not built
permanently into the rates; that is, the factors are not applied
cumulatively in determining the hospital-specific rate. The net
adjustment to the FY 1999 hospital-specific rate is 0.9783/0.9659, or
1.0128.
3. Net Change to Hospital-Specific Rate
    We are providing a chart to show the net change to the hospital-
specific rate. The chart shows the factors for FY 1998 and FY 1999 and
the net adjustment for each factor. It also shows that the cumulative
net adjustment from FY 1998 to FY 1999 is 1.0138, which represents a
increase of 1.38 percent to the hospital-specific rate. For each
hospital, the FY 1999 hospital-specific rate is determined by
multiplying the FY 1998 hospital-specific rate by the cumulative net
adjustment of 1.0138.

                            FY 1999 Update and Adjustments to Hospital-Specific Rates
----------------------------------------------------------------------------------------------------------------
                                                                                            Net        Percent
                                                                 FY 98        FY 99      adjustment     change
----------------------------------------------------------------------------------------------------------------
Update Factor...............................................       1.0090       1.0010       1.0010         0.10
Exceptions Payment Adjustment Factor........................       0.9659       0.9783       1.0128         1.28

[[Page 41016]]

Cumulative Adjustments......................................       0.9746       0.9880       1.0138        1.38
----------------------------------------------------------------------------------------------------------------
Note: The update factor for the hospital-specific rate is applied cumulatively in determining the rates. Thus,
  the incremental increase in the update factor from FY 1998 to FY 1999 is 1.0020. In contrast, the exceptions
  payment adjustment factor is not applied cumulatively. Thus, for example, the incremental increase in the
  exceptions reduction factor from FY 1998 to FY 1999 is 0.9783/0.9659, or 1.0128.

C. Calculation of Inpatient Capital-Related Prospective Payments for FY
1999

    During the capital prospective payment system transition period, a
hospital is paid for the inpatient capital-related costs under one of
two payment methodologies--the fully prospective payment methodology or
the hold-harmless methodology. The payment methodology applicable to a
particular hospital is determined when a hospital comes under the
prospective payment system for capital-related costs by comparing its
hospital-specific rate to the Federal rate applicable to the hospital's
first cost reporting period under the prospective payment system. The
applicable Federal rate was determined by making adjustments as
follows:
    <bullet> For outliers by dividing the standard Federal rate by the
outlier reduction factor for that fiscal year; and,
    <bullet> For the payment adjustment factors applicable to the
hospital (that is, the hospital's GAF, the disproportionate share
adjustment factor, and the indirect medical education adjustment
factor, when appropriate).
    If the hospital-specific rate is above the applicable Federal rate,
the hospital is paid under the hold-harmless methodology. If the
hospital-specific rate is below the applicable Federal rate, the
hospital is paid under the fully prospective methodology.
    For purposes of calculating payments for each discharge under both
the hold-harmless payment methodology and the fully prospective payment
methodology, the standard Federal rate is adjusted as follows:
(Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban Add-on,
if applicable) x (COLA adjustment for hospitals located in Alaska and
Hawaii) x (1 + Disproportionate Share Adjustment Factor + IME
Adjustment Factor, if applicable). The result is the adjusted Federal
rate.
    Payments under the hold-harmless methodology are determined under
one of two formulas. A hold-harmless hospital is paid the higher of the
following:
    <bullet> 100 percent of the adjusted Federal rate for each
discharge; or
    <bullet> An old capital payment equal to 85 percent (100 percent
for sole community hospitals) of the hospital's allowable Medicare
inpatient old capital costs per discharge for the cost reporting period
plus a new capital payment based on a percentage of the adjusted
Federal rate for each discharge. The percentage of the adjusted Federal
rate equals the ratio of the hospital's allowable Medicare new capital
costs to its total Medicare inpatient capital-related costs in the cost
reporting period.
    Once a hospital receives payment based on 100 percent of the
adjusted Federal rate in a cost reporting period beginning on or after
October 1, 1994 (or the first cost reporting period after obligated
capital that is recognized as old capital under Sec. 412.302(c) is put
in use for patient care, if later), the hospital continues to receive
capital prospective payment system payments on that basis for the
remainder of the transition period.
    Payment for each discharge under the fully prospective methodology
is the sum of the following:
    <bullet> The hospital-specific rate multiplied by the DRG relative
weight for the discharge and by the applicable hospital-specific
transition blend percentage for the cost reporting period; and
    <bullet> The adjusted Federal rate multiplied by the Federal
transition blend percentage.
    The blend percentages for cost reporting periods beginning in FY
1999 are 80 percent of the adjusted Federal rate and 20 percent of the
hospital-specific rate.
    Hospitals may also receive outlier payments for those cases that
qualify under the thresholds established for each fiscal year. Section
412.312(c) provides for a single set of thresholds to identify outlier
cases for both inpatient operating and inpatient capital-related
payments. Outlier payments are made only on that portion of the Federal
rate that is used to calculate the hospital's inpatient capital-related
payments. For fully prospective hospitals, that portion is 80 percent
of the Federal rate for discharges occurring in cost reporting periods
beginning during FY 1999. Thus, a fully prospective hospital will
receive 80 percent of the capital-related outlier payment calculated
for the case for discharges occurring in cost reporting periods
beginning in FY 1999. For hold-harmless hospitals paid 85 percent of
their reasonable costs for old inpatient capital, the portion of the
Federal rate that is included in the hospital's outlier payments is
based on the hospital's ratio of Medicare inpatient costs for new
capital to total Medicare inpatient capital costs. For hold-harmless
hospitals that are paid 100 percent of the Federal rate, 100 percent of
the Federal rate is included in the hospital's outlier payments.
    The outlier thresholds for FY 1999 are in section II.A.4.c of this
Addendum. For FY 1999, a case qualifies as a cost outlier if the cost
for the case (after standardization for the indirect teaching
adjustment and disproportionate share adjustment) is greater than the
prospective payment rate for the DRG plus $11,100.
    During the capital prospective payment system transition period, a
hospital may also receive an additional payment under an exceptions
process if its total inpatient capital-related payments are less than a
minimum percentage of its allowable Medicare inpatient capital-related
costs. The minimum payment level is established by class of hospital
under Sec. 412.348. The minimum payment levels for portions of cost
reporting periods beginning in FY 1999 are:
    <bullet> Sole community hospitals (located in either an urban or
rural area), 90 percent;
    <bullet> Urban hospitals with at least 100 beds and a
disproportionate share patient percentage of at least 20.2 percent; and
    <bullet> Urban hospitals with at least 100 beds that qualify for
disproportionate share payments under Sec. 412.106(c)(2), 80 percent;
and
    <bullet> All other hospitals, 70 percent.
    Under Sec. 412.348(d), the amount of the exceptions payment is
determined by comparing the cumulative payments made to the hospital
under the capital prospective payment system to the cumulative minimum
payment levels applicable to the hospital for each cost reporting
period subject to that system.

[[Page 41017]]

Any amount by which the hospital's cumulative payments exceed its
cumulative minimum payment is deducted from the additional payment that
would otherwise be payable for a cost reporting period.
    New hospitals are exempted from the capital prospective payment
system for their first 2 years of operation and are paid 85 percent of
their reasonable costs during that period. A new hospital's old capital
costs are its allowable costs for capital assets that were put in use
for patient care on or before the later of December 31, 1990 or the
last day of the hospital's base year cost reporting period, and are
subject to the rules pertaining to old capital and obligated capital as
of the applicable date. Effective with the third year of operation, we
will pay the hospital under either the fully prospective methodology,
using the appropriate transition blend in that Federal fiscal year, or
the hold-harmless methodology. If the hold-harmless methodology is
applicable, the hold-harmless payment for assets in use during the base
period would extend for 8 years, even if the hold-harmless payments
extend beyond the normal transition period.

D. Capital Input Price Index

1. Background
    Like the prospective payment hospital operating input price index,
the Capital Input Price Index (CIPI) is a fixed-weight price index that
measures the price changes associated with costs during a given year.
The CIPI differs from the operating input price index in one important
aspect--the CIPI reflects the vintage nature of capital, which is the
acquisition and use of capital over time. Capital expenses in any given
year are determined by the stock of capital in that year (that is,
capital that remains on hand from all current and prior capital
acquisitions). An index measuring capital price changes needs to
reflect this vintage nature of capital. Therefore, the CIPI was
developed to capture the vintage nature of capital by using a weighted-
average of past capital purchase prices up to and including the current
year.
    Using Medicare cost reports, AHA data, and Securities Data
Corporation data, a vintage-weighted price index was developed to
measure price increases associated with capital expenses. We
periodically update the base year for the operating and capital input
prices to reflect the changing composition of inputs for operating and
capital expenses. Currently, the CIPI is based to FY 1992 and was last
rebased in 1997. The most recent explanation of the CIPI was discussed
in the final rule with comment period for FY 1998 published in the
August 29, 1997 Federal Register (62 FR 46050). The following Federal
Register documents also describe development and revisions of the
methodology involved with the construction of the CIPI: September 1,
1992 (57 FR 40016), May 26, 1993 (58 FR 30448), September 1, 1993 (58
FR 46490), May 27, 1994 (59 FR 27876), September 1, 1994 (59 FR 45517),
June 2, 1995 (60 FR 29229), and September 1, 1995 (60 FR 45815), May
31, 1996 (61 FR 27466), August 30, 1996 (61 FR 46196), and June 2, 1997
(62 FR 29953), August 29, 1997 (67 FR 46050), and May 8, 1998 (63 FR
25619).
2. Forecast of the CIPI for Federal Fiscal Year 1999
    DRI forecasts a 0.7 percent increase in the CIPI for FY 1999. This
is the outcome of a projected 1.9 percent increase in vintage-weighted
depreciation prices (building and fixed equipment, and movable
equipment) and a 2.9 percent increase in other capital expense prices
in FY 1999, partially offset by a 3.0 percent decline in vintage-
weighted interest rates in FY 1999. The weighted average of these three
factors produces the 0.7 percent increase for the CIPI as a whole.

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

A. Rate-of-Increase Percentages for Excluded Hospitals and Hospital
Units

    The inpatient operating costs of hospitals and hospital units
excluded from the prospective payment system are subject to rate-of-
increase limits established under the authority of section 1886(b) of
the Act, which is implemented in Sec. 413.40 of the regulations. Under
these limits, an annual target amount (expressed in terms of the
inpatient operating cost per discharge) is set for each hospital, based
on the hospital's own historical cost experience trended forward by the
applicable rate-of-increase percentages (update factors). In the case
of a psychiatric hospital or unit, rehabilitation hospital or unit, or
long-term care hospital, the target amount may not exceed the 75th
percentile of target amounts for hospitals and units in the same class
(psychiatric, rehabilitation, and long-term care). The target amount is
multiplied by the number of Medicare discharges in a hospital's cost
reporting period, yielding the ceiling on aggregate Medicare inpatient
operating costs for the cost reporting period.
    Each hospital's target amount is adjusted annually, at the
beginning of its cost reporting period, by an applicable update factor.
Section 1886(b)(3)(B) of the Act provides that for cost reporting
periods beginning on or after October 1, 1998 and before October 1,
1999, the update factor is the market basket less a percentage point
between 0 and 2.5 depending on the hospital's or unit's costs in
relation to the ceiling. For hospitals with costs exceeding the ceiling
by 10 percent or more, the update factor is the market basket increase.
For hospitals with costs exceeding the ceiling by less than 10 percent,
the update factor is the greater of 0 percent or the market basket
minus .25 percent for each percentage point by which costs are less
than 10 percent over the ceiling. For hospitals with costs equal to or
less than the ceiling but greater than 66.7 percent of the ceiling, the
update factor is the greater of 0 percent or the market basket minus
2.5 percent. For hospitals with costs that do not exceed 66.7 percent
of the ceiling, the update factor is 0.
    The most recent forecast of the market basket increase for FY 1999
for hospitals and hospital units excluded from the prospective payment
system is 2.4 percent; therefore, the update to a hospital's target
amount for its cost reporting period beginning in FY 1999 would be
between 0 and 2.4 percent.
    In addition, section 1886(b)(3)(H) of the Act provides that for
cost reporting periods beginning on or after October 1, 1998 and before
October 1, 1999, the target amount for psychiatric hospitals and units,
rehabilitation hospitals and units, and long-term care hospitals may
not exceed an updated cap that is based on the 75th percentile of
target amounts for hospitals in the same class for cost reporting
periods ending during FY 1996. The FY 1998 75th percentile target
amounts were $10,534 for psychiatric hospitals and units, $19,104 for
rehabilitation hospital and units, and $37,688 for long-term care
hospitals. As discussed in detail in section VII. of the preamble, for
purposes of calculating the caps, the statute requires the Secretary to
first calculate the 75th percentile of the target amounts for each
class of hospital (psychiatric, rehabilitation, or long-term care) for
cost reporting periods ending during FY 1996. The resulting amounts are
updated by the market basket percentage to the applicable fiscal year.

B. Wage Index Exceptions for Excluded Hospitals and Units

    In the August 30, 1991 final rule (56 FR 43232), we set forth our
policy for target amount adjustments for

[[Page 41018]]

significant wage increases. Effective with cost reporting periods
beginning on or after April 1, 1990, significant increases in wages
since the base period are recognized as a basis for an adjustment in
the target amount under Sec. 413.40(g).
    To qualify for an adjustment, the excluded hospital or hospital
unit must be located in a labor market area for which the average
hourly wage increased significantly more than the national average
hourly wage between the hospital's base period and the period subject
to the ceiling. We use the hospital wage index for prospective payment
hospitals to determine the rate of increase in the average hourly wage
in the labor market area. For a hospital to qualify for an adjustment,
the wage index value for the cost reporting period subject to the
ceiling must be at least 8 percent higher than the wage index based on
wage survey data collected for the base year cost reporting period. If
survey data are not available for one (or both) of the cost reporting
periods used in the comparison, the wage index based on the latest
available survey data collected before that cost reporting period will
be used. For example, to make the comparison between a 1983 base period
and a hospital's cost reporting period beginning in FY 1996, we would
use the rate of increase between the wage index based on 1982 wage data
and the wage index based on the FY 1995 data, since the FY 1995 data
are the most recent data currently available. Further, the comparison
is made without regard to geographic reclassifications made by the
MGCRB under sections 1886(d) (8) and (10) of the Act. Therefore, the
comparison is made based on the wage index value of the labor market
area in which the hospital is actually located.
    We determine the amount of the adjustment for wage increases by
considering three factors for the time between the base period and the
period for which an adjustment is requested: The rate of increase in
the hospital's average hourly wage; the rate of increase in the average
hourly wage in the labor market area in which the hospital is located;
and, the rate of increase in the national average hourly wage for
hospital workers. The adjustment is limited to the amount by which the
lower of the hospital's or the labor market area's rate of increase in
average hourly wages significantly exceeds the national increase (that
is, exceeds the national rate of increase by more than 8 percent). For
purposes of computing the adjustment, the relative rate of increase in
the average hourly wage for the labor market area is assumed to have
been the same over each of the intervening years between the wage
surveys.
    To determine the rate of increase in the national average hourly
wage, we use the average hourly earnings (AHE) for hospital workers
produced by the Bureau of Labor Statistics.
    The average hourly earnings for hospital workers show the following
increases:

1992=4.8 percent
1993=3.6 percent
1994=2.7 percent
1995=3.3 percent
1996=3.1 percent
1997=2.0 percent
1998=2.6 percent
1999=2.7 percent

    We note that this section merely provides updated information with
respect to areas that would qualify for the wage index adjustment under
Sec. 413.30(g). This information was calculated in accordance with
established policy and does not reflect any change in that policy. The
geographic areas in which the percentage difference in wage indexes was
sufficient to qualify for a wage index adjustment are listed in Table
10 of section VI of the addendum to this final rule.

VI. Tables

    This section contains the tables referred to throughout the
preamble to this final rule and in this Addendum. For purposes of this
final rule, and to avoid confusion, we have retained the designations
of Tables 1 through 5 that were first used in the September 1, 1983
initial prospective payment final rule (48 FR 39844). Tables 1A, 1C,
1D, 1E, 1F, 3C, 4A, 4B, 4C, 4D, 4E, 4F, 5, 6A, 6B, 6C, 6D, 6E, 6F, 6G,
7A, 7B, 8A, 8B, and 10 are presented below. The tables presented below
are as follows:

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico,
Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 1E--National Adjusted Operating Standardized Amounts for
``Temporary Relief'' Hospitals, Labor/Nonlabor
Table 1F--Adjusted Operating Standardized Amounts for ``Temporary
Relief'' Hospitals in Puerto Rico, Labor/Nonlabor
Table 3C--Hospital Case Mix Indexes for Discharges Occurring in Federal
Fiscal Year 1997 and Hospital Average Hourly Wage for Federal Fiscal
Year 1999 Wage Index
Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Urban Areas
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Rural Areas
Table 4C--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Hospitals That Are Reclassified
Table 4D--Average Hourly Wage for Urban Areas
Table 4E--Average Hourly Wage for Rural Areas
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment
Factor (GAF)
Table 5--List of Diagnosis Related Groups (DRGs), Relative Weighting
Factors, Geometric Mean Length of Stay, and Arithmetic Mean Length of
Stay Points Used in the Prospective Payment System
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Additions to the CC Exclusions List
Table 6G--Deletions to the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 97 MEDPAR Update 03/98 GROUPER V15.0
Table 7B--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 97 MEDPAR Update 03/98 GROUPER V16.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios for Urban
and Rural Hospitals (Case Weighted) July 1998
Table 8B--Statewide Average Capital Cost-to-Charge Ratios (Case
Weighted) July 1998
Table 10--Percentage Difference on Wage Indexes for Areas that Qualify
for a Wage Index Exception for Excluded Hospitals and Units

[[Page 41019]]

                   Table 1A.--National Adjusted Operating Standardized Amounts, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
                    Large urban areas                                           Other areas
----------------------------------------------------------------------------------------------------------------
       Labor-related               Nonlabor-related              Labor-related             Nonlabor-related
----------------------------------------------------------------------------------------------------------------
2,783.42...................                   1,313.41                    2,739.36                    1,113.47
----------------------------------------------------------------------------------------------------------------

               Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
                                                                  Large urban areas            Other areas
                                                             ---------------------------------------------------
                                                                 Labor       Nonlabor      Labor       Nonlabor
----------------------------------------------------------------------------------------------------------------
National....................................................     2,760.01     1,121.87     2,760.01     1,121.87
Puerto Rico.................................................     1,327.81       534.48     1,306.79       526.01
----------------------------------------------------------------------------------------------------------------

            Table 1D.--Capital Standard Federal Payment Rate
------------------------------------------------------------------------
                                                                   Rate
------------------------------------------------------------------------
National.......................................................   378.05
Puerto Rico....................................................   181.10
------------------------------------------------------------------------

 Table 1E.--National Adjusted Operating Standardized Amounts for ``Temporary Relief'' Hospitals, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
                    Large urban areas                                           Other areas
----------------------------------------------------------------------------------------------------------------
       Labor-related               Nonlabor-related              Labor-related             Nonlabor-related
----------------------------------------------------------------------------------------------------------------
2,791.73...................                   1,134.76                    2,747.54                    1,116.79
----------------------------------------------------------------------------------------------------------------

  Table 1F.--Adjusted Operating Standardized Amounts for ``Temporary Relief'' Hospitals in Puerto Rico, Labor/
                                                    Nonlabor
----------------------------------------------------------------------------------------------------------------
                                                                  Large urban areas            Other areas
                                                             ---------------------------------------------------
                                                                 Labor       Nonlabor      Labor       Nonlabor
----------------------------------------------------------------------------------------------------------------
National....................................................     2,768.25     1,125.22     2,768.25     1,125.22
Puerto Rico.................................................     1,331.77       536.08     1,310.69       527.58
----------------------------------------------------------------------------------------------------------------

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Table 4A.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
                               Urban Areas
------------------------------------------------------------------------
                                                        Wage
          Urban area (Constituent counties)             index      GAF
------------------------------------------------------------------------
0040  Abilene, TX...................................    0.8083    0.8644
  Taylor, TX
0060  Aguadilla, PR.................................    0.4738    0.5996
  Aguada, PR
  Aguadilla, PR
  Moca, PR
0080  Akron, OH.....................................    0.9954    0.9968
  Portage, OH
  Summit, OH
0120  Albany, GA....................................    0.7993    0.8578
  Dougherty, GA
  Lee, GA
0160  Albany-Schenectady-Troy, NY...................    0.8629    0.9040
  Albany, NY
  Montgomery, NY
  Rensselaer, NY
  Saratoga, NY
  Schenectady, NY
  Schoharie, NY
0200  Albuquerque, NM...............................    0.8632    0.9042
  Bernalillo, NM
  Sandoval, NM
  Valencia, NM
0220  Alexandria, LA................................    0.8544    0.8978
  Rapides, LA
0240  Allentown-Bethlehem-Easton, PA................    1.0226    1.0154
  Carbon, PA
  Lehigh, PA
  Northampton, PA
0280  Altoona, PA...................................    0.9355    0.9554
  Blair, PA
0320  Amarillo, TX..................................    0.8509    0.8953
  Potter, TX
  Randall, TX
0380  Anchorage, AK.................................    1.3007    1.1973
  Anchorage, AK
0440  Ann Arbor, MI.................................    1.1057    1.0712
  Lenawee, MI
  Livingston, MI
  Washtenaw, MI
0450  Anniston, AL..................................    0.8676    0.9073
  Calhoun, AL
0460  Appleton-Oshkosh-Neenah, WI...................    0.8844    0.9193
  Calumet, WI
  Outagamie, WI
  Winnebago, WI
0470  Arecibo, PR...................................    0.4878    0.6117
  Arecibo, PR
  Camuy, PR
  Hatillo, PR
0480  Asheville, NC.................................    0.8960    0.9276
  Buncombe, NC
  Madison, NC
0500  Athens, GA....................................    0.8692    0.9085
  Clarke, GA
  Madison, GA
  Oconee, GA
0520  \1\ Atlanta, GA...............................    0.9936    0.9956
  Barrow, GA
  Bartow, GA
  Carroll, GA
  Cherokee, GA
  Clayton, GA
  Cobb, GA
  Coweta, GA
  DeKalb, GA
  Douglas, GA
  Fayette, GA
  Forsyth, GA
  Fulton, GA
  Gwinnett, GA
  Henry, GA
  Newton, GA
  Paulding, GA
  Pickens, GA
  Rockdale, GA
  Spalding, GA
  Walton, GA
0560  Atlantic-Cape May, NJ.........................
  Atlantic, NJ
  Cape May, NJ                                          1.0377    1.0257
0600  Augusta-Aiken, GA-SC..........................    0.9253    0.9482
  Columbia, GA
  McDuffie, GA
  Richmond, GA
  Aiken, SC
  Edgefield, SC
0640  \1\ Austin-San Marcos, TX.....................    0.8442    0.8905
  Bastrop, TX
  Caldwell, TX
  Hays, TX
  Travis, TX
  Williamson, TX
0680  \2\ Bakersfield, CA...........................    0.9959    0.9972
  Kern, CA
0720  \1\ Baltimore, MD.............................    0.9663    0.9768
  Anne Arundel, MD
  Baltimore, MD
  Baltimore City, MD
  Carroll, MD
  Harford, MD
  Howard, MD
  Queen Anne's, MD
0733  Bangor, ME....................................    0.9495    0.9651
  Penobscot, ME
0743  Barnstable-Yarmouth, MA.......................    1.5415    1.3449
  Barnstable, MA
0760  Baton Rouge, LA...............................    0.8891    0.9227
  Ascension, LA
  East Baton Rouge, LA
  Livingston, LA
  West Baton Rouge, LA
0840  Beaumont-Port Arthur, TX......................    0.9071    0.9354
  Hardin, TX
  Jefferson, TX
  Orange, TX
0860  Bellingham, WA................................    1.1459    1.0978
  Whatcom, WA
0870  \2\ Benton Harbor, MI.........................    0.8903    0.9235
  Berrien, MI
0875  \1\ Bergen-Passaic, NJ........................    1.1774    1.1183
  Bergen, NJ
  Passaic, NJ
0880  Billings, MT..................................    0.9162    0.9418
  Yellowstone, MT
0920  Biloxi-Gulfport-Pascagoula, MS................    0.8294    0.8798
  Hancock, MS
  Harrison, MS
  Jackson, MS
0960  Binghamton, NY................................    0.9078    0.9359
  Broome, NY
  Tioga, NY
1000  Birmingham, AL................................    0.9092    0.9369
  Blount, AL
  Jefferson, AL
  St. Clair, AL
  Shelby, AL
1010  Bismarck, ND..................................    0.8042    0.8614
  Burleigh, ND
  Morton, ND
1020  Bloomington, IN...............................    0.8984    0.9293
  Monroe, IN
1040  Bloomington-Normal, IL........................    0.8870    0.9212
  McLean, IL
1080  Boise City, ID................................    0.9209    0.9451
  Ada, ID
  Canyon, ID
1123  \1\ Boston-Worcester-Lawrence-Lowell-Brockton,
 MA-NH..............................................    1.1307    1.0878
  Bristol, MA
  Essex, MA
  Middlesex, MA
  Norfolk, MA
  Plymouth, MA
  Suffolk, MA
  Worcester, MA
  Hillsborough, NH
  Merrimack, NH
  Rockingham, NH
  Strafford, NH
1125  Boulder-Longmont, CO..........................    1.0059    1.0040
  Boulder, CO
1145  Brazoria, TX..................................    0.8925    0.9251
  Brazoria, TX
1150  Bremerton, WA.................................    1.1079    1.0727
  Kitsap, WA
1240  Brownsville-Harlingen-San Benito, TX..........    0.8255    0.8769
  Cameron, TX
1260  Bryan-College Station, TX.....................    0.8084    0.8645
  Brazos, TX
1280  \1\ Buffalo-Niagara Falls, NY.................    0.9607    0.9729
  Erie, NY
  Niagara, NY
1303  Burlington, VT................................    0.9616    0.9735
  Chittenden, VT
  Franklin, VT
  Grand Isle, VT
1310  Caguas, PR....................................    0.4419    0.5716
  Caguas, PR
  Cayey, PR
  Cidra, PR
  Gurabo, PR
  San Lorenzo, PR
1320  Canton-Massillon, OH..........................    0.8827    0.9181

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