[Federal Register: July 31, 1998 (Volume 63, Number 147)]
[Rules and Regulations]
[Page 40953-41002]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy98-25]

[[Page 40953]]

_______________________________________________________________________

Part II

Department of Health and Human Services

_______________________________________________________________________

Health Care Financing Administration

_______________________________________________________________________

42 CFR Parts 405, 412, and 413

Medicare Program: Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 1999 Rates; Final Rule

[[Page 40954]]

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 405, 412, and 413

[HCFA-1003-F]
RIN 0938-AI22

Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 1999 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

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SUMMARY: We are revising the Medicare hospital inpatient prospective
payment systems for operating costs and capital-related costs to
implement applicable statutory requirements, including section 4407 of
the Balanced Budget Act of 1997 (BBA), as well as changes arising from
our continuing experience with the systems. In addition, in the
addendum to this final rule, we describe changes in the amounts and
factors necessary to determine rates for Medicare hospital inpatient
services for operating costs and capital-related costs. These changes
are applicable to discharges occurring on or after October 1, 1998. We
also set forth rate-of-increase limits as well as changes for hospitals
and hospital units excluded from the prospective payment systems.
Finally, we are implementing the provisions of section 4625 of the BBA
concerning payment for the direct costs of graduate medical education.

DATES: The provisions of this final rule are effective October 1, 1998.
This rule is a major rule as defined in Title 5, United States Code,
section 804(2). Pursuant to 5 U.S.C. section 801(a)(1)(A), we are
submitting a report to the Congress on this rule on July 31, 1998.

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FOR FURTHER INFORMATION CONTACT:
Nancy Edwards, (410) 786-4531, Operating Prospective Payment, DRG, and
Wage Index Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, and Graduate Medical Education Issues.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

    Sections 1886(d) and (g) of the Social Security Act (the Act) set
forth a system of payment for the operating and capital costs of acute
care hospital inpatient stays under Medicare Part A (Hospital
Insurance) based on prospectively-set rates. Under these prospective
payment systems (PPS), Medicare payment for hospital inpatient
operating and capital-related costs is made at predetermined, specific
rates for each hospital discharge. Discharges are classified according
to a list of diagnosis-related groups (DRGs).
    Certain specialty hospitals are excluded from the prospective
payment systems. Under section 1886(d)(1)(B) of the Act, the following
hospitals and units are excluded from PPS: psychiatric hospitals or
units, rehabilitation hospitals or units, children's hospitals, long
term care hospitals, and cancer hospitals. For these hospitals and
units, Medicare payment for operating costs is based on reasonable
costs subject to certain limits.
    Under section 1886(a)(4) of the Act, costs incurred in connection
with approved graduate medical education (GME) programs are excluded
from the operating costs of inpatient hospital services. Hospitals with
approved GME programs are paid for the direct costs of GME in
accordance with section 1886(h) of the Act; the amount of payment for
direct GME costs for a cost reporting period is based on the number of
the hospital's residents in that period and the hospital's costs per
resident in a base year.
    The regulations governing the hospital inpatient prospective
payment system are located in 42 CFR part 412. The regulations
governing excluded hospitals are located in both parts 412 and 413, and
the graduate medical education regulations are found in part 413.

B. Summary of the Provisions of the May 8, 1998 Proposed Rule

    On May 8, 1998, we published a proposed rule in the Federal
Register (63 FR 25576) setting forth proposed changes to the Medicare
hospital inpatient prospective payment systems for both operating costs
and capital-related costs, which would be effective for discharges
occurring on or after October 1, 1998. We also proposed changes in
payments for excluded hospitals and payments for graduate medical
education costs. The following is a summary of the major issues
addressed and changes we proposed to make:
    <bullet> We proposed changes to the FY 1999 DRG classifications and
relative weights, as required by section 1886(d)(4)(C) of the Act.
    <bullet> We proposed to update the hospital wage data for FY 1999.
We also proposed changes to the data categories included in the wage
index and revisions to the wage index based on hospital redesignations.
    <bullet> We discussed several provisions of the regulations in 42
CFR parts 412 and 413 and set forth certain proposed changes concerning
definition of transfer cases, rural referral centers, disproportionate
share adjustment, bad debts, and direct graduate medical education
programs.
    <bullet> We discussed several provisions of the regulations in 42
CFR Part 412 and set forth certain proposed changes and clarifications
concerning capital indirect medical education payments and payments to
new hospitals.
    <bullet> We discussed the criteria governing excluded hospitals
including caps on the target amounts for FY 1999 and exceptions.
    <bullet> In the addendum to the proposed rule, we set forth
proposed changes to the amounts and factors for determining the FY 1999
prospective payment rates for operating costs and capital-related
costs. We also proposed update factors for determining the rate-of-
increase limits for cost reporting periods

[[Page 40955]]

beginning in FY 1999 for hospitals and hospital units excluded from the
prospective payment system.
    <bullet> In Appendix A of the proposed rule, we set forth an
analysis of the impact that the proposed changes would have on affected
entities.
    <bullet> In Appendix B of the proposed rule, we set forth the
technical appendix on the proposed FY 1999 capital cost model.
    <bullet> In Appendix C, as required by section 1886(e)(3)(B) of the
Act, we set forth a report to Congress on our initial estimate of a
recommended update factor for FY 1999 for both hospitals included in
and hospitals excluded from the prospective payment systems.
    <bullet> In Appendix D of the proposed rule, we set forth our
recommendation of the appropriate percentage change for FY 1999 for the
large urban area and other area average standardized amounts (and
hospital-specific rates applicable to sole community and Medicare-
dependent, small rural hospitals) for hospital inpatient services paid
for under the prospective payment system for operating costs.
    <bullet> In Appendix D of the proposed rule, we also set forth our
recommendation of the appropriate percentage change for FY 1999 for
target rate-of-increase limits to the allowable operating costs of
hospital inpatient services furnished by hospitals and hospital units
excluded from the prospective payment system.
    <bullet> In the proposed rule, we discussed in detail the March 1,
1998 recommendations concerning hospital inpatient policies made by the
Medicare Payment Advisory Commission (MedPAC) as well as our responses
to those recommendations. Under section 1805(b) of the Act, MedPAC is
required to submit a report to Congress, not later than March 1 of each
year, that reviews and makes recommendations on Medicare payment
policies.

C. Public Comments Received in Response to the Proposed Rule

    A total of 214 items of correspondence containing comments on the
proposed rule were received timely. The main areas of concern addressed
by the commenters were the change in the definition of transfer cases
and the revisions to the wage index. We also received a number of
comments on the proposal to pay qualified nonhospital providers for the
direct costs of graduate medical education.
    Summaries of the public comments received and our responses to
those comments are set forth below under the appropriate section.

II. Changes to DRG Classifications and Relative Weights

A. Background

    Under the prospective payment system, we pay for inpatient hospital
services on the basis of a rate per discharge that varies by the DRG to
which a beneficiary's stay is assigned. The formula used to calculate
payment for a specific case takes an individual hospital's payment rate
per case and multiplies it by the weight of the DRG to which the case
is assigned. Each DRG weight represents the average resources required
to care for cases in that particular DRG relative to the average
resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the
DRG relative weights periodically to account for changes in resource
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires
that the Secretary adjust the DRG classifications and relative weights
annually. These adjustments are made to reflect changes in treatment
patterns, technology, and any other factors that may change the
relative use of hospital resources. The changes to the DRG
classification system and the recalibration of the DRG weights for
discharges occurring on or after October 1, 1998 are discussed below.

B. DRG Reclassification

1. General
    Cases are classified into DRGs for payment under the prospective
payment system based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay, as well
as age, sex, and discharge status of the patient. The diagnosis and
procedure information is reported by the hospital using codes from the
International Classification of Diseases, Ninth Revision, Clinical
Modification (ICD-9-CM). The Medicare fiscal intermediary enters the
information into its claims system and subjects it to a series of
automated screens called the Medicare Code Editor (MCE). These screens
are designed to identify cases that require further review before
classification into a DRG can be accomplished.
    After screening through the MCE and any further development of the
claims, cases are classified by the GROUPER software program into the
appropriate DRG. The GROUPER program was developed as a means of
classifying each case into a DRG on the basis of the diagnosis and
procedure codes and demographic information (that is, sex, age, and
discharge status). It is used both to classify past cases in order to
measure relative hospital resource consumption to establish the DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights.
    Currently, cases are assigned to one of 496 DRGs in 25 major
diagnostic categories (MDCs). Most MDCs are based on a particular organ
system of the body (for example, MDC 6, Diseases and Disorders of the
Digestive System); however, some MDCs are not constructed on this basis
since they involve multiple organ systems (for example, MDC 22, Burns).
    In general, cases are assigned to an MDC based on the principal
diagnosis, before assignment to a DRG. However, there are five DRGs to
which cases are directly assigned on the basis of procedure codes.
These are the DRGs for liver, bone marrow, and lung transplant (DRGs
480, 481, and 495, respectively) and the two DRGs for tracheostomies
(DRGs 482 and 483). Cases are assigned to these DRGs before
classification to an MDC.
    Within most MDCs, cases are then divided into surgical DRGs (based
on a surgical hierarchy that orders individual procedures or groups of
procedures by resource intensity) and medical DRGs. Medical DRGs
generally are differentiated on the basis of diagnosis and age. Some
surgical and medical DRGs are further differentiated based on the
presence or absence of complications or comorbidities (hereafter CC).
    Generally, GROUPER does not consider other procedures; that is,
nonsurgical procedures or minor surgical procedures generally not
performed in an operating room are not listed as operating room (OR)
procedures in the GROUPER decision tables. However, there are a few
non-OR procedures that do affect DRG assignment for certain principal
diagnoses, such as extracorporeal shock wave lithotripsy for patients
with a principal diagnosis of urinary stones.
    We proposed several changes to the DRG classification system for FY
1999. The proposed changes, the comments we received concerning them,
our responses to those comments, and the final DRG changes are set
forth below. Unless otherwise noted, our DRG analysis is based on the
full (100 percent) FY 1997 MedPAR file based on

[[Page 40956]]

bills received through September 30, 1997.
2. MDC 5 (Diseases and Disorders of the Circulatory System)
    In the August 29, 1997 hospital inpatient final rule with comment
period (62 FR 45974), we noted that, because of the many recent changes
in heart surgery, we were considering conducting a comprehensive review
of the MDC 5 surgical DRGs. We have begun that review, and based upon
our analysis thus far, we proposed the following DRG changes.
    a. Coronary Bypass. There are two DRGs that capture coronary bypass
procedures: DRG 106 (Coronary Bypass with Cardiac Catheterization) and
DRG 107 (Coronary Bypass without Cardiac Catheterization). The
procedures that allow a coronary bypass case to be assigned to DRG 106
include percutaneous valvuloplasty, percutaneous transluminal coronary
angioplasty (PTCA), cardiac catheterization, coronary angiography, and
arteriography.
    In analyzing the FY 1997 MedPAR file, we noted that, of cases
assigned to DRG 106, the average standardized charges for coronary
bypass cases with PTCA were significantly higher than those cases
without PTCA. There were approximately 4,400 cases in DRG 106 where
PTCA is performed as a secondary procedure. These cases had an average
standardized charge of approximately $69,000. The average charge of the
approximately 95,000 cases in DRG 106 without PTCA was approximately
$52,000.
    Based on this analysis, we proposed to create a new DRG for
coronary bypass cases with PTCA. The cases currently in DRG 106 without
PTCA would be assigned to another DRG and the cases currently assigned
to DRG 107 would be unmodified. Because we would replace two DRGs with
three new DRGs, we proposed to revise the DRG numbers and titles
accordingly. The new DRGs and their titles are set forth below:

DRG 106  Coronary Bypass with PTCA
DRG 107  Coronary Bypass with Cardiac Catheterization
DRG 109  Coronary Bypass without Cardiac Catheterization

We note that DRG 109 has been an empty DRG for the last several years.
    We received several comments regarding this proposal.
    Comment: While the commenters supported the creation of a new DRG
to capture coronary bypass surgeries with PTCA, some of the commenters
were concerned about the renumbering of the current DRGs 106 and 107.
They believe splitting the cases currently assigned to DRG 106 into new
DRGs 106 and 107 and reassigning the cases currently assigned to DRG
107 to DRG 109 will make it difficult to conduct DRG trend analyses.
The commenters suggested that DRGs 106 and 107 should not be modified
and that DRG 109 be used to capture coronary bypass with PTCA. Two
commenters stated that a DRG that has been invalidated (109) should not
be reintroduced.
    Response: Although we understand the commenters' concern, we also
believe that the sequencing of surgical DRGs in hierarchy order is
appropriate. In this case, our alternative to the proposed revision
would have been to delete DRGs 106 and 107 and create three new DRGs
that would have been placed at the end of the DRG table, that is, after
current DRG 503. Because we did have an empty surgical DRG in MDC 5 and
it was numerically close to DRGs 106 and 107, we believed our proposed
retitling was the best alternative.
    We note that the surgical DRGs in MDC 5 have been renumbered and
retitled several times since they were first introduced in 1983. As
stated above, we are currently conducting a comprehensive review of the
MDC 5 surgical DRGs. If that review results in the reclassification of
procedures among the current DRGs, we will probably renumber and
retitle those DRGs.
    Comment: We received one comment requesting clarification of the
DRG assignment for PTCA and cardiac catheterization procedures when
performed in conjunction with coronary bypass. The commenter suggested
that we add the phrase ``without PTCA'' to the titles of DRGs 107 and
109 to more aptly describe the cases assigned to those DRGs.
    Response: Coronary bypass performed in conjunction with single or
multiple PTCA or percutaneous valvuloplasty will be assigned to DRG
106. The procedure codes for PTCA and percutaneous valvuloplasty are as
follows: 35.96, 36.01, 36.02, and 36.05. Procedures assigned to DRG 107
would include any coronary bypass with cardiac catheterization,
coronary angiography, or coronary arteriography, and DRG 109 is for
cases with the coronary bypass procedure only. We believe that the
proposed titles accurately describe the cases assigned to each of the
DRGs and that adding the phrase ``without PTCA'' to the titles of DRGs
107 and 109 is unnecessary. We are incorporating our proposed DRG
changes and DRG numbers and titles in the final DRG classifications.
    b. Implantable heart assist system and annuloplasty. In the August
29, 1997 final rule with comment period, we moved implant of an
implantable, pulsatile heart assist system (procedure code 37.66) from
DRGs 110 and 111 (Major Cardiovascular Procedures) <SUP>1</SUP> to DRG
108 (Other Cardiothoracic Procedures). Although this move improved
payment for these procedures, they were still much more expensive than
the other cases in DRG 108 ($96,000 for heart assist versus an average
of $54,000 for all other cases in the FY 1996 MedPAR file). We stated
that we would continue to review the MDC 5 surgical DRGs in an attempt
to find a DRG placement for these cases that would be more similar in
terms of resource use.
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    \1\ A single title combined with two DRG numbers is used to
signify pairs. Generally, the first DRG is for cases with CC and the
second DRG is for cases without CC. If a third number is included,
it represents cases with patients who are age 0-17. Occasionally, a
pair of DRGs is split between age >17 and age 0-17.
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    As discussed in the proposed rule, in reviewing the FY 1997 MedPAR
file, we noted that heart assist system implant continues to be the
most expensive procedure in DRG 108. In fact, other than heart
transplant, heart assist system implant is the most expensive procedure
in MDC 5. The average FY 1997 charge for these cases, when assigned to
DRG 108, is over $150,000 compared to about $53,000 for all cases in
DRG 108. Obviously, the charges for heart assist implant are increasing
at a much greater rate than the average charges for DRG 108. In
addition, the length of stay for cases coded with 37.66 is
approximately 32 days compared to about 11 days for all other DRG 108
cases.
    One possibility for improving payment for these cases is to move
them to DRGs 104 and 105 (Cardiac Valve Procedures). Those DRGs, which
split on the basis of the performance of cardiac catheterization, have
average charges of approximately $66,000 and $51,000, respectively.
While heart assist implant cases are still more expensive than the
average case in these DRGs, payment would be improved. Clinically,
placement of heart assist implant in DRGs 104 and 105 is not without
precedent. Effective with FY 1988, we placed implant of a total
automatic implantable cardioverter defibrillator (AICD) in these DRGs.
In addition, the vast majority of procedures assigned to DRG 108
involve surgically splitting open the sternum to perform the procedure.
However, implant of the heart assist device does not require this
approach.
    While reviewing the DRG 108 cases, we also noted that procedure
code 35.33

[[Page 40957]]

(annuloplasty) is assigned to this DRG. Annuloplasty is a valve
procedure and is clinically more similar to the cases assigned to DRGs
104 and 105 than it is to the cases assigned to DRG 108. In addition,
the average standardized charge for annuloplasty cases assigned to DRG
108 is about $67,000, well above the overall average charge of
approximately $53,000 for cases in DRG 108. Therefore, we proposed to
move annuloplasty from DRG 108 to DRGs 104 and 105.
    In order to more accurately reflect the cases assigned to DRGs 104
and 105, we proposed to retitle them as follows:

DRG 104  Cardiac Valve and Other Major Cardiothoracic Procedures
with Cardiac Catheterization
DRG 105  Cardiac Valve and Other Major Cardiothoracic Procedures
without Cardiac Catheterization.

    We received only supportive comments for our proposal to move
annuloplasty to DRGs 104 and 105; therefore, that change is included in
the final DRGs.
    Comment: Commenters generally appreciated any improvement in the
payment for heart assist devices. However, some of them continue to
urge HCFA to reclassify these cases to DRG 103 (Heart Transplant) or to
their own DRG. Two commenters were unsure if we had proposed a
classification change which was reflected in the proposed DRG weights
or had merely requested comment on such a change. Another commenter was
concerned that cases reassigned to DRG 105 (those in which there is no
cardiac catheterization performed) would receive a lower payment than
they currently do in DRG 108.
    Response: First, we note that the proposed DRG weights did include
this change; that is, we moved over 2,000 heart assist implant cases
from DRG 108 to DRGs 104 and 105 before recalibrating the proposed
weights. In addition, although the final FY 1999 weight for DRG 105 is
slightly lower than the weight for DRG 108 (5.7099 and 5.9764,
respectively), the much higher DRG 104 weight (7.3690) results in an
overall improvement in payment for these cases when reclassified. Using
the FY 1997 MedPAR cases, we estimate that at least 40 percent of the
heart assist implant cases will be assigned to DRG 104. Thus, as long
as a hospital treats a mix of heart assist implant cases, with and
without the cardiac catheterization procedure, its overall payment
should be higher under the revised classification. We presume this will
be the case for virtually all hospitals.
    With regard to the comments concerning reclassification of this
procedure to DRG 103 or a new DRG, we refer the reader to our response
to a similar comment in the August 29, 1997 final rule (62 FR 45967).
3. MDC 22 (Burns)
    Under the current DRG system, burn cases are assigned to one of six
DRGs in MDC 22 (Burns), which have not been revised since 1986. In our
FY 1998 hospital inpatient proposed rule (June 2, 1997; 62 FR 29912),
in response to inquiries we had received, we indicated that we would
conduct a comprehensive review of MDC 22 to determine whether changes
in these DRGs could more appropriately capture the variation in
resource use associated with different classes of burn patients. We
solicited public comments on this issue, particularly asking for
recommendations on ways to categorize related diagnosis and procedure
codes to produce DRG groupings that would be more homogeneous in terms
of resource use.
    In our May 8, 1998 proposed rule (63 FR 25579), we discussed in
detail the results of our review of MDC 22. We received a proposal
(endorsed by the American Burn Association (ABA)) for restructuring the
DRGs based on several statistical and clinical criteria, including age,
severity of the burn, and the presence of complications or
comorbidities. Subsequently, we worked closely with representatives of
the ABA and with the clinicians who developed the proposal in order to
refine it for Medicare purposes. Based on this work, we proposed to
replace the six existing DRGs in MDC 22 with eight new DRGs. For ease
of reference and classification, the current DRGs in MDC 22, DRGs 456
through 460 and 472, would no longer be valid, and we would establish
new DRGs 504 through 511 to contain all cases that currently group to
MDC 22. (The complete titles of the new DRGs are set forth below.)
    In reviewing the Medicare burn cases, we found that the most
important distinguishing characteristic in terms of resource use was
the amount of body surface affected by the burn and how much of that
burn was a 3rd degree burn. The second most important factor was
whether or not the patient received a skin graft. Thus, a patient with
burns covering at least 20 percent of body area, with at least 10
percent of that a 3rd degree burn, consumed the most resources.
However, if a patient met these criteria and did not receive a skin
graft, then the case was much less expensive and the average length of
stay fell from over 30 days to 8 days. The first two proposed burn DRGs
reflect these distinctions (DRGs 504 and 505).
    After classifying the most extensive burn cases, we found that the
patients with 3rd degree burns that did not meet the criteria to be
assigned to DRGs 504 and 505 were the most expensive of the remaining
cases (that is, those patients whose burns did not meet the at least 20
percent body area or at least 10 percent 3rd degree criteria). These
burns are referred to clinically as ``full-thickness burns.'' A subset
of these full-thickness burn cases, those with skin graft or an
inhalation injury, were much more expensive than the other cases. After
dividing these patients into two groups, with or without skin graft or
inhalation injury, we examined whether other factors had an influence
on resource use. We found that patients who had a CC (complication or
comorbidity) or a concomitant significant trauma consumed more
resources whether or not they had a skin graft or inhalation injury.
Thus, the next four proposed DRGs were defined as full-thickness burns
with skin graft or inhalation injury with or without CC or significant
trauma, or full-thickness burns without skin graft or inhalation injury
with or without CC or significant trauma (DRGs 506 through 509).
    Finally, the last two proposed DRGs (510 and 511) were for cases
with nonextensive burns. These cases are also split on the basis of CCs
or concomitant significant trauma.
    Consistent with the recommendations of several commenters on last
year's proposed rule, the new burn DRGs would no longer include a
separate DRG for cases in which burn patients were transferred to
another acute care facility.
    The specific diagnosis and procedure codes that were included in
each of the eight proposed DRGs and their titles are as follows.
    DRGs 504 and 505--Extensive 3rd Degree Burns with and without Skin
Graft. DRGs 504 and 505 include all cases with burns involving at least
20 percent of body surface area combined with a 3rd degree burn
covering at least 10 percent of body surface area. Thus, these cases
have diagnosis codes of 948.xx, with a fourth digit of 2 or higher
(indicating that burn extends over 20 percent or more of body surface)
and a fifth digit of 1 or higher (indicating a 3rd degree burn
extending over 10 percent or more of body surface). Cases with the
appropriate diagnosis codes are classified into DRG 504 if one of the
following skin graft procedure codes is present:

85.82  Split-thickness graft to breast
85.83  Full-thickness graft to breast
85.84  Pedicle graft to breast
86.60  Free skin graft, NOS
86.61  Full-thickness skin graft to hand

[[Page 40958]]

86.62  Other skin graft to hand
86.63  Full-thickness skin graft to other sites
86.65  Heterograft to skin
86.66  Homograft to skin
86.67  Dermal regenerative graft (new code in FY 1999--see Table 6A
in section VI. of the Addendum)
86.69  Other skin graft to other sites
86.70  Pedicle of flap graft, NOS
86.71  Cutting and preparation of pedicle grafts or flaps
86.72  Advancement of pedicle graft
86.73  Attachment of pedicle or flap graft to hand
86.74  Attachment of pedicle or flap graft to other sites
86.75  Revision of pedicle or flap graft
86.93  Insertion of tissue expander

    DRGs 506 and 507--Full Thickness Burn with Skin Graft or Inhalation
Injury with or without CC or Significant Trauma. These DRGs include all
other cases of 3rd degree burns that also have either a skin graft or
an inhalation injury. Thus, these cases have diagnosis codes of 941.xx
through 946.xx, and 949.xx, with a fourth digit of 3 or higher, as well
as cases with codes of 948.xx that did not group into DRGs 504 or 505
(that is, 948.00, 948.01, and 948.1x through 948.9x with a fifth digit
of 0). In addition, cases classified into DRGs 506 and 507 must have
either one of the skin graft procedure codes listed above or one of the
following diagnosis codes for inhalation injuries:

518.5  Pulmonary insufficiency following trauma and surgery
518.81  Respiratory failure
518.84  Acute and chronic respiratory failure (new code in FY 1999--
see Table 6A in section VI. of the Addendum)
947.1  Burn of larynx, trachea, or lung
987.9  Toxic effect of gas, fume, or vapor, NOS

Cases that meet both of these coding criteria are assigned to DRG 506
if there is a diagnosis code indicating either a CC (based on the
standard DRG CC list) or concomitant significant trauma (based on the
significant trauma diagnosis codes, listed by body site, used for
classification in MDC 24).
    DRGs 508 and 509--Full Thickness Burn without Skin Graft or
Inhalation Injury with or without CC or Significant Trauma. These DRGs
include all other cases of 3rd degree burns. Thus, these DRGs include
all cases without a skin graft or inhalation injury that have diagnosis
codes of 941.xx through 946.xx, and 949.xx, with a fourth digit of 3 or
higher, as well as cases with codes of 948.xx that did not group into
DRGs 504 or 505. DRG 508 also requires a secondary diagnosis from the
standard CC list or the trauma list based on the significant trauma
diagnosis codes, listed by body site, used for classification in MDC
24.
    DRGs 510 and 511--Nonextensive Burns with and without CC or
Significant Trauma. The remaining burn cases would be classified into
one of these two proposed DRGs, depending on whether or not the claim
included a diagnosis code reflecting the presence of a CC or a
significant trauma, as explained above.
    Comment: We received five comments on this proposed change. In
general, the commenters, including the ABA, strongly supported the
proposed restructuring of MDC 22. The commenters agreed that the new
burn DRGs should bring about meaningful improvements to the clinical
coherency and payment equity for the cases assigned to the MDC 22 DRGs.
One commenter noted that under the new DRGs, diagnosis codes in the
948.xx series (that is, the codes used to identify the extent of body
surface involved in a burn and the percentage of the body surface with
a 3rd degree burn) would take on added importance and emphasized the
need for coder education in this area. Another commenter submitted
several suggestions for additional procedure codes that should be added
to the list of procedure codes that would result in assignment to DRG
504 and to DRGs 506 and 507. These codes include both additional codes
that the commenter believes should be considered as skin grafts (such
as procedure codes 08.61 through 08.69, reconstruction of eyelid with
flaps or grafts) as well as codes for other procedures (for example,
limb reattachments or eyeball enucleations) that, as the commenter
pointed out, are now considered a related operating room procedure
under existing DRG 472, Extensive Burns with Operating Room Procedure.
This commenter also suggested that DRGs 506 and 507 be identified as
surgical DRGs in Table 5 of the addendum to the final rule.
    Response: We appreciate the positive responses generated by this
proposal. We agree that our proposed changes will place greater
emphasis on the need for accurate use of the series 948.xx diagnosis
codes. We note that this issue has been addressed in the American
Hospital Association's quarterly publication, ``Coding Clinic for ICD-
9-CM.'' In the 1994, 4th quarter issue, Coding Clinic stated ``It is
advisable to use category 948 as additional coding when needed to
provide data for evaluating burn mortality, such as that needed by burn
units. It is also advisable to use category 948 as an additional code
for reporting purposes when there is mention of a third-degree burn
involving 20 percent or more of the body surface.'' We believe the vast
majority of burn cases already include the 948.xx coding if
appropriate, especially those treated in burn centers. However, we will
be pleased to work with other hospital groups that are interested in
developing educational materials related to the accurate coding of burn
cases.
    In developing the coding classifications used to assign cases under
the burn DRGs, we worked closely with the ABA and its medical
consultants to identify the most significant distinguishing
characteristics in terms of resource use in burn cases. This process
involved both grouping cases that were clinically similar as well as
conducting a series of test runs to maximize the amount of variation in
resource use that could be explained using varying groups of diagnosis
and procedure codes. As stated in the May 8 proposed rule (63 FR
25579), we estimate that the proposed changes to the burn DRGs would
increase by more than 25 percent the amount of variation in resource
use explained by the DRGs in MDC 22, as well as improve the clinical
coherence of the cases within each DRG. As recommended by the ABA, the
procedure codes used to identify skin grafts coincide with the
procedure codes now in use under existing DRG 458, Non-Extensive Burns
with Skin Graft, and we believe that these codes represent the most
resource-intensive skin grafts. Therefore, we are not adding the codes
suggested by the commenter.
    We recognize that some procedures now listed under DRG 472 will no
longer affect DRG assignment under the restructured burn DRGs. However,
we believe that the substantially increased ability of the new DRGs to
explain the variation in resource use among burn cases clearly
indicates the appropriateness of narrowing the focus of the
classification system to emphasize the extent and severity of the burn,
in conjunction with skin grafts or inhalation injury. Our analysis
indicated that the presence of skin grafts or inhalation injuries had a
much more consistent effect on the consumption of hospital resources
than the presence of one of the numerous operating room procedures now
listed under DRG 472. We also note that, since the skin graft
procedures now classified to DRG 504 were classified to former DRG 472,
many DRG 472 cases will now be assigned to DRG 504, which has a higher
weight than 472 did (14.1153 versus 10.2429). When the FY 1999 cases
become available, we will review them to assess the revisions to MDC 22
and the possible need for the type of changes suggested by the
commenter.

[[Page 40959]]

    Finally, we note that we do not classify DRGs 506 and 507 as
surgical DRGs because they include not only cases involving skin
grafts, which are considered surgical procedures, but also cases
involving inhalation injuries, which would not necessarily involve any
surgical procedures. Thus, in this final rule, we are adopting the
changes to the burn DRGs as proposed.
4. Legionnaires' Disease
    Effective with discharges occurring on or after October 1, 1997, a
new diagnosis code was created for pneumonia due to Legionnaires'
disease (code 482.84). In the August 29, 1997 final rule with comment
period, we assigned this code to DRGs 79, 80, and 81 (Respiratory
Infections and Inflammations) (62 FR 46090). However, we did not
include this code as a human immunodeficiency virus (HIV) major related
condition in MDC 25 (HIV Infections). Because pneumonia due to
Legionnaires' disease is a serious respiratory condition that has a
deleterious effect on patients with HIV, we proposed to assign
diagnosis code 482.84 to DRG 489 (HIV with Major Related Condition) as
a major related condition. In addition, we did not assign the code as a
major problem in DRGs 387 (Prematurity with Major Problems) and 389
(Full Term Neonate with Major Problems). These DRGs are assigned to MDC
15 (Newborns and Other Neonates with Conditions Originating in the
Perinatal Period). Again, as a part of the proposed rule, we assigned
diagnosis code 482.84 as a major problem in DRGs 387 and 389 because of
its effect on resource use in treating newborns.
    Commenters supported these proposed revisions, and we are
incorporating them into the final DRGs.
5. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. It is, therefore, necessary to have a decision rule by which
these cases are assigned to a single DRG. The surgical hierarchy, an
ordering of surgical classes from most to least resource intensive,
performs that function. Its application ensures that cases involving
multiple surgical procedures are assigned to the DRG associated with
the most resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibration, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications, to determine if the ordering of classes coincided
with the intensity of resource utilization, as measured by the same
billing data used to compute the DRG relative weights.
    A surgical class can be composed of one or more DRGs. For example,
in MDC 5, the surgical class ``heart transplant'' consists of a single
DRG (DRG 103) and the class ``major cardiovascular procedures''
consists of two DRGs (DRGs 110 and 111). Consequently, in many cases,
the surgical hierarchy has an impact on more than one DRG. The
methodology for determining the most resource-intensive surgical class
involves weighing each DRG for frequency to determine the average
resources for each surgical class. For example, assume surgical class A
includes DRGs 1 and 2 and surgical class B includes DRGs 3, 4, and 5.
Assume also that the average charge of DRG 1 is higher than that of DRG
3, but the average charges of DRGs 4 and 5 are higher than the average
charge of DRG 2. To determine whether surgical class A should be higher
or lower than surgical class B in the surgical hierarchy, we would
weigh the average charge of each DRG by frequency (that is, by the
number of cases in the DRG) to determine average resource consumption
for the surgical class. The surgical classes would then be ordered from
the class with the highest average resource utilization to that with
the lowest, with the exception of ``other OR procedures'' as discussed
below.
    This methodology may occasionally result in a case involving
multiple procedures being assigned to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER searches for the procedure in the
most resource-intensive surgical class this result is unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average relative
weight is ordered above a surgical class with a higher average relative
weight. For example, the ``other OR procedures'' surgical class is
uniformly ordered last in the surgical hierarchy of each MDC in which
it occurs, regardless of the fact that the relative weight for the DRG
or DRGs in that surgical class may be higher than that for other
surgical classes in the MDC. The ``other OR procedures'' class is a
group of procedures that are least likely to be related to the
diagnoses in the MDC but are occasionally performed on patients with
these diagnoses. Therefore, these procedures should only be considered
if no other procedure more closely related to the diagnoses in the MDC
has been performed.
    A second example occurs when the difference between the average
weights for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
since, by virtue of the hierarchy change, the relative weights are
likely to shift such that the higher-ordered surgical class has a lower
average weight than the class ordered below it.
    Based on the preliminary recalibration of the DRGs, we proposed to
modify the surgical hierarchy as set forth below. However, in
developing the proposed rule, we were unable to test the effects of the
proposed revisions to the surgical hierarchy and to reflect these
changes in the proposed relative weights due to the unavailability of
revised GROUPER software at the time the proposed rule was prepared.
Rather, we simulated most major classification changes to approximate
the placement of cases under the proposed reclassification and then
determined the average charge for each DRG. These average charges then
serve as our best estimate of relative resource use for each surgical
class. We test the proposed surgical hierarchy changes after the
revised GROUPER is received and reflect the final changes in the DRG
relative weights in the final rule.
    We proposed to revise the surgical hierarchy for MDC 3 (Diseases
and Disorders of the Ear, Nose, Mouth and Throat) as follows:
    <bullet> We would reorder Sinus and Mastoid Procedures (DRGs 53-54)
above Myringotomy with Tube Insertion (DRGs 61-62).
    <bullet> We would reorder Mouth Procedures (DRGs 168-169) above
Tonsil and Adenoid Procedure Except Tonsillectomy and/or Adenoidectomy
Only (DRGs 57-58).
    We received two comments in support of our surgical hierarchy
proposals. However, for this final rule, we tested the proposed changes
using the most recent MedPAR file and the revised GROUPER software, and
we found that the proposal to move Sinus and Mastoid Procedures (DRGs
53-54) above Myringotomy with Tube Insertion (DRGs 61-62) is not
supported. Therefore, this change will not be made in this final rule.
The proposed reordering of DRGs 53 and 54 above Cleft Lip and Palate
Repair (DRG 52) (DRG 52 is currently ordered below DRGs 61 and 62 but
above DRGs 53 and 54) is still supported and will be

[[Page 40960]]

incorporated in the final GROUPER, as will the proposed reordering of
DRGs 168 and 169 above DRGs 57 and 58.
6. Refinement of Complications and Comorbidities List
    There is a standard list of diagnoses that are considered CCs. We
developed this list using physician panels to include those diagnoses
that, when present as a secondary condition, would be considered a
substantial complication or comorbidity. In previous years, we have
made changes to the standard list of CCs, either by adding new CCs or
deleting CCs already on the list. We did not propose to delete any of
the diagnosis codes on the CC list.
    In the September 1, 1987 final notice concerning changes to the DRG
classification system (52 FR 33143), we modified the GROUPER logic so
that certain diagnoses included on the standard list of CCs would not
be considered a valid CC in combination with a particular principal
diagnosis. Thus, we created the CC Exclusions List. We made these
changes to preclude coding of CCs for closely related conditions, to
preclude duplicative coding or inconsistent coding from being treated
as CCs, and to ensure that cases are appropriately classified between
the complicated and uncomplicated DRGs in a pair.
    In the May 19, 1987 proposed notice concerning changes to the DRG
classification system (52 FR 18877), we explained that the excluded
secondary diagnoses were established using the following five
principles:
    <bullet> Chronic and acute manifestations of the same condition
should not be considered CCs for one another (as subsequently corrected
in the September 1, 1987 final notice (52 FR 33154)).
    <bullet> Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for a condition should not be considered CCs for
one another.
    <bullet> Conditions that may not co-exist, such as partial/total,
unilateral/bilateral, obstructed/unobstructed, and benign/malignant,
should not be considered CCs for one another.
    <bullet> The same condition in anatomically proximal sites should
not be considered CCs for one another.
    <bullet> Closely related conditions should not be considered CCs
for one another.
    The creation of the CC Exclusions List was a major project
involving hundreds of codes. The FY 1988 revisions were intended to be
only a first step toward refinement of the CC list in that the criteria
used for eliminating certain diagnoses from consideration as CCs were
intended to identify only the most obvious diagnoses that should not be
considered complications or comorbidities of another diagnosis. For
that reason, and in light of comments and questions on the CC list, we
have continued to review the remaining CCs to identify additional
exclusions and to remove diagnoses from the master list that have been
shown not to meet the definition of a CC. (See the September 30, 1988
final rule for the revision made for the discharges occurring in FY
1989 (53 FR 38485); the September 1, 1989 final rule for the FY 1990
revision (54 FR 36552); the September 4, 1990 final rule for the FY
1991 revision (55 FR 36126); the August 30, 1991 final rule for the FY
1992 revision (56 FR 43209); the September 1, 1992 final rule for the
FY 1993 revision (57 FR 39753); the September 1, 1993 final rule for
the FY 1994 revisions (58 FR 46278); the September 1, 1994 final rule
for the FY 1995 revisions (59 FR 45334); the September 1, 1995 final
rule for the FY 1996 revisions (60 FR 45782); the August 30, 1996 final
rule for the FY 1997 revisions (61 FR 46171); and the August 29, 1997
final rule for the FY 1998 revisions (62 FR 45966)).
    We proposed a limited revision of the CC Exclusions List to take
into account the changes that will be made in the ICD-9-CM diagnosis
coding system effective October 1, 1998. (See section II.B.8, below,
for a discussion of ICD-9-CM changes.) These proposed changes were made
in accordance with the principles established when we created the CC
Exclusions List in 1987. We received no comments on these proposed
changes and we are incorporating them as final changes.
    Tables 6F and 6G in section VI of the Addendum to this final rule
contain the revisions to the CC Exclusions List that would be effective
for discharges occurring on or after October 1, 1998. Each table shows
the principal diagnoses with changes to the excluded CCs. Each of these
principal diagnoses is shown with an asterisk and the additions or
deletions to the CC Exclusions List are provided in an indented column
immediately following the affected principal diagnosis.
    CCs that are added to the list are in Table 6F--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 1998,
the indented diagnoses will not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6G--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 1998 the indented diagnoses will be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical Information Service (NTIS) of
the Department of Commerce. It is available in hard copy for $92.00
plus $6.00 shipping and handling and on microfiche for $20.50, plus
$4.00 for shipping and handling. A request for the FY 1988 CC
Exclusions List (which should include the identification accession
number, (PB) 88-133970) should be made to the following address:
National Technical Information Service; United States Department of
Commerce; 5285 Port Royal Road; Springfield, Virginia 22161; or by
calling (703) 487-4650.
    Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997, and 1998) and those in Tables 6F and 6G of this document must be
incorporated into the list purchased from NTIS in order to obtain the
CC Exclusions List applicable for discharges occurring on or after
October 1, 1998.
    Alternatively, the complete documentation of the GROUPER logic,
including the current CC Exclusions List, is available from 3M/Health
Information Systems (HIS), which, under contract with HCFA, is
responsible for updating and maintaining the GROUPER program. Version
16.0 of this manual, which will include the final FY 1999 DRG changes,
will be available in October 1998 for $225.00, which includes $15.00
for shipping and handling. This manual may be obtained by writing 3M/
HIS at the following address: 100 Barnes Road; Wallingford, Connecticut
06492; or by calling (203) 949-0303.
7. Review of Procedure Codes in DRGs 468, 476, and 477
    Each year, we review cases assigned to DRG 468 (Extensive OR
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
OR Procedure Unrelated to Principal Diagnosis) in order to determine
whether it would be appropriate to change the procedures assigned among
these DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none
of the OR procedures performed is related to the principal diagnosis.
These DRGs are intended to capture atypical cases, that is, those cases
not occurring with sufficient frequency to represent a

[[Page 40961]]

distinct, recognizable clinical group. DRG 476 is assigned to those
discharges in which one or more of the following prostatic procedures
are performed and are unrelated to the principal diagnosis.

60.0  Incision of prostate
60.12  Open biopsy of prostate
60.15  Biopsy of periprostatic tissue
60.18  Other diagnostic procedures on prostate and periprostatic
tissue
60.21  Transurethral prostatectomy
60.29  Other transurethral prostatectomy
60.61  Local excision of lesion of prostate
60.69  Prostatectomy NEC
60.81  Incision of periprostatic tissue
60.82  Excision of periprostatic tissue
60.93  Repair of prostate
60.94  Control of (postoperative) hemorrhage of prostate
60.95  Transurethral balloon dilation of the prostatic urethra
60.99  Other operations on prostate

    All remaining OR procedures are assigned to DRGs 468 and 477, with
DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis. The original list of the ICD-9-CM procedure codes
for the procedures we consider nonextensive procedures, if performed
with an unrelated principal diagnosis, was published in Table 6C in
section IV. of the Addendum to the September 30, 1988 final rule (53 FR
38591). As part of the final rules published on September 4, 1990,
August 30, 1991, September 1, 1992, September 1, 1993, September 1,
1994, September 1, 1995, August 30, 1996, and August 29, 1997, we moved
several other procedures from DRG 468 to 477, as well as moving some
procedures from DRG 477 to 468. (See 55 FR 36135, 56 FR 43212, 57 FR
23625, 58 FR 46279, 59 FR 45336, 60 FR 45783, 61 FR 46173, and 62 FR
45981, respectively.)
    a. Adding procedure codes to MDCs. We annually conduct a review of
procedures producing DRG 468 or 477 assignments on the basis of volume
of cases in these DRGs with each procedure. Our medical consultants
then identify those procedures occurring in conjunction with certain
principal diagnoses with sufficient frequency to justify adding them to
one of the surgical DRGs for the MDC in which the diagnosis falls.
Based on this year's review, we did not identify any necessary changes;
therefore, we did not propose to move any procedures from DRGs 468 and
477 to one of the surgical DRGs.
    b. Reassignment of procedures among DRGs 468, 476, and 477. We also
reviewed the list of procedures that produce assignments to DRGs 468,
476, and 477 to ascertain if any of those procedures should be moved
from one of these DRGs to another based on average charges and length
of stay. Generally, we move only those procedures for which we have an
adequate number of discharges to analyze the data. Based on our review
this year, we did not propose to move any procedures from DRG 468 to
DRGs 476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG 477 to
DRGS 468 or 476.
8. Changes to the ICD-9-CM Coding System
    As discussed above in section II.B.1 of this preamble, the ICD-9-CM
is a coding system that is used for the reporting of diagnoses and
procedures performed on a patient. In September 1985, the ICD-9-CM
Coordination and Maintenance Committee was formed. This is a Federal
interdepartmental committee charged with the mission of maintaining and
updating the ICD-9-CM. That mission includes approving coding changes,
and developing errata, addenda, and other modifications to the ICD-9-CM
to reflect newly developed procedures and technologies and newly
identified diseases. The Committee is also responsible for promoting
the use of Federal and non-Federal educational programs and other
communication techniques with a view toward standardizing coding
applications and upgrading the quality of the classification system.
    The Committee is co-chaired by the National Center for Health
Statistics (NCHS) and HCFA. The NCHS has lead responsibility for the
ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic
Index for Diseases while HCFA has lead responsibility for the ICD-9-CM
procedure codes included in the Tabular List and Alphabetic Index for
Procedures.
    The Committee encourages participation in the above process by
health-related organizations. In this regard, the Committee holds
public meetings for discussion of educational issues and proposed
coding changes. These meetings provide an opportunity for
representatives of recognized organizations in the coding fields, such
as the American Health Information Management Association (AHIMA)
(formerly American Medical Record Association (AMRA)), the American
Hospital Association (AHA), and various physician specialty groups as
well as physicians, medical record administrators, health information
management professionals, and other members of the public to contribute
ideas on coding matters. After considering the opinions expressed at
the public meetings and in writing, the Committee formulates
recommendations, which then must be approved by the agencies.
    The Committee presented proposals for coding changes at public
meetings held on June 5 and December 4 and 5, 1997, and finalized the
coding changes after consideration of comments received at the meetings
and in writing within 30 days following the December 1997 meeting. The
initial meeting for consideration of coding issues for implementation
in FY 2000 was held on June 4, 1998. Copies of the minutes of the 1997
meetings can be obtained from the HCFA Home Page @ http://www.hcfa.gov/
pubaffr.htm, under the ``What's New'' listing. Paper copies of these
minutes are no longer available and the mailing list has been
discontinued. We encourage commenters to address suggestions on coding
issues involving diagnosis codes to: Donna Pickett, Co-Chairperson;
ICD-9-CM Coordination and Maintenance Committee; NCHS; Room 1100; 6525
Belcrest Road; Hyattsville, Maryland 20782. Comments may be sent by E-
mail to: dfp4@cdc.gov.
    Questions and comments concerning the procedure codes should be
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination
and Maintenance Committee; HCFA, Center for Health Plans and Providers,
Plan and Provider Purchasing Policy Group, Division of Acute Care; C4-
05-27; 7500 Security Boulevard; Baltimore, Maryland 21244-1850.
Comments may be sent by E-mail to: pbrooks@hcfa.gov.
    The ICD-9-CM code changes that have been approved will become
effective October 1, 1998. The new ICD-9-CM codes are listed, along
with their proposed DRG classifications, in Tables 6A and 6B (New
Diagnosis Codes and New Procedure Codes, respectively) in section VI.
of the Addendum to this proposed rule. As we stated above, the code
numbers and their titles were presented for public comment in the ICD-
9-CM Coordination and Maintenance Committee meetings. Both oral and
written comments were considered before the codes were approved.
Therefore, we solicited comments only on the proposed DRG
classifications.
    Further, the Committee has approved the expansion of certain ICD-9-
CM codes to require an additional digit for valid code assignment.
Diagnosis codes that have been replaced by expanded codes, other codes,
or have been deleted are in Table 6C (Invalid Diagnosis Codes). These
invalid diagnosis codes will not be recognized by the GROUPER beginning
with discharges occurring on or after October 1, 1998. The

[[Page 40962]]

corresponding new or expanded diagnosis codes are included in Table 6A.
Procedure codes that have been replaced by expanded codes, other codes,
or have been deleted are in Table 6D (Invalid Procedure Codes).
Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis
Code Titles), which also include the proposed DRG assignments for these
revised codes. For FY 1999, there are no revisions to procedure code
titles.
    We received several comments about our proposed DRG assignments of
new and revised codes.
    Comment: One commenter believes that revised diagnosis code 518.81
(acute respiratory failure) should be assigned as a ``major
complication'' in DRG 121 since it was classified in this manner prior
to the code revision. In addition, new diagnosis codes 518.83 (chronic
respiratory failure) and 518.84 (acute and chronic respiratory failure)
each should also be classified as a ``major complication'' in DRG 121.
Several commenters stated that new procedure code 37.67 (implantation
of cardiomyostimulation system) should not be classified to DRGs 442,
443, and 486 since the procedure is not performed for either injuries
or trauma. Commenters also noted that the DRG assignments as set forth
in Tables 6A through 6E in the May 8, 1998 proposed rule (63 FR 22576)
were not always aligned properly with the appropriate MDC number.
    Response: We agree with the commenter that diagnosis codes 518.81,
518.83, and 518.84 should be included on the ``major complication''
list for DRG 121. As noted in the comment, code 518.81 is currently
designated as a major complication and the assignment remains valid. In
addition, the expanded codes 518.83 and 518.84 should be assigned to
the major complication list because these conditions were formerly
assigned to code 518.81. We also agree that procedure code 37.67 should
not have been assigned to DRGs 442, 443, and 486 for the reasons cited
by the commenter. We have revised Tables 6A, 6C, and 6E to reflect
these changes. In addition, we have reformatted the tables to correct
any alignment problems. Finally, we note that in Table 6B, the DRG
assignment of procedure code 86.67 should list only DRGs 504, 506, and
507 under MDC 22. DRGs 458 and 472, which were listed in the proposed
rule, have been deleted as a result of our restructuring of the burn
DRGs (see section II.B.3 of this preamble).
9. Other Issues
    a. Palliative care. Effective October 1, 1996 (FY 1997), we
introduced a diagnosis code to allow the identification of those cases
in which palliative care was delivered to a hospital inpatient. This
code, V66.7 (Encounter for palliative care), was unusual in that there
had been no previous code assignment that included the concept of
palliative care. Since this was a new concept, instructional materials
were developed and distributed by the AHA as well as specialty groups
on the use of this new code. With new codes, it sometimes takes several
years for physician documentation to improve and for coders to become
accustomed to looking for this type of information in order to assign a
code. There is an inclusion note listed under V66.7 which indicates
that this code should be used as a secondary diagnosis only; the
patient's medical problem would always be listed first. Currently, use
of diagnosis code V66.7 does not have an impact on DRG assignment.
Consistent with prior practice, we have waited until the FY 1997 data
became available for analysis before considering any possible
modifications to the DRGs.
    As discussed in the proposed rule, in analyzing the FY 1997 bills
received through September 1997, we found that 4,769 discharges
included V66.7 as a secondary diagnosis. These cases were widely
distributed throughout 199 DRGs. The vast majority of these DRGs
included five or fewer discharges with use of palliative care. Only 12
DRGs included more than 100 cases. These were the following:

------------------------------------------------------------------------
                                                              Number of
               DRG                           Title              cases
------------------------------------------------------------------------
10...............................  Nervous System Neoplasms          144
                                    with CC.
14...............................  Specific Cerebrovascular          272
                                    Disorders Except TIA.
79...............................  Respiratory Infections            139
                                    and Inflammations Age
                                    >17 with CC.
82...............................  Respiratory Neoplasms...          526
89...............................  Simple Pneumonia and              200
                                    Pleurisy Age >17 with
                                    CC.
127..............................  Heart Failure and Shock.          184
172..............................  Digestive Malignancy              226
                                    with CC.
203..............................  Malignancy of                     285
                                    Hepatobiliary System or
                                    Pancreas.
239..............................  Pathological Fractures            218
                                    and Musculosketal and
                                    Connective Tissue
                                    Malignancy.
296..............................  Nutritional and                   173
                                    Miscellaneous Metabolic
                                    Disorders Age >17 with
                                    CC.
403..............................  Lymphoma and Non-Acute            178
                                    Leukemia with CC.
416..............................  Septicemia Age >17......          147
------------------------------------------------------------------------

    Six of these DRGs are cancer-related; however, the other DRGs are
quite diverse. Upon further analysis, we found that, for the most part,
discharges with code V66.7 do not significantly differ in length of
stay from the discharges in the same DRG without code V66.7. The length
of stay for discharges with code V66.7 are sometimes longer and
sometimes shorter and the comparative length of stay for a given DRG
tends to vary by only one day. In general, the average charges for a
palliative care case discharge with a secondary code of V66.7 were
lower than the charges for other discharges within the DRG. However,
these differences were relatively small and were well within the
standard variation of charges for cases in the DRG.
    One approach we could take to revise the DRGs would be to divide
those DRGs with a large number of cases coded with V66.7 into two
different DRGs, with and without palliative care. However, the
relatively small proportion of cases in each DRG argues against this
approach; no DRG has more than 1 percent of its cases coded with
palliative care and, in most cases, the percentage is well under 1
percent. An alternative approach would be to group all palliative care
cases, regardless of the underlying disease or condition, into one new
DRG. However, the charges of these cases are so varied that this is not
a logical choice. In addition, there is a lack of clinical coherence in
such an approach. The underlying diagnoses of these cases range from
respiratory conditions to heart failure to septicemia.

[[Page 40963]]

Because there are so few cases in the FY 1997 data and they are so
widely dispersed among different DRGs, we did not propose any DRG
modification. We will make a more detailed analysis of these cases over
the next year based on a more complete FY 1997 data file as well as
review of the FY 1998 cases that will be available later this year. As
time goes by, hospital coders and physicians should become more aware
of this code and we hope that more complete data will assist our
decision-making process.
    We received a few comments supporting our decision to make no DRG
changes at this time for palliative care cases. One commenter agreed
with our statement that it may take several years for use of this code
to spread through the medical community.
    b. PTCA. Effective with discharges occurring on or after October 1,
1997, we reassigned cases of PTCA with coronary artery stent implant
from DRG 112 (Percutaneous Cardiovascular Procedures) to DRG 116 (Other
Permanent Cardiac Pacemaker Implant or PTCA with Coronary Artery Stent
Implant). In the August 29, 1997 final rule with comment period, we
responded to several commenters who contended that PTCA cases treated
with platelet inhibitors were as resource intensive as the PTCA with
stent implant cases and that these cases should also be moved to DRG
116. However, there is currently no code that describes the infusion of
platelet inhibitors. Therefore, we were unable to make any changes in
the DRGs for FY 1998.
    As set forth in Table 6B, New Procedure Codes in section VI. of the
addendum to this final rule, a new procedure code for injection or
infusion of platelet inhibitors (code 99.20) will be effective with
discharges occurring on or after October 1, 1998. Our usual policy on
new codes is to assign them to the same DRG or DRGs as their
predecessor code. Because infusion of platelet inhibitors is currently
assigned to a non-OR procedure code, we followed our usual practice and
designated code 99.20 as a non-OR code that does not affect DRG
assignment.
    We will not have any data on this new code until we receive bills
for FY 1999. Thus, we would be unable to make any changes in DRG
assignment until FY 2001. We note, however, that the Conference Report
that accompanied the Balanced Budget Act of 1997 contained language
stating that ``* * * in order to ensure that Medicare beneficiaries
have access to innovative new drug therapies, the Conferees believe
that HCFA should consider, to the extent feasible, reliable, validated
data other than MedPAR data in annually recalibrating and reclassifying
the DRGs.'' (H.R. Rep. No. 105-217 at 734 (1997)). At the time the
proposed rule was published, we had received no data that would have
allowed us to make an appropriate modification of DRG 112 for PTCA
cases with platelet infusion therapy. In that rule, we stated that we
would review and analyze any data we received during the comment period
about the use of platelet inhibitors for Medicare beneficiaries.
    Since publication of the proposed rule, we received some data
concerning the use of GPIIb/IIIa platelet inhibitor drug therapy as
well as some comments on the issue. A discussion of the data and the
comments and our responses are set forth below.
    Comment: The data we received were provided by the pharmaceutical
company that manufactures a GPIIb/IIIa platelet inhibitor. In its
comment accompanying the data, the company states its belief that the
data conclusively demonstrate that procedure code 99.20 should be
assigned to DRG 116 effective for discharges occurring on or after
October 1, 1998. We received two other comments from hospitals
supporting this reassignment in order to improve payment for a
beneficial drug therapy. Another hospital urged HCFA not to make the
reassignment because the commenter believes that there is no evidence
that use of the drug decreases mortality or the risk of need for
emergency coronary bypass in patients undergoing stent implantation. In
addition, this commenter believes that the price charged for platelet
inhibitor is exorbitant and that HCFA should not directly subsidize a
pharmaceutical company through a DRG change. Finally, two commenters, a
drug company and a pharmaceutical association, were encouraged by
HCFA's willingness to consider data other than MedPAR data for
analyzing possible DRG changes.
    The data we received comprise two different sets of Medicare
beneficiaries who received PTCA, PTCA with implant of a coronary stent,
PTCA with platelet inhibitor therapy, or PTCA with both implant of a
stent and platelet inhibitor therapy. One set of data consists of just
under 500 patients who received treatment in seven hospitals during a
clinical trial conducted between January 1, 1996 and June 15, 1997. The
other set consists of just over 6,200 patients treated in 83 hospitals
between October 1, 1995 and December 31, 1996 (this is data from a
health care information company that, among other products and
services, performs clinical and financial analysis of data under
contract with hospitals). For the first set of data, the hospitals are
identified; however, for the second set of data, the hospital
identifying information is confidential and was not released to HCFA.
In order to provide HCFA with standardized charges, the information
company obtained the HCFA provider-specific file and standardized the
charges before providing them to HCFA.
    According to the commenter, based on the data provided the
approximate average standardized charges for the different classes of
patients are as follows:

    <bullet> PTCA alone--$17,000.
    <bullet> PTCA and stent--$22,000.
    <bullet> PTCA and platelet inhibitor--$24,000.
    <bullet> PTCA and both stent and platelet inhibitor--$29,000.

Based on these data, the drug's manufacturer urges us to reassign
procedure code 99.20 to DRG 116. The commenter also argues that failure
to improve the payment for these cases may result in Medicare
beneficiaries being denied equal access to potentially life-saving
treatment.
    Response: We have reviewed the data submitted as well as considered
the comments we have received. Based on the data provided, it appears
that the cost of a PTCA case with platelet inhibitor drug therapy is at
least as expensive as a PTCA case with stent implant. However, the vast
majority of the cases (over 90 percent) cannot be linked to a hospital.
In addition, although the large data set does constitute a sample of
cases, as claimed by the commenter, it is not a random sample, but
rather a sample of those hospitals that contract with the health
information company. The pharmaceutical company states that the 83
hospitals are representative of all hospitals in the country, but we
have no way to verify that claim. Because the data cannot be verified,
and do not reflect a complete data set or a random sample, HCFA cannot
use the data to make a change in the DRG assignment.
    The language that Congress included in the Conference Report that
accompanied the Balanced Budget Act of 1997 stated that HCFA should ``*
* * consider, to the extent feasible, reliable, validated data other
than MedPAR data in annually recalibrating and reclassifying the
DRGs.'' The data we have been given does not meet these requirements.
We cannot validate whether the data are Medicare beneficiaries nor can
we verify which hospitals provided the treatment or the amount of
charges reported to Medicare. In addition, we do not believe that we

[[Page 40964]]

should base any DRG reclassification decisions that will increase
payment for a set of cases on data that would not meet HCFA's strict
requirements for making a DRG change that would lower the relative
weight for a set of cases (see discussion below concerning radiosurgery
procedures).
    As we have stated in several proposed and final rules (most
recently in the August 30, 1996 final rule in a discussion of the
coronary artery stent implant (61 FR 46170) and the August 29, 1997
final rule in response to a comment on the DRG assignment for new
diagnosis code 686.01) (62 FR 45982), our longstanding practice is to
assign a new code to the same DRG or DRGs as its predecessor code. Our
compelling reason for this practice is our inability to move the cases
associated with the new code to a new DRG assignment as part of the DRG
reclassification and recalibration process. Consequently, our policy is
to wait until we have a full year of Medicare data upon which to base
an analysis of what the most appropriate DRG assignment would be. We
can then move any cases that we would reassign so we can revise the DRG
relative weights accordingly. If we were to assign procedure code 99.20
to DRG 116 at this time, we would be unable to move the cases
associated with that code from DRG 112 into DRG 116 based on the data
provided. Thus, the relative weight of DRG 112 would still reflect the
cases with procedure code 99.20. Since these cases presumably have much
higher charges than the other PTCA cases, the relative weight for DRG
112 would be overstated, which means the payments to those cases would
be overstated. In addition, the charges for PTCA cases with platelet
inhibitor drug therapy would not be reflected in the DRG 116 relative
weight.
    Our practice of waiting until we have identifiable MedPAR data
applies to all DRG changes, that is, both those changes that would
enhance payment for a particular diagnosis or procedure, as well as,
those that would decrease payment for a particular diagnosis or
procedure. We note that, in FY 1996, when we created a new procedure
code for stereotactic radiosurgery (92.3), we assigned the code to DRGs
1, 2, and 3, because that is where the predecessor procedure code was
assigned. However, since code 92.3 is a nonoperating room procedure, we
were relatively sure that the code would not remain assigned to DRG 1,
2, and 3 (which are the highest weighted surgical DRGs in MDC 1) once
we had the actual charge data. As discussed in the August 29, 1997
final rule (62 FR 45971), procedure code 92.3 was reassigned to DRGs 7
and 8 once we had the FY 1996 data to analyze. Therefore, we
``overpaid'' those cases for 2 years; that is, their charges were much
less than the average charges for DRGs 1, 2, and 3.
    We believe that any data we use to reclassify and recalibrate DRGs
must be comprehensive and valid, as well as verifiable by HCFA.
    Concerning the commenter's argument that failure to change the DRG
assignment for infusion of platelet inhibitor will compromise the
availability of this treatment for Medicare beneficiaries, we note, as
we have in several previous documents, that it is a violation of a
hospital's Medicare provider agreement to place restrictions on the
number of Medicare beneficiaries it accepts for treatment unless it
places the same restrictions on all other patients.
c. Implantation of Muscle Stimulator
    Comment: We received one comment arguing that the current DRG
assignment for the implantation of a muscle stimulator and the
associated tendon transfer for quadriplegics is inappropriate. The
specific muscle stimulator device (an implanted neuroprosthesis that
restores functional hand motion in people with quadriplegia who are 24
months post-injury) was approved by the Food and Drug Administration in
August 1996. The device is designed to provide neuromuscular
stimulation for certain patients with quadriplegia so that they can
grasp with their hand and perform tasks such as holding eating utensils
and pens and brushing their teeth. In many cases, the patient also
undergoes a tendon transfer to the hand during the same admission or
during a prior admission. The commenter notes that when the tendon
transfer (procedure code 82.56 (other hand tendon transfer or
transplantation)) and the insertion of the muscle stimulator (procedure
code 83.92 (insertion or replacement of skeletal muscle stimulator))
are performed during the same admission, the case is assigned to DRG 7
or 8 (Peripheral and Cranial Nerve and Other Nerve System Procedures).
However, when the procedures are performed during two separate
admissions, the tendon transfer is assigned to DRGs 7 and 8 and the
insertion of the muscle stimulator is assigned to DRG 468 (Extensive OR
Procedure Unrelated to Principal Diagnosis). The commenter stated that
although payment for DRGs 7, 8, and 468 are all significantly less than
the cost of the hospital stay and the device, DRG 468 pays more and
results in the hospital losing less money. The commenter noted that the
device alone costs $24,500 and hospitals report losses of $11,000 to
$26,000 when the device is inserted and a tendon transfer is performed
during the same admission (resulting in assignment to DRGs 7 and 8).
However, when the insertion of the device is performed in a separate
admission, the cases are assigned to DRG 468 and hospitals' losses are
limited to $4,000 to $18,000.
    The commenter believes that hospitals will refuse to perform this
very useful surgery unless the DRG assignment is revised. If the
insertion of the muscle stimulator were assigned to a surgical DRG in
MDC 1 where the diagnosis codes for quadriplegia are assigned, the
highest paying DRG assignment would be DRGs 1, 2, and 3 (Craniotomy).
Besides being clinically inappropriate, the commenter believes the
weights for these DRGs are too low to adequately pay for this
procedure.
    The commenter recommended both a short and a long-term solution for
this problem. For now, all cases with insertion of muscle stimulators
performed in conjunction with tendon transfer should be assigned to DRG
468. In the long term, HCFA should establish a new DRG for the
implantation of muscle stimulation devices and other stimulation
devices as they become available.
    Response: In examining the latest FY 1997 MedPAR file (bills
received through March 1998), we found only three cases for
implantation of muscle stimulators for quadriplegics. One case was
assigned to DRG 7 and the other two to DRG 8. The standardized charge
and length of stay for each case is set forth below.

------------------------------------------------------------------------
                                                               Length of
                      DRG                        Standardized     stay
                                                    charge       (days)
------------------------------------------------------------------------
7..............................................       $25,227          7
8..............................................         8,849          2
8..............................................        42,183          2
------------------------------------------------------------------------

The average charge for all cases assigned to DRG 7 is approximately
$21,000 and the average charge for DRG 8 cases is about $11,500.
    With so few cases, we would prefer to review the data in the FY
1998 MedPAR file before making any reclassification. Therefore, we will
add these cases to our FY 2000 DRG reclassification analysis agenda. We
note that the charges reported for two of the three cases are
significantly less than the costs that the commenter believes would be
incurred for this surgery (approximately $35,000).
    It would be inappropriate to assign the muscle stimulator
insertions solely

[[Page 40965]]

to DRG 468. This DRG was created to capture a set of clinically
unrelated cases where the only operating room procedures performed are
unrelated to the patient's principal diagnosis. To permanently assign a
procedure code only to DRG 468 would be contrary to the basic design
and precepts of the DRG system.

C. Recalibration of DRG Weights

    We proposed to use the same basic methodology for the FY 1999
recalibration as we did for FY 1998. (See the August 29, 1997 final
rule with comment (62 FR 45982).) That is, we recalibrated the weights
based on charge data for Medicare discharges. However, we used the most
current charge information available, the FY 1997 MedPAR file, rather
than the FY 1996 MedPAR file. The MedPAR file is based on fully-coded
diagnostic and surgical procedure data for all Medicare inpatient
hospital bills.
    The final recalibrated DRG relative weights are constructed from FY
1997 MedPAR data, based on bills received by HCFA through March 1998,
from all hospitals subject to the prospective payment system and short-
term acute care hospitals in waiver States. The FY 1997 MedPAR file
includes data for approximately 11.3 million Medicare discharges.
    The methodology used to calculate the DRG relative weights from the
FY 1997 MedPAR file is as follows:
    <bullet> All the claims were regrouped using the DRG classification
revisions discussed above in section II.B of this preamble.
    <bullet> Charges were standardized to remove the effects of
differences in area wage levels, indirect medical education costs,
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
    <bullet> The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG.
    <bullet> We then eliminated statistical outliers, using the same
criteria as was used in computing the current weights. That is, all
cases that are outside of 3.0 standard deviations from the mean of the
log distribution of both the charges per case and the charges per day
for each DRG.
    <bullet> The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
A transfer case (including a postacute care transfer case as discussed
in section IV.A of this preamble) is counted as a fraction of a case
based on the ratio of its length of stay (plus one day to account for
the double per diem payment for the first day) to the geometric mean
length of stay of the cases assigned to the DRG. That is, a 5-day
length of stay transfer case assigned to a DRG with a geometric mean
length of stay of 10 days is counted as 0.6 of a total case. Transfers
from DRGs 209, 210, or 211 to postacute care are counted as a fraction
of a discharge based on the ratio determined by dividing the geometric
mean length of stay for the DRG by the sum of half the geometric mean
and half the length of stay for the case, plus one.
    <bullet> We established the relative weight for heart and heart-
lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner
consistent with the methodology for all other DRGs except that the
transplant cases that were used to establish the weights were limited
to those Medicare-approved heart, heart-lung, liver, and lung
transplant centers that have cases in the FY 1995 MedPAR file.
(Medicare coverage for heart, heart-lung, liver, and lung transplants
is limited to those facilities that have received approval from HCFA as
transplant centers.)
    <bullet> Acquisition costs for kidney, heart, heart-lung, liver,
and lung transplants continue to be paid on a reasonable cost basis.
Unlike other excluded costs, the acquisition costs are concentrated in
specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant
for heart and heart-lung transplants); DRG 480 (Liver Transplant); and
DRG 495 (Lung Transplant)). Because these costs are paid separately
from the prospective payment rate, it is necessary to make an
adjustment to prevent the relative weights for these DRGs from
including the effect of the acquisition costs. Therefore, we subtracted
the acquisition charges from the total charges on each transplant bill
that showed acquisition charges before computing the average charge for
the DRG and before eliminating statistical outliers.
    When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We proposed to use that same case
threshold in recalibrating the DRG weights for FY 1999. Using the FY
1997 MedPAR data set, there are 37 DRGs that contain fewer than 10
cases. We computed the weights for the 37 low-volume DRGs by adjusting
the FY 1998 weights of these DRGs by the percentage change in the
average weight of the cases in the other DRGs.
    The weights developed according to the methodology described above,
using the final DRG classification changes, result in an average case
weight that is different from the average case weight before
recalibration. Therefore, the new weights are normalized by an
adjustment factor, so that the average case weight after recalibration
is equal to the average case weight before recalibration. This
adjustment is intended to ensure that recalibration by itself neither
increases nor decreases total payments under the prospective payment
system.
    Comment: One commenter was concerned about the general trend in the
relative weights. This commenter calculated average relative weights
for each MDC as well as the overall average DRG weight. Based upon this
calculation, the commenter noted that the average weight for the pre-
MDC DRGs and MDCs 8 (Diseases and Disorders of the Musculoskeletal
system and Connective Tissue) and 24 (Multiple Significant Trauma) are
decreasing. Concerning MDC 8, the commenter believes the average weight
is decreasing because of the use of postacute care for these DRGs,
noting that 4 of them are included in the list of 10 DRGs affected by
the transfer to postacute care provision (see section IV.A of this
preamble for a discussion of this provision). The commenter suggested
that we leave the FY 1998 weights intact for MDC 8 until we can assess
the effect of postacute care transfers on average standardized amounts.
For the pre-MDCs and MDC 24, the commenter believes that the cases
assigned to these categories are extremely resource-intensive and that
the average weights should not be decreasing. Finally, the commenter
noted that, although the total weight increased for MDC 22 (Burns), the
average weight decreased. The commenter believes this is inconsistent
with the statement in the proposed rule that the changes being made to
MDC 22 would improve the explanation of variation in resource use in
those DRGs (63 FR 25579).
    Response: We reviewed the table of average DRG weights presented in
the comment, both overall and within MDCs, and we found that the
commenter has mistakenly used a simple averaging methodology to
determine the mean weight rather than a weighted averaging methodology,
which is how the DRG relative weights are calculated. For example,
suppose an MDC has three DRGs and there are 3 cases assigned to DRG 1,
6 cases assigned to DRG 2, and 7 cases assigned to DRG 3. The weights
for the DRGs are

[[Page 40966]]

1.000, 2.000, and 3.000, respectively. The simple average weight for
the three DRGs would be calculated by adding the weights and dividing
by the number of DRGs as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY98.051

However, the weighted average would be calculated by first multiplying
the weights of each DRG by the number of cases in that DRG and dividing
by the number of cases as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY98.052

    Because of this mistake in average weight calculation, the
commenter has made some incorrect conclusions. For example, the
commenter states that the average DRG weight for FY 1998 is 1.3681 and
the average of the proposed FY 1999 weights is 1.3895. In reality, the
average FY 1998 weight is 1.4606 and the average of the proposed FY
1999 weights is 1.4673.

    (Note: These average weights are based on the MedPAR cases used
to recalibrate the weights; that is, the FY 1998 weights are based
on FY 1996 cases reclassified into the FY 1998 DRGs and the proposed
FY 1999 weights are based on FY 1997 cases reclassified into the FY
1999 DRGS).
    The average weight of the final FY 1999 weights is 1.4679.

    Contrary to the commenter's assertion, the average weight of the
proposed FY 1999 MDC 22 DRGs did not decrease compared to the FY 1998
MDC 22 weights (4.6663 and 4.5234, respectively). In addition, although
all of the FY 1999 proposed pre-MDC DRG weights except DRG 483
decreased relative to FY 1998, the increase in DRG 483 was large enough
(coupled with an increase in cases) to result in an overall higher
average weight for the pre-MDC DRGs. We note that the weights for DRGs
481, 482, and 483 have increased between the proposed and final FY 1999
recalibrations. As we have noted in the past, the weights for the
transplant DRGs (481, 482, and 495) have gradually decreased over the
years. In addition, the transplant DRGs have a relatively small number
of cases with a large range of reported charges. A few very low or high
charge cases can make a relatively dramatic difference in the weights
from year to year (August 29, 1997; 62 FR 45983).
    Finally, with regard to the commenter's request that we set the FY
1999 MDC 8 weights equal to the FY 1998 weights, we could refer the
commenter to the discussion above concerning the steps we take in
recalibrating the weights. Each year, when we recalibrate the DRG
weights, we use charge data from the most recent Medicare cases
available. That is, we use the charges reported by hospitals to
establish the weights. In this way, we ensure that we are using the
most recent hospital charging practices and patterns to set the new
relative weights. Because each DRG weight is ``relative'' to all other
DRG weights, we cannot arbitrarily freeze a set of those DRGs at the
previous year's weights. In a relative system such as this, if some
weights increase, others must decrease. Finally, as discussed above,
when we recalibrate the weights, a transfer case is counted as a
fraction of a case rather than a whole case.
    Section 1886(d)(4)(C)(iii) of the Act requires that beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payment to hospitals is affected by factors other than average case
weight. Therefore, as we have done in past years and as discussed in
section II.A.4.b of the Addendum to this final rule, we make a budget
neutrality adjustment to assure that the requirement of section
1886(d)(4)(C)(iii) of the Act is met.

III. Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts ``for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level.'' In
accordance with the broad discretion conferred under the Act, we
currently define hospital labor market areas based on the definitions
of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New
England County Metropolitan Areas (NECMAs) issued by the Office of
Management and Budget (OMB). OMB also designates Consolidated MSAs
(CMSAs). A CMSA is a metropolitan area with a population of one million
or more, comprised of two or more PMSAs (identified by their separate
economic and social character). For purposes of the hospital wage
index, we use the PMSAs rather than CMSAs since they allow a more
precise breakdown of labor costs. If a metropolitan area is not
designated as part of a PMSA, we use the applicable MSA. Rural areas
are areas outside a designated MSA, PMSA, or NECMA.
    Effective April 1, 1990, the term Metropolitan Area (MA) replaced
the term Metropolitan Statistical Area (MSA) (which had been used since
June 30, 1983) to describe the set of metropolitan areas comprised of
MSAs, PMSAs, and CMSAs. The terminology was changed by OMB in the March
30, 1990 Federal Register to distinguish between the individual
metropolitan areas known as MSAs and the set of all metropolitan areas
(MSAs, PMSAs, and CMSAs) (55 FR 12154). For purposes of the prospective
payment system, we will continue to refer to these areas as MSAs.
    Section 1886(d)(3)(E) of the Act also requires that the wage index
be updated annually beginning October 1, 1993. Furthermore, this
section provides that the Secretary base the update on a survey of
wages and wage-related costs of short-term, acute care hospitals. The
survey should measure, to the extent feasible, the earnings and paid
hours of employment by occupational category, and must exclude the
wages and wage-related costs incurred in furnishing skilled nursing
services. We also adjust the wage index, as discussed below in section
III.F, to take into account the geographic reclassification of
hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of
the Act.

B. FY 1999 Wage Index Update

    The final FY 1999 wage index (effective for hospital discharges
occurring on or after October 1, 1998 and before October 1, 1999) is
based on the data collected from the Medicare cost reports submitted by
hospitals for cost reporting periods beginning in FY 1995 (the FY 1998
wage index was

[[Page 40967]]

based on FY 1994 wage data). The FY 1999 wage index includes the
following categories of data, which were also included in the FY 1998
wage index:
    <bullet> Total salaries and hours from short-term, acute care
hospitals.
    <bullet> Home office costs and hours.
    <bullet> Direct patient care contract labor costs and hours.
The wage index also continues to exclude the direct salaries and hours
for nonhospital services such as skilled nursing facility services,
home health services, or other subprovider components that are not
subject to the prospective payment system. Finally, as discussed in
detail in the August 29, 1997 final rule with comment period, we
calculate a separate Puerto Rico-specific wage index and apply it to
the Puerto Rico standardized amount. (See 62 FR 45984 and 46041) This
wage index is based solely on Puerto Rico's data.
    For FY 1999 we proposed two changes to the categories of data
included in the wage index: adding contract labor costs and hours for
top management positions and replacing the fringe benefit category with
the wage-related costs associated with hospital and home office
salaries category. These two changes reflect changes to the Medicare
cost report that were discussed in the September 1, 1994 final rule
with comment period (59 FR 45355). The changes were made to the cost
report for cost reporting periods beginning during FY 1995. Because we
are using wage data from the FY 1995 cost report for the FY 1999 wage
index, these two changes will be reflected in the wage index for the
first time in FY 1999.
    As discussed in detail in the September 1, 1994 final rule with
comment period (59 FR 45355), we expanded the definition of contract
services reported on the Worksheet S-3 to include the labor-related
costs associated with contract personnel in a hospital's top four
management positions: Chief Executive Officer/Hospital Administrator,
Chief Operating Officer, Chief Financial Officer, and Nursing
Administrator. We also revised the cost report to reflect a change in
terminology from ``fringe benefits'' to ``wage-related costs,'' to
promote the consistent reporting of these costs. (See September 1, 1994
final rule with comment period (59 FR 45356-45359).) We made this
change in terminology because we believed it would eliminate confusion
regarding those wage-related costs that are incorporated in the wage
index versus the broader definition of fringe benefits recognized under
the Medicare cost reimbursement principles. Wage-related costs, which
include core and other wage-related costs, are reported on the Form
HCFA-339, the Provider Cost Report Reimbursement Questionnaire.
    Finally, we analyzed the wage data for the following costs, which
were separately reported for the first time on the FY 1995 cost
reports:
    <bullet> Physician Part A costs.
    <bullet> Resident and Certified Registered Nurse Anesthetist (CRNA)
Part A costs.
    <bullet> Overhead cost and hours by cost center.
Our analyses and proposals concerning these data are set forth below in
section III.C.
    Comment: MedPAC submitted a general comment on the wage index.
First, the Commission stated that several of the issues raised in the
proposed rule stem from the failure of the wage index to account for
the mix of occupational categories employed by each hospital and that
if the wage index reflected this mix it would be more accurate. In
addition, MedPAC, noted that new measures are needed to implement each
new prospective system as well as for Medicare+Choice plans and
suggested that attention should be given to alternative strategies for
obtaining labor prices that could eliminate the need to collect data
separately for each type of provider affected. MedPac intends to
examine this issue during the upcoming year.
    Response: We have addressed the issue of occupational mix in the
past. In the May 27, 1994 Federal Register, we indicated we were not
proposing to collect occupational mix data due to a lack of support
from the hospital industry for an additional reporting burden with
uncertain impact (59 FR 27724). However, certain segments of the
industry continue to insist that an occupational mix would make the
wage index fairer. We will continue to evaluate all the data and
evidence that we receive on this issue. With respect to MedPAC's
interest in examining alternative data collection strategies, we look
forward to the results of its examination, and will provide whatever
assistance we can.

C. Issues Relating to the FY 1999 Wage Index

1. Physician Part A Costs
    Currently, if a hospital directly employs a physician, the Part A
portion of the physician's salary and wage-related costs (that is,
administrative and teaching services) is included in the calculation of
the wage index. However, the costs for contract physician Part A
services are not included. Our policy has been that, to be included in
the wage index calculation, a contracted service must be direct patient
care, or, beginning with the FY 1999 wage index, top level management
(see discussion above). Because some States have laws that prohibit
hospitals from directly hiring physicians, the hospitals in those
States have claimed that they are disadvantaged by the wage index's
exclusion of contract physician Part A costs. We began collecting
separate wage data for both direct and contract physician Part A
services on the FY 1995 cost report in order to analyze this issue. As
we discussed in the September 1, 1994 final rule with comment period
(59 FR 45354), our original purpose in collecting these data was to
exclude all physician Part A costs from the wage index.
    When we made the change to the cost report, there were five States
in which hospitals were prohibited from directly employing physicians.
We understand that only two States currently maintain this prohibition:
Texas and California. Thus, the number of hospitals affected by our
current policy has decreased. Nevertheless, the fact that hospitals in
these two States are still prohibited from directly employing
physicians for Part A services and, therefore, must enter into
contractual agreements with physicians for these services, perpetuates
the perceived inequity.
    The main reason we planned to exclude all Part A physician costs
rather than include the contract costs was our concern that it would be
difficult to accurately attribute the Part A costs and hours of these
contract physicians. In addition, we were concerned that including
these costs could inappropriately inflate the hospitals' average hourly
wages. That is, we anticipated that average costs for contract
physicians would be significantly higher than the costs for those
physicians directly employed by the hospital. However, our analysis of
the data shows that the average hourly wages for contract physician
Part A costs are very similar to, and, in fact slightly lower than, the
costs for salaried physician Part A services.
    Based on this result, we believe that continuing to include the
directly employed physician Part A costs and adding the costs for
contract physicians is the better policy. Thus, we proposed to
calculate the FY 1999 wage index including both direct and contract
physician Part A costs.
    Of the 5,070 hospitals included in the FY 1995 wage data file,
approximately 32 percent reported contract physician Part A costs.
Including these costs would raise the wage index values for

[[Page 40968]]

2 MSAs (4 hospitals) by more than 5 percent and 7 MSAs (43 hospitals)
by between 2 and 5 percent. Two MSAs and one Statewide rural area (74
hospitals) would experience a decrease between 2 and 5 percent. The
wage index values for the remaining 365 areas (4,949 hospitals) would
be relatively unaffected, experiencing changes of between -2 and 2
percent.
    We received several comments regarding the inclusion of contract
physician costs, and physician Part A costs generally. The specific
comments and our responses are set forth below.
    Comment: A national hospital association noted its concern about
the inclusion of teaching-related costs in the wage index because
Medicare pays separately for the salaries of teaching physicians
through direct graduate medical education (GME) payments. Nevertheless,
the commenter supports the inclusion of contract physician costs in the
FY 1999 wage index. The commenter indicated that it would work to
develop a consensus among hospital and health system representatives on
which physician salaries, if any, should be included in future wage
indexes. Another commenter supported the inclusion of contract
physician costs but recommended that HCFA take swift action to remove
teaching physician costs ``to achieve geographic equity in payments.''
    Several commenters believe that all physician Part A costs,
including teaching physician costs, should be recognized in calculating
the wage index. The commenters asserted that these are costs of doing
business, and including them in the wage index appropriately measures
the geographic variations in what hospitals pay for labor. However,
numerous commenters argued that it is inappropriate to include teaching
physician costs in the wage index because, in effect, it results in
double payment to teaching hospitals for these costs. Recognizing that
HCFA does not have the data available to separately identify the
portion of physician costs attributable to teaching physicians, these
commenters believe it would be preferable to remove all Part A
physician costs from the wage index calculation.
    Response: As a conceptual matter, we believe that physician Part A
costs other than teaching physician costs should be included in the
wage index because these costs are paid under the prospective payment
system. Further, in light of the data now available, we believe
including contract physician Part A costs improves equity in the wage
index by allowing hospitals that are prohibited by State law from
directly employing physicians to include their costs of contracted
physicians.
    With regard to teaching physician costs, the 1995 cost report does
not separate teaching physician costs from other physician Part A
costs. Consequently, we are unable to exclude teaching physician costs
from the FY 1999 wage index. We believe the optimal approach is to
consider this issue directly in developing the FY 2000 wage index. To
facilitate evaluation of this issue, we will instruct the fiscal
intermediaries to separate teaching physician costs from hospitals' FY
1996 wage data. We will carefully analyze those data, and any changes
we propose to make based on that analysis will be included in the FY
2000 proposed rule.
    We do not agree with the commenters' suggestion that, in lieu of
collecting data that would allow us to separately identify teaching
physician costs, we should remove all physician salaries from the wage
index. These physician Part A costs are incurred by the hospital for
services related to such positions as medical director and clinical
department heads. As such, they are legitimate labor costs included
under the prospective payment system. Based on our analysis of the FY
1995 cost reports, we believe that the data reported for physician Part
A costs are sufficiently reliable and complete that inclusion of
physician Part A costs (direct as well as contract costs) for FY 1999
results in a wage index that better reflects relative hospital labor
costs than a wage index that excludes all physician Part A costs.
Moreover, as stated above, we believe the addition of contract
physician Part A costs in the FY 1999 wage index improves the fairness
and accuracy of the wage index relative to the FY 1998 wage index
(which included direct physician Part A costs (salaries) but not
contract physician Part A costs). Thus, rather than excluding all
physician Part A costs, we believe the more responsible approach is to
collect the necessary data as expeditiously as possible in order to
analyze whether it is feasible to separate teaching physician costs
from other physician Part A costs.
    Comment: Several commenters favored not only including physician
salaries in the wage index, but also continuing to include teaching
physician salaries. Commenters believe that if Congress had known about
the payment redistributions that would result from eliminating teaching
physician salaries from the wage index before it had enacted the
reductions applicable to teaching hospitals in the Balanced Budget Act
of 1997, it may not have enacted such deep cuts. One commenter also
suggested that if we excluded physician salaries, we would need to
restandardize the large urban standardized amount to reflect the new
wage index.
    Another commenter stated that the costs of teaching physicians and
residents should be included in the wage index because Medicare
payments for GME are not sufficient to compensate hospitals for their
GME costs. This commenter compared hospitals' direct GME costs on the
Medicare cost report with the payments they receive and estimated a
shortfall of $900 million. The commenter further noted that reductions
in Medicare disproportionate share payments as a result of the Balanced
Budget Act would have the effect of increasing the empirical estimate
for the indirect graduate medical education adjustment, leading to a
further shortfall in payments for GME.
    Response: We cannot know what Congress would or would not have done
if it had known about the impacts of future changes to wage index
policy. Rather, refinements to the wage data should be evaluated on
their individual merits in terms of whether they contribute to or
detract from the fairness and accuracy of the wage index. We disagree
that changes to the wage index may require restandardization of the
large urban standardized amount. The large urban standardized amount
was not created by a separate standardization of the costs of hospitals
in large urban areas, but by applying differential update factors
established by Congress.
    We also disagree with the comment that the wage index should
continue to include costs related to teaching physicians and residents
because current and future GME payments are not fully compensating
hospitals for their GME costs. The adequacy of direct GME payments is a
separate issue by virtue of the fact that these costs are recognized
separately and paid for through Medicare outside the prospective
payment system. The amount Medicare pays for direct GME is based on
policy considerations related to the nature of GME, and reflects
Medicare's fair share of those costs. Similarly, indirect GME costs are
distinct from hospitals' labor costs, and the level of IME payments is
not relevant to the wage index.
    Comment: Many commenters referred to an analysis done by one
commenter showing the projected payment impacts by State of our
proposed policy of including physician (both direct and contract),
resident, and CRNA costs in the wage index. These commenters

[[Page 40969]]

referred to the large losses that, according to this analysis, certain
States will allegedly suffer because of this policy (California: $79
million; Florida: $36 million; Texas: $10 million). Corresponding gains
were cited among northeast hospitals. The suggestion of these comments
was that we should revise our proposed policy and exclude all of these
costs to redistribute these losses and gains.
    Response: We disagree with the characterization of this analysis.
With the exception of contract physician costs, all of these costs have
been included in prior wage indexes. Therefore, the commenter's
analysis does not reflect the impact of the proposed wage index
relative to the current wage index. With respect to the losses in
certain States cited by the commenter, our analysis indicates that, the
projected payment impacts of including contract physician costs
relative to a wage index without these costs are, respectively: a $13
million decrease, a $15 million decrease, and an $18 million increase.
We note that these figures do not reflect the impact of changes to the
wage indexes in these areas resulting from updating from the 1994 wage
data to 1995 wage data, or the exclusion of allocated overhead. They
do, however, present a clearer picture of the impacts in these States
of including contract physician costs relative to current policy.
    Comment: One commenter vigorously opposes the inclusion of contract
physician Part A costs, arguing we should instead exclude all physician
Part A costs. The commenter, a national association of health systems,
argued that this proposal contradicts the objectives we identified in
the May 27, 1994 proposed rule (59 FR 27720) and the September 1, 1994
final rule (59 FR 45354), where we discussed the need to separately
collect physician Part A costs. The commenter raises the following
points and ultimately recommends excluding all physician Part A costs
from the calculation of the wage index.
    First, the commenter contends that, by choosing to include
physician Part A contract costs rather than exclude all physician Part
A costs, we ``have expanded the unfair and unjustifiable policy tilt
enjoyed by teaching hospitals.'' To emphasize this point, the commenter
notes that over 70 percent of all contract physician costs stem from
teaching hospitals (90 percent of salaried physician costs are also
from teaching hospitals).
    Second, the commenter states that our rationale for proposing to
include contract physician costs focused narrowly on whether these
costs would inappropriately inflate the wage data. This narrow focus,
according to the commenter, left out any explanation of why it is
better to include contract physician costs rather than to exclude all
Part A physician costs.
    Third, the commenter quotes liberally from our discussion in the
proposed and final rules published in 1994, particularly our rationale
for providing for separate reporting of physician Part A costs on the
cost report. Referenced specifically are the three reasons why HCFA
believed at that time that eliminating physician Part A costs would be
preferable to including contracted physician costs. These reasons were:
(1) Physician costs are not driven by normal labor market situations;
(2) many hospitals indicated difficulties in accurately determining
hours for these physicians' services; and (3) some hospitals have
difficulty separating costs related to Part A from those related to
Part B. The commenter specifically asks HCFA why it has changed its
beliefs.
    Finally, the commenter surmises that one reason we proposed to
include contract physician costs is that few areas would experience a
significant change in their wage index values. To refute this, the
commenter describes the results of analysis of the impacts of the
proposed policy. The analysis found ``a dramatic and damaging impact on
California, the largest state in the nation in terms of hospitals and
number of Medicare discharges.'' The commenter believes that ``HCFA's
wage index policy should be based not on whether the outcome will
result in little change, but on whether it is the right policy in the
first place.''
    Response: We appreciate the considered arguments and detailed
analysis presented by the commenter and understand the importance of
this issue to the hospitals represented by the association. We agree
with the commenter that the primary consideration in developing and
refining the hospital wage index should be the ``right policy.'' In the
context of the hospital wage index, we believe we should promote the
fair and accurate measurement of relative hospital wage levels across
geographic areas. At the same time, we believe it is appropriate to
consider the potential impact of possible courses of action, though we
agree with the commenter that the potential impact should not be the
driving force in policy decisions.
    In the context of the hospital wage index, it is also critical to
keep in mind that developing the ``right policy'' is a function not
only of conceptual issues but also of data issues. If, for example, we
believe as a conceptual matter that a certain type of cost should be
included in the wage index, but the data on those costs are incomplete
and unreliable, then including the costs in the wage index (which are
conceptually right) could (because of the data problems) distort the
measure of relative wage levels across geographic areas, and thus
detract from the fairness and accuracy of the wage index; similarly, if
we believe as a conceptual matter that a certain type of cost should be
excluded from the wage index, but there is incomplete and unreliable
data to separate those costs from other costs, then excluding the costs
based on bad data could detract from the equity of the wage index.
Thus, our ability to implement a ``conceptually right'' policy depends
on the availability of reliable and complete data.
    As indicated above in the response to another comment, we believe
there is good reason to include all physician Part A costs, rather than
exclude all physician Part A costs as the commenter recommends. Among
other things, with the exception of teaching physician costs, physician
Part A costs are Part A costs that are paid under the prospective
payment system. In addition, physician Part A costs represent above-
average costs, although only a small percentage of the total for most
hospitals; therefore, excluding all physician Part A costs might
understate the relative wages of some hospitals. Based on our analysis
of the FY 1995 cost reports, we believe that data reported for
physician Part A costs are sufficiently reliable and complete that
inclusion of the costs results in a wage index that is more fair and
accurate, relative to a wage index which would exclude all physician
Part A costs, even if the data are not perfect.
    As discussed above, although we have decided to adopt our proposal
to include contract physician Part A costs in the wage index, we intend
to direct the fiscal intermediaries to separately identify physician
Part A costs (salaried and contracted) related to teaching for cost
reports beginning during FY 1996. Although this information will not be
reported separately on the Worksheet S, Part III until FY 1997 cost
reports, we believe this issue merits undertaking a special auditing
effort of the FY 1996 cost reports.
    With regard to the high proportion of physician costs attributable
to teaching hospitals, although the distribution of costs seems
disproportionate (and this is a large part of the reason we are
expediting our efforts to separate teaching physician costs from other
physician costs), our analysis of these

[[Page 40970]]

data indicates that, among hospitals reporting these costs, there is
little difference between teaching and nonteaching hospitals in terms
of the relative impact of these costs on hospitals' average hourly
wages. That is, among both teaching and nonteaching hospitals reporting
physician Part A costs, these costs make up between 3 and 4 percent of
their total wage costs. Therefore, although more teaching hospitals
report these costs than nonteaching hospitals (47 percent of teaching
hospitals versus 30 percent of nonteaching hospitals), the average
hourly wages of teaching hospitals are not more heavily weighted by
these costs than they are for nonteaching hospitals.
    In fact, two of the MSAs that would be most negatively affected by
excluding all physician costs from the wage data, Pittsburgh, PA and
Rochester, NY, both have more nonteaching hospitals reporting physician
costs than teaching hospitals. We believe the commenter's perception
that we are tilting the wage index policy toward teaching hospitals is
misguided and reflects an oversimplification of the issue. Based on our
analysis of this issue, we are convinced the most prudent course is to
focus on specifically developing data to further improve the fairness
and accuracy of the wage index.
    In describing the perceived problems from our discussion of the
physician cost data in the May 27, 1994 proposed rule, the commenter
fails to acknowledge that the discussion was in relation to a proposed
change. In fact, it was in response to public comments on this proposed
change where we agreed to revise the cost report to collect data on
contract physician costs. In addition, the September 1, 1994 final rule
clearly stated that HCFA intended to evaluate the physician cost data
prior to proposing any changes for the FY 1999 wage index.
    Regarding the problems associated with contract labor discussed in
the FY 1995 proposed and final rules, we note that the separate
physician cost data were not available at that time, and therefore the
discussion was based on information provided from fiscal intermediaries
and industry sources. Based on our analysis of the data available now,
we believe that the problems are not as widespread as initially feared.
Rather, these costs are similar to those reported for contracted
medical providers that we do include, such as therapists and nursing
staff. The commenter did not allege that there were widespread problems
reporting these data.
    The commenter's characterization of the impact of this change on
California's hospitals is inaccurate. No California MSA experiences a
decrease in their wage index of more than 0.6 percent as a result of
this change. The dramatic impacts referenced by the commenter occur
only under the assumption that the comparative baseline excludes all
physician Part A costs, the course recommended by the commenter. While
excluding all physician Part A costs would result in a significant
redistribution of payments to certain States such as California, other
areas would experience dramatic payment decreases relative to last
year.
    Comment: One commenter believes that, because the hospital wage
index is used to adjust payments for various other types of providers,
the wage data should be expanded to be as comprehensive as possible.
Specifically, the commenter recommended that wage data related to
excluded distinct part units, as well as all physician data, be
included.
    Response: We have convened workgroups, both internally and
externally, to focus on future wage index policies, and we anticipate
that we will continue to focus on the appropriate scope of the wage
data in those workgroups. In addition, any significant changes in the
types of data to be included in the wage index will be implemented
through the annual rulemaking process with opportunity for public
comment, as has been our policy in the past. For the record, we believe
that the hospital wage index should reflect, to the greatest degree
possible, the wage costs associated with the prospective payment areas
of the hospital.
    Comment: One commenter believes that there are ``evident problems
with the quality and consistency of the physician contract labor
data,'' which is evidenced by California's ranking as the 7th lowest
State in terms of contract physician average hourly wage. This
commenter also recommended that we begin a more rigorous audit
mechanism of the wage data, stating that data reliability is still a
problem.
    Response: We do not include hospitals' data (other than wage-
related costs) if either the salaries or hours reported for contract
labor are zero. Applying this edit to the wage data, California ranks
as the 12th highest State in terms of contract physician average hourly
wages. The analysis provided by the commenters did not include such an
edit; therefore, their results are different. We disagree with the
general point of this comment that there are quality problems with
these data. These data have been subjected to the same review and edit
process as are all wage data. We will continue to monitor the process
for collecting wage data in the future, and make improvements as
necessary. We also encourage hospitals and their associations to feel
free to provide specific recommendations for potential improvements.
    Comment: One commenter noted that hospitals that acquire their
physician Part A services through related organizations do not have an
appropriate line on Worksheet S-3 to record these wage costs.
Therefore, these hospitals are disadvantaged by the inclusion of costs
only for directly employed and contract physician Part A services in
the wage index calculation. The commenter recommended that we adjust
the FY 1999 wage index to include related organization physician Part A
costs for hospitals that were unable to include the costs on their
Worksheet S-3s.
    Response: The commenter's statements about Worksheet S-3 are
incorrect. The cost report instructions at section 2806.3 of the
Provider Reimbursement Manual, Part II, allow hospitals to include the
costs for physician Part A services from related organizations on line
33 of Worksheet S-3. These costs are also included on the trial
balance, Worksheet A, in column 2 (with any adjustments in column 6).
Regarding the commenter's recommendation, we cannot adjust the final FY
1999 wage index to include costs that hospitals did not properly report
on their cost reports.
2. Resident and CRNA Part A Costs
    The wage index presently includes salaries and wage-related costs
for residents in approved medical education programs and for CRNAs
employed by hospitals under the rural pass-through provision. However,
Medicare pays for these costs outside the prospective payment system.
Removing these costs from the wage index calculation would be
consistent with our general policy to exclude costs that are not paid
through the prospective payment system, but, because they were not
separately reported, we could not remove them.
    In the September 1, 1994 final rule with comment period (59 FR
45355), we stated that we would begin collecting the resident and CRNA
wage data separately and would evaluate the data before proposing a
change in computing the wage index. However, there were data reporting
problems associated with these costs on the FY 1995 cost report. The
original instructions for reporting

[[Page 40971]]

resident costs on Line 6 of Worksheet   S-3, Part III, erroneously
included teaching physician salaries and other teaching program costs
from Worksheet A of the cost report. Although we issued revised
instructions to correct this error, we understand these revisions may
not have been uniformly instituted. Another issue relating to
residents' salaries stems from apparent underreporting of these costs
by hospitals and inconsistent treatment of the associated wage-related
costs.
    In addition, the original Worksheet   S-3 and reporting
instructions did not provide for the separate reporting of CRNA wage-
related costs. We believe that much of the CRNA Part A costs are
reported under contract labor, rather than under salaried employee
costs, due to the heavy use of contract labor by rural hospitals. We do
not believe that it would be feasible at this time to try to remove
these CRNA Part A costs from the contract labor costs in the FY 1995
cost report data. We improved the reporting instructions for CRNA costs
on the FY 1996 cost report.
    Our analysis of the CRNA and resident wage data submitted on the FY
1995 cost report convinces us that these data are inaccurately and
incompletely reported by hospitals. For example, although there are
over 900 teaching hospitals receiving graduate medical education
payments, only about 800 hospitals reported resident cost data. Because
we do not want to make a relatively significant change in the wage
index data calculation without complete and accurate data upon which to
base our decision, we proposed to delay any decision regarding
excluding resident and CRNA costs from the wage index until at least
next year. In the May 8 proposed rule, we announced our intention to
review the FY 1996 data when it becomes available later this year and
present our analysis and any proposals in next year's proposed rule.
    Comment: Several commenters believe that HCFA should immediately
exclude intern and resident and CRNA wage costs for the same reasons
the commenters cited for excluding the teaching physician costs. One
commenter objected to our statement that problems with the reporting of
these data (stemming from inconsistent instructions) warranted a one-
year delay. The commenter stated that ``it is better to exclude all
clearly identified costs now rather than waiting some indeterminate
time for all costs to be identified before excluding any of it.''
Analysis purporting to show a negative impact of $24 million on
California due to including these data in the wage index was cited.
    Response: As we stated above, the instructions to the FY 1995 cost
report Worksheet S-3 for reporting resident costs did not specifically
separate teaching physician salaries and other GME program costs from
residents' costs. This may have inappropriately inflated resident costs
on Line 6 of Worksheet S-3. As a result, removing the costs reported on
Line 6 from the FY 1999 wage index calculation would distort the wage
index. Our reasoning with respect to retaining the CRNA costs is
similar; that is, if Line 2 was removed, it would result in distortions
since these costs were reported inconsistently. Therefore, because the
data for these costs are not sufficiently reliable and complete, we
maintain our position that the more responsible approach is to delay
removing these costs until more accurate data are available for the FY
2000 wage index. With regard to the negative impact on California, any
analysis based on this data will be skewed by the reporting flaws
noted. The FY 1999 wage index calculation will continue to include
intern and resident and CRNA wage costs.
    We also believe that several of the commenters are confused about
the issue of CRNA costs. Currently, only the Part A portion of these
costs are included in the wage index, and the only hospitals paid for
these costs are small rural hospitals who employ the equivalent of no
more than one full-time CRNA and are paid on the basis of reasonable
costs. Therefore, they do not contribute to the concentration of
physician costs in teaching hospitals.
    Comment: One commenter noted that the hourly wage rates for
residents are lower than the overall average hourly wage of the
hospitals that pay their salaries, and that the inclusion of residents'
salaries and wage-related costs actually results in a decrease in
teaching hospitals' average hourly wages rather than an increase, as
suggested by most other commenters. The commenter suggested that
removing residents from the data used to calculate the wage index would
increase the wage index values in areas with a high concentration of
teaching hospitals.
    Response: The FY 1995 data do not permit us to evaluate the
accuracy of this comment because residents' salaries are commingled
with teaching physicians' salaries for many hospitals. As with all
changes to the wage data, the impacts cannot be evaluated properly
until accurate data are available for all hospitals nationally.
3. Overhead Allocation
    In the proposed rule, we discussed in detail our proposal to remove
from the calculation of the FY 1999 wage index the overhead costs
associated with certain subprovider components that are excluded from
the prospective payment system (63 FR 25586). Although the overall
impact on hospitals of this change is relatively small, we believe it
is an appropriate step toward improving the overall consistency of the
wage index. In addition, we believe this change will significantly
increase the accuracy of the wage data for individual hospitals,
especially hospitals that have a relatively small portion of their
facility devoted to acute inpatient care.
    We received several comments supporting this change, and none
expressing opposition to it. One commenter referred to it as a step
toward improving uniformity and overall consistency in the wage index
process. We have, therefore, incorporated our proposal in the final
wage index.

D. Verification of Wage Data From the Medicare Cost Report

    The data for the FY 1999 wage index were obtained from Worksheet S-
3, Parts III and IV of the FY 1995 Medicare cost reports. The data file
used to construct the final wage index includes FY 1995 data submitted
to the Health Care Provider Cost Report Information System (HCRIS). As
in past years, we performed an intensive review of the wage data,
mostly through the use of edits designed to identify aberrant data.
    As a part of the August 29, 1997 final rule with comment period, we
implemented a new timetable for requesting wage data corrections (62 FR
45990). We notified hospitals again of these changes through a February
1998 memorandum to the fiscal intermediaries and in the proposed rule.
As noted in the proposed rule, beginning this year with the FY 1999
wage index, the wage index published in the final rule incorporates all
corrections, including those to correct data entry or tabulation errors
of the final wage data by the intermediary or HCFA.
    To allow hospitals an opportunity to evaluate the wage data to be
used to construct the proposed and the final FY 1999 hospital wage
index, we made available to the public data files containing the FY
1995 hospital wage data. In memoranda dated February 2 and April 21,
1998, we instructed all Medicare intermediaries to inform the
prospective payment hospitals they serve of the availability of the
wage data files and the process and timeframe for requesting revisions.
The proposed and the final wage data files were made available February
6 and May 14, 1998,

[[Page 40972]]

through the Internet at HCFA's home page (http://www.hcfa.gov). The
intermediaries were also instructed to advise hospitals of the
alternative availability of these data through their representative
hospital organizations or directly from HCFA.
    Table 3C in the Addendum to this final rule, as in the proposed
rule, contains each hospital's adjusted average hourly wage used to
construct the wage index values. A hospital can verify its adjusted
average hourly wage, as calculated from Steps 4 and 5 of the
computation of the wage index (see section III.E of this preamble)
based on the wage data on the hospital's cost report (after taking into
account any adjustments made by the intermediary), by dividing the
adjusted average hourly wage in Table 3C by the applicable wage
adjustment factors as set forth in Step 5 of the computation of the
wage index. However, a hospital's average hourly wage using this
calculation will vary from the average hourly wage shown on Line 32 of
Worksheet S-3, Part III. (See Step 5 for a complete explanation.)
    We created the correction process, as detailed in the proposed
rule, to resolve all substantive wage data correction disputes before
finalizing the wage data for the FY 1999 payment rates. Hospitals had
until June 5, 1998, to submit requests to correct errors in the final
wage data (released May 14, 1998) due to data entry or tabulation
errors by the intermediary or HCFA. The correction requests considered
were limited to errors in the final wage data that the hospital could
not have known about prior to the availability of the final wage data
public use file. If hospitals availed themselves of these opportunities
to timely identify and bring errors in their wage data to their
intermediaries' attention, the wage index implemented on October 1
should be free of such errors. Nevertheless, in the unlikely event that
errors should arise after that date, we retain the right to make
midyear changes to the wage index under very limited circumstances.
    Specifically, in accordance with Sec. 412.63(w)(2), we may make
midyear corrections to the wage index only in those limited
circumstances where a hospital can show: (1) That the intermediary or
HCFA made an error in tabulating its data; and (2) that the hospital
could not have known about the error, or did not have an opportunity to
correct the error, before the beginning of FY 1999 (that is, by the
June 5, 1998 deadline). As indicated earlier, since a hospital will
have had the opportunity to verify its data, and the intermediary will
notify the hospital of any changes, we do not foresee any specific
circumstances under which midyear corrections would be made. However,
should a midyear correction be necessary, the wage index change for the
affected area will be effective prospectively from the date the
correction is made.

E. Computation of the Wage Index

    The method used to compute the final wage index is as follows:
    Step 1--As noted above, we based the FY 1999 wage index on wage
data reported on the FY 1995 Medicare cost reports. We gathered data
from each of the non-Federal, short-term, acute care hospitals for
which data were reported on the Worksheet S-3, Parts III and IV of the
Medicare cost report for the hospital's cost reporting period beginning
on or after October 1, 1994 and before October 1, 1995. In addition, we
included data from a few hospitals that had cost reporting periods
beginning in September 1994 and reported a cost reporting period
exceeding 52 weeks. These data were included because no other data from
these hospitals would be available for the cost reporting period
described above, and particular labor market areas might be affected
due to the omission of these hospitals. However, we generally describe
these wage data as FY 1995 data.
    Step 2--For each hospital, we subtracted the excluded salaries
(that is, direct salaries attributable to skilled nursing facility
services, home health services, and other subprovider components not
subject to the prospective payment system) from gross hospital salaries
to determine net hospital salaries. To determine total salaries plus
wage-related costs, we added the costs of contract labor for direct
patient care, certain top management, and physician Part A services;
hospital wage-related costs, and any home office salaries and wage-
related costs reported by the hospital, to the net hospital salaries.
The actual calculation is the sum of lines 2, 4, 6, 32, and 33 of
Worksheet S-3, Part III. This calculation differs from the one computed
on line 32 of Worksheet S-3, Part III. Therefore, a hospital's average
hourly wage calculated under this step will be different from the
average hourly wage shown on line 32, column 5.
    Step 3--For each hospital, we subtracted the reported excluded
hours from the gross hospital hours to determine net hospital hours. To
determine total hours, we increased the net hours by the addition of
home office hours and hours for contract labor attributable to direct
patient care, certain top management, and physician Part A salaries.
    Step 4--For each hospital reporting both total overhead salaries
and total overhead hours greater than zero, we then allocated overhead
costs. First, we determined the ratio of excluded area hours (Line 24
of Worksheet S-3, Part III) to revised total hours (Line 9 of Worksheet
S-3, Part III, adding back CRNA Part A, physician Part A, and resident
hours). Second, we computed the amounts of overhead salaries and hours
to be allocated to excluded areas by multiplying the above ratio by the
total overhead salaries and hours reported on Line 16 of Worksheet S-3,
Part IV. Finally, we subtracted the computed overhead salaries and
hours associated with excluded areas from the total salaries and hours
derived in Steps 2 and 3.
    Step 5--For each hospital, we adjusted the total salaries plus
wage-related costs to a common period to determine total adjusted
salaries plus wage-related costs. To make the wage inflation
adjustment, we estimated the percentage change in the employment cost
index (ECI) for compensation for each 30-day increment from October 14,
1994 through April 15, 1996, for private industry hospital workers from
the Bureau of Labor Statistics Compensation and Working Conditions. For
previous wage indexes, we used the percentage change in average hourly
earnings for hospital industry workers to make the wage inflation
adjustment. For FY 1999 we used the ECI for compensation for private
industry hospital workers because it reflects the price increase
associated with total compensation (salaries plus fringes) rather than
just the increase in salaries, which is what the average hourly
earnings category reflected. In addition, the ECI includes managers as
well as other hospital workers. We changed the methodology used to
compute the monthly update factors. This new methodology uses actual
quarterly ECI data to determine the monthly update factors. The
methodology assures that the update factors match the actual quarterly
and annual percent changes. The inflation factors used to inflate the
hospital's data were based on the midpoint of the cost reporting period
as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                              Adjustment
                     After                         Before       factor
------------------------------------------------------------------------
10/14/94......................................     11/15/94     1.032882
11/14/94......................................     12/15/94     1.030771
12/14/94......................................     01/15/95     1.028721

[[Page 40973]]

01/14/95......................................     02/15/95     1.026731
02/14/95......................................     03/15/95     1.024776
03/14/95......................................     04/15/95     1.022827
04/14/95......................................     05/15/95     1.020886
05/14/95......................................     06/15/95     1.018901
06/14/95......................................     07/15/95     1.016822
07/14/95......................................     08/15/95     1.014649
08/14/95......................................     09/15/95     1.012446
09/14/95......................................     10/15/95     1.010279
10/14/95......................................     11/15/95     1.008146
11/14/95......................................     12/15/95     1.006047
12/14/95......................................     01/15/96     1.003981
01/14/96......................................     02/15/96     1.001950
02/14/96......................................     03/15/96     1.000000
03/14/96......................................     04/15/96     0.998181
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning January
1, 1995 and ending December 31, 1995 is June 30, 1995. An inflation
adjustment factor of 1.016822 would be applied to the wages of a
hospital with such a cost reporting period. In addition, for the data
for any cost reporting period that began in FY 1995 and covers a period
of less than 360 days or greater than 370 days, we annualized the data
to reflect a 1-year cost report. Annualization is accomplished by
dividing the data by the number of days in the cost report and then
multiplying the results by 365.
    Step 6--Each hospital was assigned to its appropriate urban or
rural labor market area prior to any reclassifications under sections
1886(d)(8)(B) or 1886(d)(10) of the Act. Within each urban or rural
labor market area, we added the total adjusted salaries plus wage-
related costs obtained in Step 5 for all hospitals in that area to
determine the total adjusted salaries plus wage-related costs for the
labor market area.
    Step 7--We divided the total adjusted salaries plus wage-related
costs obtained in Step 6 by the sum of the total hours (from Step 4)
for all hospitals in each labor market area to determine an average
hourly wage for the area.
    Step 8--We added the total adjusted salaries plus wage-related
costs obtained in Step 5 for all hospitals in the Nation and then
divided the sum by the national sum of total hours from Step 4 to
arrive at a national average hourly wage. Using the data as described
above, the national average hourly wage is $20.7325.
    Step 9--For each urban or rural labor market area, we calculated
the hospital wage index value by dividing the area average hourly wage
obtained in Step 7 by the national average hourly wage computed in Step
8. We note that in June, 1998, OMB announced the designation of the
Missoula, Montana MSA comprising Missoula, Montana.
    Step 10--Following the process set forth above, we developed a
separate Puerto Rico-specific wage index for purposes of adjusting the
Puerto Rico standardized amounts. We added the total adjusted salaries
plus wage-related costs (as calculated in Step 5) for all hospitals in
Puerto Rico and divided the sum by the total hours for Puerto Rico (as
calculated in Step 4) to arrive at an overall average hourly wage of
$9.5025 for Puerto Rico. For each labor market area in Puerto Rico, we
calculated the hospital wage index value by dividing the area average
hourly wage (as calculated in Step 7) by the overall Puerto Rico
average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for
discharges on or after October 1, 1997, the area wage index applicable
to any hospital that is not located in a rural area may not be less
than the area wage index applicable to hospitals located in rural areas
in that State. Furthermore, this wage index floor is to be implemented
in such a manner as to assure that aggregate prospective payments are
not greater or less than those which would have been made in the year
if this section did not apply. For FY 1999, this change affects 118
hospitals in 32 MSAs. The MSAs affected by this provision are
identified in Table 4A by a footnote.

F. Revisions to the Wage Index Based on Hospital Redesignation

    Under section 1886(d)(8)(B) of the Act, hospitals in certain rural
counties adjacent to one or more MSAs are considered to be located in
one of the adjacent MSAs if certain standards are met. Under section
1886(d)(10) of the Act, the Medicare Geographic Classification Review
Board (MGCRB) considers applications by hospitals for geographic
reclassification for purposes of payment under the prospective payment
system.
    The methodology for determining the wage index values for
redesignated hospitals is applied jointly to the hospitals located in
those rural counties that were deemed urban under section 1886(d)(8)(B)
of the Act and those hospitals that were reclassified as a result of
the MGCRB decisions under section 1886(d)(10) of the Act. Section
1886(d)(8)(C) of the Act provides that the application of the wage
index to redesignated hospitals is dependent on the hypothetical impact
that the wage data from these hospitals would have on the wage index
value for the area to which they have been redesignated. Therefore, as
provided in section 1886(d)(8)(C) of the Act, the wage index values
were determined by considering the following:
    <bullet> If including the wage data for the redesignated hospitals
would reduce the wage index value for the area to which the hospitals
are redesignated by 1 percentage point or less, the area wage index
value determined exclusive of the wage data for the redesignated
hospitals applies to the redesignated hospitals.
    <bullet> If including the wage data for the redesignated hospitals
reduces the wage index value for the area to which the hospitals are
redesignated by more than 1 percentage point, the hospitals that are
redesignated are subject to that combined wage index value.
    <bullet> If including the wage data for the redesignated hospitals
increases the wage index value for the area to which the hospitals are
redesignated, both the area and the redesignated hospitals receive the
combined wage index value.
    <bullet> The wage index value for a redesignated urban or rural
hospital cannot be reduced below the wage index value for the rural
areas of the State in which the hospital is located.
    <bullet> Rural areas whose wage index values would be reduced by
excluding the wage data for hospitals that have been redesignated to
another area continue to have their wage index values calculated as if
no redesignation had occurred.
    <bullet> Rural areas whose wage index values increase as a result
of excluding the wage data for the hospitals that have been
redesignated to another area have their wage index values calculated
exclusive of the wage data of the redesignated hospitals.
    <bullet> The wage index value for an urban area is calculated
exclusive of the wage data for hospitals that have been reclassified to
another area. However, geographic reclassification may not reduce the
wage index value for an urban area below the statewide rural wage index
value.
    We note that, except for those rural areas where redesignation
would reduce the rural wage index value, the wage index value for each
area is computed exclusive of the wage data for hospitals that have
been redesignated from the area for purposes of their wage index. As a
result, several urban areas listed in Table 4a have no hospitals
remaining in the area. This is because all the hospitals originally in
these urban areas have been reclassified to another area by the MGCRB.
These areas with no remaining hospitals receive the prereclassified
wage index value. The prereclassified wage index value will apply as
long as the area remains empty.
    The final wage index values for FY 1999 are shown in Tables 4A, 4B,
4C,

[[Page 40974]]

and 4F in the Addendum to this final rule. Hospitals that are
redesignated should use the wage index values shown in Table 4C. Areas
in Table 4C may have more than one wage index value because the wage
index value for a redesignated urban or rural hospital cannot be
reduced below the wage index value for the rural areas of the State in
which the hospital is located. When the wage index value of the area to
which a hospital is redesignated is lower than the wage index value for
the rural areas of the State in which the hospital is located, the
redesignated hospital receives the higher wage index value, that is,
the wage index value for the rural areas of the State in which it is
located, rather than the wage index value otherwise applicable to the
redesignated hospitals.
    Tables 4D and 4E list the average hourly wage for each labor market
area, prior to the redesignation of hospitals, based on the FY 1995
wage data. In addition, Table 3C in the Addendum to this final rule
includes the adjusted average hourly wage for each hospital based on
the FY 1995 data (as calculated from Steps 4 and 5, above). The MGCRB
will use the average hourly wage published in the final rule to
evaluate a hospital's application for reclassification for FY 2000,
unless that average hourly wage is later revised in accordance with the
wage data correction policy described in Sec. 412.63(w)(2). In such
cases, the MGCRB will use the most recent revised data used for
purposes of the hospital wage index.
    Although we did not propose any changes to the reclassification
guidelines, we received two comments on that issue.
    Comment: One commenter was concerned that the number of hospitals
participating in countywide reclassifications has declined over the
years. The commenter believes that this is an indication that the
criteria for hospitals in an urban county seeking reclassification to
another urban county should be adjusted.
    Response: When we implemented the MGCRB process, we anticipated
that, over the years, the number of hospitals that would continue to
qualify for reclassification would decrease due to better data
reporting and efforts by hospitals to constrain costs. The
reclassification process is an annual process in which a hospital or
group of hospitals must meet the defined criteria on an annual basis in
order to remain reclassified to an alternative area for either the wage
index, the standardized amount, or both. We note that hospitals that do
not meet the countywide criteria under Sec. 412.234 may apply on an
individual basis.
    Comment: One commenter supports the policy that allows rural
hospitals to reclassify to another area for purposes of the
disproportionate share adjustment even if the standardized amount is
the same for both areas. However, this commenter is also concerned that
separate criteria have not been developed for this type of
reclassification and that we continue to rely on the criteria set forth
in Sec. 412.230(d), which is the criteria for reclassification to
another area for purposes of the standardized amount.
    Response: Section 4203(a) of the Balanced Budget Act of 1997
provided that, for a limited period of time, a rural hospital may apply
for reclassification to another area for purposes of receiving
disproportionate share payments whether or not the standardized amount
is the same for both areas. Section 4203(b) provides that the MGCRB
will apply the guidelines for reclassification for purposes of the
standardized amount until the Secretary establishes other guidelines.
    We believe that the criteria in place for standardized amount
reclassification are appropriate for determining whether hospitals
should be reclassified for purposes of the disproportionate share
payment. The criteria address the extent to which a hospital warrants
reclassification by comparing the hospital's costs to its payments with
and without reclassification. Nevertheless, we welcome specific
suggestions for revising the DSH reclassification criteria.

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

A. Definition of Transfers (Sec. 412.4)

    Pursuant to section 1886(d)(5)(I) of the Act, the prospective
payment system distinguishes between ``discharges,'' situations in
which a patient leaves an acute care (prospective payment) hospital
after receiving complete acute care treatment, and ``transfers,''
situations in which the patient is transferred to another acute care
hospital for related care. If a full DRG payment were made to each
hospital involved in a transfer situation, irrespective of the length
of time the patient spent in the ``sending'' hospital prior to
transfer, a strong incentive to increase transfers would be created,
thereby unnecessarily endangering patients' health. Therefore, our
policy, which is set forth in the regulations at Sec. 412.4, provides
that, in a transfer situation, full payment is made to the final
discharging hospital and each transferring hospital is paid a per diem
rate for each day of the stay, not to exceed the full DRG payment that
would have been made if the patient had been discharged without being
transferred.
    Currently, the per diem rate paid to a transferring hospital is
determined by dividing the full DRG payment that would have been paid
in a nontransfer situation by the geometric mean length of stay for the
DRG into which the case falls. Hospitals receive twice the per diem for
the first day of the stay and the per diem for every following day up
to the full DRG amount. Transferring hospitals are also eligible for
outlier payments. Two exceptions to the current transfer payment policy
are transfer cases classified into DRG 385 (Neonates, Died or
Transferred to Another Acute Care Facility) and DRG 456 (Burns,
Transferred to Another Acute Care Facility), which receive the full DRG
payment instead of being paid on a per diem basis.
    Under section 1886(d)(5)(J) of the Act, which was added by section
4407 of the Balanced Budget Act of 1997, a ``qualified discharge'' from
one of 10 DRGs selected by the Secretary to a postacute care provider
will be treated as a transfer case beginning with discharges on or
after October 1, 1998. Section 1886(d)(5)(J)(iii) confers broad
authority on the Secretary to select 10 DRGs ``based upon a high volume
of discharges classified within such group and a disproportionate use
of'' certain postdischarge services. Section 1886(d)(5)(J)(ii) defines
a ``qualified discharge'' as a discharge from a prospective payment
hospital of an individual whose hospital stay is classified in one of
the 10 selected DRGs if, upon such discharge, the individual--
    <bullet> Is admitted to a hospital or hospital unit that is not a
prospective payment system hospital;
    <bullet> Is admitted to a skilled nursing facility; or
    <bullet> Is provided home health services by a home health agency
if the services relate to the condition or diagnosis for which the
individual received inpatient hospital services and if these services
are provided within an appropriate period as determined by the
Secretary.
    The Conference Agreement that accompanied the law noted that
``(t)he Conferees are concerned that Medicare may in some cases be
overpaying hospitals for patients who are transferred to a post acute
care setting after a very short acute care hospital stay. The Conferees
believe that Medicare's payment system should

[[Page 40975]]

continue to provide hospitals with strong incentives to treat patients
in the most effective and efficient manner, while at the same time,
adjust PPS [prospective payment system] payments in a manner that
accounts for reduced hospital lengths of stay because of a discharge to
another setting.'' (H.R. Rep. No. 105-217, 740.) In its March 1, 1997
report, ProPAC expressed similar concerns: ``* * * length of stay
declines have been greater in DRGs associated with substantial
postacute care use, suggesting a shift in care from hospital inpatient
to postacute settings' (pp. 21-22).
    In fact, based on the latest available data, overall Medicare
hospital costs per case have decreased during FYs 1994 and 1995. This
unprecedented real decline in costs per case has led to historically
high Medicare operating margins (over 10 percent on average). Along
with these declining lengths of stay and costs per case, there has been
an increase in the utilization of postacute care. In 1990, the rate of
skilled nursing facility services per 1,000 Medicare enrollees was 19.
By 1995, it had grown to 33. Corresponding numbers for home health
agency services are 58 per 1,000 Medicare enrollees during 1990 and 93
per 1,000 enrollees during 1995. Although home health services are not
always directly related to a hospitalization episode, there does appear
to be a trend toward increased use of home health for the provision of
postacute care rehabilitation services. Previous analysis of the
percentage of hospital discharges that receive postacute home health
care showed a 10.3 percent increase in 1994 compared to 1992.
    In the May 8, 1998 proposed rule, we discussed our proposals to
implement section 1886(d)(5)(J) of the Act. These proposals are set
forth below.
1. Selection of 10 DRGs
    Section 1886(d)(5)(J)(iii)(I) of the Act provides that the
Secretary select 10 DRGs based on a high volume of discharges to
postacute care and a disproportionate use of postacute care services.
Therefore, in order to select the DRGs to be paid as transfers, we
first identified those DRGs with the highest percentage of postacute
care.
    We used the FY 1996 MedPAR file because the complete FY 1997 MedPAR
file was not available at the time we conducted our analysis. To
identify postacute care utilization, we merged hospital inpatient bill
files with postacute care bill files matching beneficiary
identification numbers and discharge and admission dates. We created
this file rather than depend on information concerning discharge
destination on the inpatient bill because we have found that the
discharge destination codes included on the hospital bills are often
inaccurate in identifying discharges to a facility other than another
prospective payment hospital.
    Section 1886(d)(5)(J)(ii)(III) of the Act requires the Secretary to
choose an appropriate window of days in which the home health services
start in order for the discharge to meet the definition of a transfer.
In order to include postdischarge home health utilization in our
analysis, we identified all hospital discharges for patients who
received any home health care within 7 days after the date of
discharge. (As described below in section IV.A.2., we ultimately
decided to propose 3 days as the window for home health services.)
    Starting with the DRG with the highest percentage of postacute care
discharges and continuing in descending order, we selected the first 20
DRG's that had a relatively large number of discharges to postacute
care (our lower limit was 14,000 cases). In order to select 10 DRG's
from the 20 DRG's on our list, for each of the DRG's we considered the
volume and percentage of discharges to postacute care that occurred
before the mean length of stay and whether the discharges occurring
early in the stay were more likely to receive postacute care. The
following table lists the 10 DRG's we proposed to include under our
expanded transfer definition, their percentage of postacute utilization
compared to total cases, and the total number of cases identified as
going to postacute care.

------------------------------------------------------------------------
                                                 Percent of   Number of
        DRG            Title and type of DRG     postacute    postacute
                       (surgical or medical)    utilization     cases
------------------------------------------------------------------------
14................  Specific Cerebrovascular           49.5      186,845
                     Disorders Except
                     Transient Ischemic Attack
                     (Medical).
113...............  Amputation for Circulatory         59.0       28,402
                     System Disorders
                     Excluding Upper Limb and
                     Toe (Surgical).
209...............  Major Joint Limb                   71.9      257,875
                     Reattachment Procedures
                     of Lower Extremity
                     (Surgical).
210...............  Hip and Femur Procedures           77.8      111,799
                     Except Major Joint Age
                     >17 With CC (Surgical).
211...............  Hip and Femur Procedures           74.2       19,548
                     Except Major Joint Age
                     >17 Without CC (Surgical).
236...............  Fractures of Hip and               61.2       24,498
                     Pelvis (Medical).
263...............  Skin Graft and/or                  49.4       14,499
                     Debridement for Skin
                     Ulcer or Cellulitis With
                     CC (Surgical).
264...............  Skin Graft and/or                  39.3        1,328
                     Debridement for Skin
                     Ulcer or Cellulitis W/O
                     CC (Surgical).
429...............  Organic Disturbances and           45.4       19,314
                     Mental Retardation
                     (Medical).
483...............  Tracheostomy Except for            45.3       18,254
                     Face, Mouth and Neck
                     Diagnoses (Surgical).
------------------------------------------------------------------------

    We included DRG 263 on the list because of its ranking in the top
20 DRG's in terms of postacute utilization and volume of discharges to
postacute care. DRG's 263 and 264 are paired DRG's; that is, the only
difference in the cases assigned to DRG 263 as opposed to DRG 264 is
that the patient has a complicating or comorbid condition. If we
included only DRG 263 in the list, it would be possible for a transfer
case with a relatively short length of stay that should be assigned to
DRG 263 and receive a relatively small transfer payment to be assigned
instead to DRG 264, and receive the full DRG payment, simply by failing
to include the CC diagnosis code on the bill. Therefore, our choice was
to either delete DRG 263 from the list or add DRG 264. We decided to
include DRG 264 in the proposed list because DRG 263 fully meets all
the conditions for inclusion on the list of 10 DRG's.
2. Postacute Care Settings
    Section 1886(d)(5)(J)(ii) of the Act requires the Secretary to
define and pay as transfers cases from one of 10 DRG's selected by the
Secretary if the individual is discharged to one of the following
settings:
    <bullet> A hospital or hospital unit that is not a subsection
[1886](d) hospital, that is, a hospital or unit excluded from the
inpatient prospective payment system.
    <bullet> A skilled nursing facility, that is, a facility that meets
the definition of a skilled nursing facility set forth at section 1819
of the Act.
    <bullet> Home health services provided by a home health agency, if
the services are

[[Page 40976]]

related to the condition or diagnosis for which the individual received
inpatient hospital services, and if the home health services are
provided within an appropriate period (as determined by the Secretary).
    Section 1886(d)(1)(B) of the Act defines the hospitals and hospital
units that are excluded from the prospective payment system as the
following: psychiatric, rehabilitation, childrens', long-term care, and
cancer hospitals and psychiatric and rehabilitation distinct part units
of a hospital. Therefore, any discharge from a prospective payment
hospital from one of the 10 proposed DRG's that is admitted to one of
these types of facilities on the date of discharge from the acute
hospital, on or after October 1, 1998, would be considered a transfer
and paid accordingly under the prospective payment systems (operating
and capital) for inpatient hospital services.
    We proposed that a discharge from a prospective payment hospital to
a skilled nursing facility would include cases discharged from one of
the 10 DRG's from an inpatient bed in the hospital to a bed in the same
hospital that has been designated for the provision of skilled nursing
care (a ``swing'' bed). The swing bed provision allows certain small
rural hospitals to furnish services in inpatient beds which, if
furnished by a skilled nursing facility, would constitute extended care
services. In addition, any patient who receives swing-bed services is
deemed to have received extended care services as if furnished by a
skilled nursing facility. Thus, if swing beds were not included in the
transfer policy, those hospitals with swing bed agreements could move
patients assigned to one of the 10 selected DRG's from an inpatient bed
to a swing bed and receive payment and receive the full DRG payment. In
the proposed rule, we stated that we did not believe that this would be
a fair policy in that it would create a payment advantage for swing bed
hospitals. Therefore, we proposed that a discharge to a swing bed would
be paid as a transfer when the patient is classified to one of the 10
selected DRG's.
    Section 1886(d)(5)(J)(ii)(III) of the Act states that the discharge
of an individual who receives home health services upon discharge will
be treated as a transfer if ``such services are provided within an
appropriate period (as determined by the Secretary) * * *.'' As
discussed above in section IV.A.1, we began our analysis using 7 days
(one week) as the time period we would consider. However, after
conducting further analysis, we proposed that 3 days after the date of
discharge would be a more appropriate timeframe. Based on our analysis
of the FY 1996 bills, approximately 90 percent of patients began
receiving home health care within 3 days.
    With regard to an appropriate definition of ``home health services
* * * relate[d] to the condition or diagnosis for which the individual
received inpatient hospital services * * *'', we considered several
possible approaches. Under one approach we could compare the principal
diagnosis of the inpatient stay to the diagnosis code indicated on the
home health bill, similar to our policy on the 3-day payment window for
preadmission services. However, we believe that such a policy is far
too restrictive in terms of qualifying discharges for transfer payment.
In addition, a hospital would not know when it discharges a patient to
home health what diagnosis code the home health agency will put on the
bill. Therefore, the hospital would not be able to correctly code the
inpatient bill as a transfer or discharge.
    We also considered proposing that any home health care that begins
within the designated timeframe be included ``as related'' in our
definition. However, this definition might be too broad and the
hospital would not be able to predict which cases should be coded as
transfers because the hospital often may not know about home health
services that are provided upon discharge but were not ordered or
planned for as part of the hospital discharge plan.
    We proposed that home health services would be considered related
to the hospital discharge if the patient is discharged from the
hospital with a written plan of care for the provision of home health
care services from a home health agency. In this way, the hospital
would be fully aware of the status of the patient when discharged and
could be held responsible for correctly coding the discharge as a
transfer on the inpatient bill. In general, this would mean that the
home health service would qualify as a Part A home health benefit under
section 1861(tt) of the Act as added by section 4611(b) of the BBA.
    In the proposed rule, we noted that we plan to compare inpatient
bills with home health service bills for care provided within 3 days
after discharge. If we find that home health services were provided
within the postdischarge window, the hospital will be notified and the
hospital payment adjusted unless the hospital can submit documentation
verifying the discharge status of the patient. This will alert
hospitals if there are problems with their discharge/transfer billing
and allow them to adjust their discharge planning process and billing
practices. If we find a continued pattern of a hospital billing for
cases from the 10 DRG's as discharges and our records indicate that the
patients are receiving postacute care services from an excluded
hospital, a skilled nursing facility, or within the 3-day home health
service window, the hospitals may be investigated for fraudulent or
abusive billing practices.
3. Payment Methodology
    The statute does not dictate the payment methodology we must use
for these transfer cases. However, section 1886(d)(5)(J)(i) of the Act
provides that the payment amount for a case may not exceed the sum of
half the full DRG payment amount and half of the payment amount under
the current per diem payment methodology.
    Based on our analysis comparing the costs per case for the
transfers in the 10 DRG's with payments under our current transfer
payment methodology, we found that most of the 10 DRG's are
appropriately paid using our current methodology (that is, twice the
per diem for the first day and the per diem for each subsequent day).
In fact, this payment would, on average, slightly exceed costs.
However, this is not true of DRG's 209, 210, and 211. For those three
DRG's, a disproportionate percentage (about 50 percent) of the costs of
the case are incurred on the first day of the stay. Therefore, we
stated in the proposed rule that we would pay DRG's 209, 210, and 211
based on 50 percent of the DRG payment for the first day of the stay
and 50 percent of the per diem for the remaining days of the stay. The
other seven DRG's would be paid under the current transfer payment
methodology.
    We proposed to revise Sec. 412.4 to reflect these policies. In
addition, we proposed to delete the reference in Sec. 412.4(d)(2) to
DRG 456 (Burns, Transferred to Another Acute Care Facility) because we
proposed to replace that DRG and there would no longer be any burn DRG
with a transfer designation. As discussed in section II.B.3 of this
preamble, we have adopted that DRG change effective for FY 1999.
    We received a large number of comments concerning this proposal. In
general, commenters were opposed to the implementation of any postacute
care transfer policy. Acknowledging that the policy is required by
statute, most commenters also disagreed with the manner in which we
proposed to implement the policy. However, one association representing
postacute care providers was supportive of the proposed policy, in
general, and our

[[Page 40977]]

various policy proposals. As discussed in the specific comments and
responses that follow, we are implementing the discharge to postacute
care provision as set forth in the proposed rule except that we are not
including swing beds in the definition of a postacute care setting and
we are clarifying the payment methodology for DRGs 209, 210, and 211.
    Comment: Commenters believed that the postacute care transfer
provision penalizes hospitals for providing effective care and creates
a perverse incentive for hospitals to keep patients longer. Some
commenters suggested that this provision interferes with the practice
of medicine by overriding the clinical decision-making process by
physicians in determining the most appropriate level of care to provide
to their patients. Many commenters stated that the postacute care
transfer policy is contrary to the original intent of the prospective
payment system. Several commenters urged us either to repeal the entire
provision or to support efforts to have it repealed.
    Response: We disagree that this provision penalizes hospitals for
effective care. As noted in the May 8 proposed rule, the Conference
Agreement accompanying Public Law 105-33 states that ``Medicare's
payment system should continue to provide hospitals with strong
incentives to treat patients in the most effective and efficient
manner, while at the same time, adjust PPS payments in a manner that
accounts for reduced hospital lengths of stay because of a discharge to
another setting.'' The transfer provision adjusts payments to hospitals
to reflect the reduced lengths of stay arising from the shift of
patient care from the acute care setting to the postacute care setting.
In addition, because Medicare also often pays for the postacute care
portion of beneficiaries' care, the transfer provision appropriately
adjusts hospitals' payments to avoid duplicate payments for the care
provided during a patient's episode of care.
    With respect to the payment incentives created by this provision,
we would refer the reader to the tables set forth at Appendix D of this
final rule. These tables graphically demonstrate payments compared to
costs for transfer cases in each of the 10 selected DRGs. These tables
show that, across virtually all lengths of stay for each of the DRGs,
Medicare will pay in excess of costs even after the implementation of
this provision. Thus, the argument that this provision creates perverse
incentives and interferes with the appropriate practice of medicine is
not persuasive. This policy does not require a change in physician
clinical decision-making nor in the manner in which physicians and
hospitals practice medicine; it simply addresses the appropriate level
of payments once those decisions have been made.
    We believe a stronger argument can be made that the incentives of
the current policy, where hospitals receive the full DRG payment for
these DRGs regardless of how long patients remain in the acute care
hospital prior to being transferred for postacute care, potentially
have a greater impact on clinical decision-making. Simply put, as costs
rise with each additional acute care day and payments are fixed,
hospitals have a financial incentive to discharge patients as soon as
possible. The incentive is less clear, and can be argued to be neutral,
to the extent that the marginal payments for an additional acute
inpatient care day increase in proportion to the marginal costs of that
day. Thus, the postacute care transfer policy does not create perverse
incentives for hospitals to keep patients longer; instead, it addresses
current incentives to discharge patients as soon as possible.
    With respect to whether the provision is contrary to the original
intent of the prospective payment system, we believe it is entirely
consistent with the following statement made in the Federal Register
during the first year of the prospective payment system in response to
a comment concerning the hospital-to-hospital transfer policy: ``(t)he
rationale for per diem payments as part of our transfer policy is that
the transferring hospital generally provides only a limited amount of
treatment. Therefore, payment of the full prospective payment rate
would be unwarranted'' (49 FR 244). We also note that in its earliest
update recommendations, the Prospective Payment Assessment Commission
(MedPAC's predecessor organization) included what it called a site-of-
service substitution adjustment to account for the shifting of portions
of inpatient care to other settings. We believe this provision is an
appropriate and consistent response to the changing treatment practice
of the hospital industry.
    Comment: A commenter observed that our estimate of the impact of
this transfer provision on hospitals' payments per case (a 0.6 percent
decrease in payments) results in an overall payment reduction of $600
million for FY 1999. The commenter stated that the Congressional Budget
Office (CBO) estimated the impact at $100 million for FY 1999. The
commenter believed that this disparity in estimates substantiates
claims that the new provision will have undesirable and unintended
consequences.
    Response: We believe the commenter's estimate of the impacts of
this provision are overstated. Based on the 0.6 percent decrease in
payment per case estimated in our impact analysis, the projected impact
of this transfer provision is approximately a $480 million decrease in
overall payments. Although this savings estimate is higher than CBO's
estimate, we would note that CBO assumed hospitals would change their
behavior by keeping patients longer. As we describe in our impact
analysis, we do not make any assumptions regarding changes in
hospitals' behavior. We would also note that the precision with which
one can estimate the savings associated with a provision such as this
is highly dependent on the specifications of the provision and the data
available to generate an estimate. Unlike the CBO estimate, our
estimate reflects the 10 actual DRGs to be included and the latest
discharge data to identify which cases would qualify as transfers.
    Comment: A large number of commenters objected to the inclusion of
swing beds as a postacute care setting. Many of these commenters stated
that they believed that Congress did not intend that discharges to
swing beds be included in the postacute transfer provision. In
addition, the commenters were concerned about the negative impact of
this policy on rural hospitals and rural health care in general. Two
commenters, including MedPAC, supported our proposal concerning swing
bed discharges.
    Response: We proposed to include discharges to swing beds because
the services provided in swing beds are exactly the same as the
services provided in skilled nursing facilities. That is, a swing-bed
hospital is equivalent to a skilled nursing facility when it provides a
swing-bed service. Thus, the policy rationale for including discharges
to skilled nursing facilities in the postacute care provision would
apply equally to discharges to swing beds.
    Although we are not persuaded by the commenters that, from a
payment policy perspective, our proposal to include swing beds in the
transfer provision was inappropriate, we understand the commenter's
concern that this policy could have an adverse impact on small rural
hospitals. Although our analysis shows that the impact on these
hospitals is negligible in the aggregate, the impact on individual
hospitals may be more significant. We have decided not to include
discharges to a swing bed in the expanded transfer definition at this

[[Page 40978]]

time. We will monitor these discharges closely and may reconsider this
decision in the future. We note that section 1886(d)(5)(J)(iv) of the
Act requires the Secretary to include a description of the effect of
the postacute care transfer policy in the FY 2001 hospital inpatient
prospective payment system proposed rule.
    Comment: Commenters requested clarification of our policy
concerning transfers to skilled nursing facilities. First, the
commenters questioned the Secretary's authority to include as transfers
those discharges to nursing homes that are not certified by Medicare.
In addition, the commenters believed that patients discharged to a
Medicare-certified skilled nursing facility for custodial care should
not be included. The commenters also urged us to limit application of
the transfer policy to discharges to skilled nursing facilities in
cases where the patient receives Medicare-covered postacute care.
    Response: Section 1886(d)(5)(J)(ii) of the Act defines a
``qualified discharge'' in part as a discharge of an individual from a
prospective payment system hospital, if upon such discharge, the
individual is ``* * * admitted to a skilled nursing facility. * * *''
There is no language in the statute that further defines skilled
nursing facility. In the proposed rule, we stated that a discharge to a
facility that meets the definition of a skilled nursing facility set
forth at section 1819 of the Act would be considered a transfer.
Discharges to nursing homes that are not certified by Medicare as
skilled nursing facilities, or distinct parts of nursing homes that are
not certified as skilled nursing facilities, would not be considered
transfers.
    However, we do not believe it would be appropriate from either a
legal or policy perspective to limit the transfer definition to
situations where a patient is transferred to a skilled nursing facility
for noncovered services. The statute does not limit application of the
transfer definition to ``covered'' skilled nursing facility services.
Moreover, there are several policy reasons why we would not adopt such
a policy. First, it would place an added administrative burden upon the
hospital to evaluate the patient's eligibility for covered skilled
nursing services. Second, it would create incentives for providing
noncovered postacute care that could potentially place beneficiaries at
medical and financial risk. Third, it would be inconsistent with
existing transfer policy (from one acute care hospital to another acute
care hospital), which does not limit the definition of a transfer to
those cases in which a patient receives Medicare-covered services at
the receiving hospital. Finally, the basic rationale for the transfer
policy (that is, adjusting hospital payments to reflect reduced
hospital costs due to discharge to a postacute care facility) applies
regardless of whether the postacute care is covered by Medicare.
Therefore, our final regulations provide that all discharges from the
10 specified DRGs admitted to a skilled nursing facility will be
defined as transfers, regardless of the coverage status of that
admission.
    Comment: One commenter believes that patients who were admitted to
a skilled nursing facility any time within 30 days after the date of
discharge (the so-called 30-day skilled nursing facility eligibility
window) and who received care related to the inpatient stay will be
considered a transfer under this policy. The commenter is concerned
that hospitals will be expected to track patients for this period of
time and be held accountable for their actions in such situations.
    Response: In order to be considered a transfer, the patient must be
admitted directly from the hospital to the skilled nursing facility. If
the patient is not admitted directly to a skilled nursing facility, it
would not constitute a transfer situation, even if care begins within
the 30-day eligibility window and is related to the acute care hospital
stay.
    Comment: One commenter suggested that the expanded transfer
definition should apply only in cases where the patient is transferred
within a hospital system, that is, the patient is discharged to an
entity that is related to or owned by the hospital. A transfer to an
independent postacute care entity would be defined as a discharge.
    Response: Section 1886(d)(5)(J)(ii) of the Act defines a qualified
discharge from a prospective payment hospital as one in which the
individual, upon discharge, ``* * * is admitted as an inpatient of a
hospital or hospital unit excluded that is not a subsection (d)
hospital * * * is admitted to a skilled nursing facility * * * is
provided home health services from a home health agency. * * *'' The
statute or the conference report does not limit the applicability of
this provision to postacute care providers that are owned by or related
to the discharging hospital. In addition, we do not believe that
ownership of or affiliation with the postacute care providers is the
overriding concern that led to the enactment of this provision.
Although a hospital that owns or is related to the postacute care
provider has an even greater financial incentive to transfer a patient
early in the hospital stay to that facility, the current incentive to
the hospital itself to discharge the patient as soon as possible is the
same whether or not it owns or is related to the postacute care
provider. Finally, if the transfer definition were based on a
hospital's affiliation with the postacute provider, it would create a
strong incentive to reconfigure the hospital's corporate structure to
avoid being included under the provision.
    Comment: One commenter suggested that psychiatric hospitals and
units be excluded from the provision because the postacute care
services furnished by these facilities are unrelated to a medical
hospitalization.
    Response: As a legal matter, section 1886(d)(5)(J)(ii)(I) of the
Act includes all hospitals and hospital units excluded from the
prospective payment system. This definition covers psychiatric
hospitals and units. As a policy matter, we also strongly believe that
transfers to psychiatric hospitals and units should be included under
this provision. Inpatient care furnished by hospitals is not limited to
diseases and disorders of the body, but is also furnished to patients
with mental diseases and disorders as evidenced by the nine DRGs
devoted solely to these conditions. Furthermore, exempting psychiatric
hospitals and units from the provision could create an incentive to
temporarily transfer patients who need postacute care to a psychiatric
hospital or unit setting as a way of avoiding the transfer payment,
thus delaying the appropriate medical care for the patient.
    Comment: Several commenters disagreed with our proposal to include
as transfers all discharges from the 10 specified DRGs to home health
care that begins within 3 days after the date of discharge. The
commenters argued that postacute care that begins 3 days after
discharge should not be considered a substitute for inpatient hospital
care. Although MedPAC agreed with these commenters that home health
services furnished after a delay of more than one day may not
necessarily be regarded as substituting for inpatient acute care, they
also noted that a 3-day window allows for the fact that most home
health patients do not receive care every day as well as those
occasions in which there may be a delay in arranging for the provision
of planned care. The Commission also stated that a shorter period may
create a stronger incentive to delay the provision of necessary
treatment beyond the window so the hospital can receive the full DRG
payment. Another commenter

[[Page 40979]]

supported 3 days as an appropriate period of time.
    Those commenters who recommended an alternative number of days for
the home health window universally stated that a discharge to home
health care should be considered a transfer only if the patients begin
to receive home health care on the day of discharge. One commenter
argued that a 3-day window would lead to either needlessly prolonged
hospital stays or delayed home health care. Another commenter
questioned why we would not want patients transferred to home health
care as soon as possible.
    Response: The statute defines ``qualified discharge'' to include
discharges where the individual is provided home health care ``within
an appropriate period (as determined by the Secretary).'' We continue
to believe a 3-day window for home health services is appropriate. Home
health care is a less-structured and more flexible means of providing
postacute care because it is provided not in an institutional setting
but rather in the patient's home. We believe that a 3-day window
provides flexibility in situations where home care may not be available
or medically appropriate immediately upon discharge. It is also of
sufficient length to discourage hospitals and physicians from delaying
the initiation of necessary postacute care, while being short enough to
avoid placing an undue burden upon hospitals that may want to delay
submitting the inpatient hospital claim until they verify whether or
not home health care has begun within the 3 days.
    We do not believe that it is appropriate to limit the transfer
definition to situations where home care begins on the same day as the
patient is discharged from the hospital. Our analysis indicates that
currently less than 8 percent of discharged patients who receive home
health services begin receiving those services on the date of
discharge. It is unreasonable to expect that patients who are
discharged in the late afternoon or evening would receive a home health
visit that same day. Furthermore, we believe the financial incentive to
delay needed home care for only a matter of hours would be overwhelming
if we limited the definition to the same day. As we noted in the
proposed rule, approximately 90 percent of patients who receive home
health services after an inpatient hospital stay began their treatment
within 3 days after the date of discharge. We believe 3 days
accommodates current practices, while also being sufficiently narrow to
allow hospitals to determine whether the care was actually delivered
prior to submitting the bill. We intend to monitor this aspect of the
policy through case review in order to track any changes in hospital
practices that may indicate that we need to revise our window
definition.
    Comment: One commenter argued that the best method to determine
whether postacute home health services are related to the inpatient
stay would be to match the principal diagnosis codes on the inpatient
and home health bills. The commenter believed this would alleviate
situations where the patient is discharged from the hospital with a
written plan for the provision of home health services, but the
services are related to a medical condition other than the condition
responsible for the inpatient stay. In addition, the commenter noted
that matching principal diagnosis codes would be consistent with
current policy for the 3-day window for preadmission services.
    Response: We disagree that the determination of whether home health
care is related to the acute hospitalization should be based on the
presence of identical diagnosis codes on the inpatient and home health
bills. This approach would rely on the coding practices of the
providers involved. Providers, especially postacute care providers,
frequently have the discretion to select from several possible
diagnosis codes. A common practice of postacute care providers is to
use the V57 diagnosis code category (care involving use of
rehabilitation procedures) as principal because those codes best
describe the reason for the postacute care. However, this code is
seldom used by hospitals for acute care discharges because they are
instructed by coding rules to code as principal the condition that
required the hospital admission as determined at the time of discharge.
In fact, if the hospitals coded discharges with the rehabilitation
codes as principal, the discharges would never be included in the
postacute care policy because those discharges would never be
classified to one of the 10 selected DRGs.
    We believe our proposed policy on this issue is preferable. We note
that hospitals that code a discharge to home health will be permitted
to indicate through a condition code on the inpatient bill that the
hospital's discharge plan does not call for home care related to the
hospitalization, but that other nonrelated home care is appropriate.
This way, the hospital will make a conscious selection that the home
care the patient is to receive is not related to the hospitalization,
and would be expected to have documentation in the patient's records to
that effect.
    Comment: In the context of discussing the home health window,
MedPAC questioned whether the same day requirement for admission to an
excluded hospital or unit or a skilled nursing facility was too
limited. The Commission suggested expanding the definition to account
for a 24-hour period following discharge.
    Response: In describing which discharges to excluded hospitals and
units or skilled nursing facilities should be treated as a transfer,
the statute states that the patient is admitted to the facility upon
discharge from the hospital. We believe that Congress intended that the
policy apply to situations when the patient moves from the hospital
directly to the excluded facility or the skilled nursing facility.
Therefore, unless a patient is being transported from the hospital to
the other facility in the middle of the night, the discharge and
admission should occur on the same calendar day. We note that a direct
transfer that spans midnight and results in a one-day difference in the
discharge and admission dates will be considered a transfer for
purposes of this policy.
    Comment: Many commenters indicated the discharge to postacute care
provision will be an administrative burden for hospitals. Because
Medicare beneficiaries are free to obtain services without a hospital
referral, hospitals are concerned that they will be subject to
allegations of fraud and abuse if they discharge a beneficiary to home
with no plan of care for home health services and the beneficiary
subsequently receives postacute care without the hospital's knowledge.
These hospitals believe that they may be forced to hold bills for the
10 DRGS when they discharge a patient to self-care at home so they can
follow-up and ensure that the patient did not receive postacute care.
    Another commenter is disturbed by our discussion in the proposed
rule concerning future actions we may take if we find continued
patterns of a hospital billing postacute transfer cases as discharges,
including the possibility that hospitals may be investigated for
fraudulent or abusive billing practices. The commenter believes that
our language was too strong and that we are not allowing a period of
transition in which hospitals may make honest billing errors as they
adjust to this new policy.
    Finally, commenters suggested that we clarify when hospitals are
responsible for knowing that a case is transferred for postacute care.

[[Page 40980]]

    Response: We recognize there may occasionally be cases where a
hospital believes it is discharging a patient to home or another
setting not included in the postacute transfer definition, and a
physician orders postacute care for the patient without notifying the
hospital. Although these cases would be considered transfers under this
provision, we do not believe that such instances, where they occur
truly without knowledge of the hospital, constitute fraudulent actions.
As we indicated in the proposed rule, we intend to monitor postacute
care cases to evaluate whether such situations occur with unlikely
frequency at specific hospitals and we will investigate the
circumstances in those instances.
    Although we recognize honest mistakes will occur, we do not believe
it is inappropriate to put hospitals on notice that we reserve the
right to investigate those with aberrant patterns of inaccurate billing
on these cases. While it is reasonable to assume there will be a
learning curve in terms of hospitals' billing practices as these
changes are implemented, we also take seriously our responsibility to
protect the Medicare trust fund. Our intention in including a
discussion of this issue in the proposed rule was an attempt to avoid
any misunderstanding in terms of our commitment to ensure the correct
implementation of this provision.
    In response to the request for clarification about the hospital's
responsibility for knowing when a transfer occurs, the hospital is
responsible for coding the bill based on its discharge plan for the
patient, or if it finds out subsequently that postacute care occurred,
it is responsible for either coding the original bill as a transfer or
submitting an adjustment bill. We have consulted with the National
Uniform Billing Committee (NUBC) to ensure that the appropriate changes
are made on the claims form to enable hospitals to accurately code
these cases and to submit corrections to them when additional
information affecting the patient's discharge status code becomes
available after the bill is submitted.
    Comment: One commenter recommended that we establish a hierarchical
decision process for determining whether a discharge to home health
services qualifies as a transfer. This commenter believed that the
overriding consideration should be whether the services are related to
the hospital stay. This commenter suggested that any home care ordered
in the discharge plan should constitute related home health care,
regardless of when it is provided.
    Response: Congress directed the Secretary to determine the
appropriate time period within which the provision of home health
services would trigger a transfer payment. Services provided outside
that window, even if related to the hospital stay, would not result in
the discharge being considered a transfer. In addition, we believe that
a time limit is consistent with the concern that these transfer cases
are predominantly situations where care is being shifted from the acute
setting to a postacute care setting. If a patient is discharged to home
and does not need home health care for several days, there may be
little, if any, shift of acute care services to the postacute care
setting.
    Comment: One commenter stated that we should specify that the
written plan of care for home health services should be defined clearly
as ``a specific order by the patient's physician in the hospital
medical record that directs the hospital to arrange for home health
services upon discharge.''
    Response: We do not believe that it is necessary to specify the
precise definition of what a written plan of care for home health
services must entail. We note that we would deem a case to be a
transfer if care related to the discharge was provided within 3 days
after the date of discharge even if the hospital had no written plan of
care.
    Comment: A representative of physical therapists expressed concern
that the 3-day window for home health services may influence hospitals
to wait until after the 3 days to initiate home health services. This
commenter is also concerned that our proposal to identify related home
health services based on the written plan of care by the hospital at
the time of discharge may discourage hospitals from planning for home
health, resulting in uncoordinated and delayed postacute care following
discharge.
    Response: We believe there are sufficient protections against
hospitals inappropriately delaying home health care. First, the
provision of home health care is ordered by the patient's physician
orders. We believe physicians will be reluctant to compromise their
patients' treatment by inappropriately delaying home health care. In
addition, we will monitor hospitals' discharge patterns to home health
for evidence that care is being routinely delayed until the fourth day
after discharge and intend to aggressively pursue situations where
abuse is evident. If evidence of a pattern of abuse is found, we will
address it through appropriate policy changes in the FY 2001 proposed
rule.
    With respect to the commenter's concern that identifying related
home health services based on the hospital's written plan of care may
create a disincentive to plan home care, we will also be able to
identify those cases where home health services were received within 3
days of discharge and the hospital indicated that the patient was
discharged home with no plan for home health services. As we noted
above, we recognize there will be a certain percentage of cases where
home care is arranged after release from the hospital; however, we
would expect such situations to be relatively rare.
    Comment: One commenter, representing medical rehabilitation
providers, expressed concern that this provision may change hospitals'
referral patterns, delaying the initiation of rehabilitation services.
The commenter suggested that we collect the following information from
prospective payment hospitals to monitor their referral patterns:
    <bullet> Site of referral for cases in the 10 DRGs, including
discharge to home without postacute care.
    <bullet> Date from onset and length of stay prior to referral, by
DRG.
    <bullet> General medical condition and functional status of the
patient if the hospital normally collects functional information.
    In addition, HCFA should collect the following information from
postacute care providers:
    <bullet> The DRG assigned to the acute care hospitalization.
    <bullet> The date from onset and date of referral to the postacute
care provider.
    <bullet> For patients referred for rehabilitation services to a
rehabilitation hospital or unit, the functional status of the patient
on admission to and at discharge from the rehabilitation provider.
    The commenter noted that over 90 percent of rehabilitation
providers already use functional assessment tools, therefore, this data
collection would not be excessively burdensome.
    Response: We appreciate this commenter's concerns regarding any
potentially adverse effects of this provision with respect to
beneficiaries' health. We already collect most of the hospital data
suggested by the commenter (with the exception of patients' functional
status and medical condition, though even this could be accessed on a
limited basis). Similarly, for postacute providers, the first two items
of data are already readily available in our system. As we have
described above, we intend to use these data to monitor providers'
behavior after implementation of this policy.
    Comment: Commenters requested that we require the fiscal
intermediaries to

[[Page 40981]]

automatically adjust the payments received by the hospital when the
hospital codes a case as a discharge and no bill is ever received for
postacute care services. In making this request, the commenters
referred to the process we described in the proposed rule in which we
would compare the discharge status coded on the hospital bills with
postacute care bills received to determine whether qualifying postacute
care was provided when the hospital billed the case as a discharge.
    Response: As noted above, hospitals will be able to submit
corrections to their discharge status codes when they determine that
previously submitted bills are incorrect. It would be impractical to
require the fiscal intermediaries to adjust payments for cases coded as
transfers when no matching postacute care bill is identified. Such a
requirement raises a potential scenario where a case may be
inappropriately adjusted upward because the matching postacute bill has
not entered the claims system at the time the bill comparison is made.
The prescribed period of time within which a provider may submit a bill
for Medicare payment is relatively long and we believe it would be
impractical for each intermediary to reprocess already paid bills based
solely on the absence of a matching postacute care bill. In addition,
we note that there may be occasions when no postacute care bill is
submitted even though the patient was discharged to that care. For
example, as we discussed above, if a patient is transferred to a
skilled nursing facility and receives noncovered care, there will be no
bill in the Medicare claims files. We believe it is preferable to
require hospitals to submit bill adjustments.
    Comment: One commenter was unclear about how postacute care
transfers will be identified in the billing process. Specifically, the
commenter questioned whether the hospital will indicate a transfer by
the discharge status code or whether the identification will occur by
matching the acute hospitalization bill against a postacute bill at the
fiscal intermediary.
    Response: Transfer cases will be identified based on the discharge
status code listed on the hospital claim form (the HCFA-1490, also
known as the UB-92). As noted above, we have consulted with the NUBC to
ensure that the appropriate changes are made on the claims form to
enable hospitals to accurately code these cases. The language in the
proposed rule concerning a process of matching the date of discharge
from the acute hospital stay with the date that postacute care services
begin was a description of the process that HCFA will use as a check to
verify the accuracy of the discharge codes.
    Comment: One commenter asked whether the discharge destination code
``08,'' which is described as ``Discharged/transferred to home under
care of a Home IV (intravenous) provider,'' would be used to identify a
transfer. This commenter was also concerned about whether code ``05,''
which is described as ``Discharged/transferred to another type of
institution for inpatient care or referred for outpatient services to
another institution'' would be sufficient to identify transfers to
excluded hospitals or units.
    Response: Discharge code ``08'' will not trigger a transfer payment
because it should not be used in situations where a patient is
receiving IV services under the Medicare home health benefit. Rather,
code ``06'' should be used to signify all care provided by a home
health agency under the Medicare home health benefit.
    With respect to discharge code ``05,'' the NUBC is discussing what
additional codes need to be added or what current codes may be revised
to allow for more specific coding to distinguish transfer situations
from nontransfers. Instructions on the discharge codes will be provided
to the fiscal intermediaries and, thereafter, to the hospitals before
the effective date of the postacute transfer provision (that is,
October 1, 1998).
    Comment: Several commenters suggested that DRG 483 should not be
included as one of the 10 DRGs under this provision. The commenters
believed that this DRG is not clinically homogeneous and includes many
different conditions with different expected lengths of stay. They also
stated that our analysis showed that transfers from this DRG would be
paid below costs for almost every day below the mean length of stay.
One commenter indicated it appeared this DRG was singled out for
specific treatment.
    MedPAC commented that the criteria we used to select the 10 DRGs
was reasonable, although it indicated that the list is fairly narrow in
the types of conditions or procedures represented. Therefore, when we
consider an expansion of this list, MedPAC recommended that we include
coronary surgery DRGs, such as the coronary bypass DRGs (106, 107, and
109), and the pneumonia DRGs (89, 90, or 91).
    Response: As described in the proposed rule and above in this
section of the preamble, the 10 DRGs were selected based on the
criteria specified in the statute, that is, the DRGs exhibit a high
volume and disproportionate percentage of postacute cases. None of the
10 DRGs were predetermined. With respect to DRG 483, a significant
percentage of discharges (over 45 percent are transferred to postacute
care. This places it in the top 25 DRGs in terms of postacute care
utilization. Of those 25 DRGs, it is ranked 9th in terms of the volume
of cases receiving postacute care. We believe these factors justify its
inclusion.
    In addition, contrary to the commenter's statement, our analysis of
payments and costs for transfers in this DRG shows that average
payments exceed average costs for all but those cases transferred very
early in the stay (before the 6th day in a DRG with an average length
of stay of 34 days). (See the table for DRG 483 in Appendix D of this
final rule.) The marginal costs per day for this DRG are consistent
with and are accommodated almost perfectly by the transfer per diem
payment methodology.
    We appreciate MedPAC's support regarding our selection criteria and
will take its recommendations regarding additional DRGs into
consideration in our future analysis.
    Comment: Some commenters believe that the process we used to select
the 10 DRGs did not reflect the intent of Congress. They suggested
that, in selecting the 10 DRGs, we should include an evaluation of
whether a DRG was prone to inappropriate use of postacute care.
    Response: Section 1886(d)(5)(J)(iii)(I) of the Act provides that
the affected DRGs are ``* * *10 diagnosis-related groups selected by
the Secretary based on a high-volume of discharges classified within
such groups and a disproportionate use of post discharge [sic] services
* * *.'' This language does not direct the Secretary to select the 10
DRGs based upon their vulnerability to inappropriate use of postacute
care. As stated earlier, the postacure care transfer provision adjusts
hospital payments to reflect the reduced lengths of stay arising from
the shift of care to the postacute care setting.
    Comment: One commenter was offended by the rationale stated in the
proposed rule for including DRG 264 (Skin Graft and/or Debridement for
Skin Ulcer or Cellulitis without complication or comorbidity (CC)) in
the list of 10 DRGs. The commenter argued that no medical record coder
would intentionally fail to list a CC in order to avoid the transfer
payment for a case that groups to DRG 263 (Skin Graft and/or
Debridement for Skin Ulcer or Cellulitis With CC). The commenter noted
that this would be an illegal,

[[Page 40982]]

fraudulent act on the part of the coder and should not be used as a
deciding factor in the methodology for selecting the 10 DRGs.
    Response: In making our selection of the 10 DRGs, we decided to
include paired DRGs if one of them met our criteria. While we do not
believe that medical record coders will exclude a CC code in their list
of diagnosis codes, the hospital claim is not generally submitted to
HCFA by the coder, but rather by a billing office where information
included on the claim is frequently subject to additional review. By
including DRG 264, we hope to avoid any questions or issues concerning
the accurate coding of a particular case involving skin graft and
debridement.
    Comment: Several commenters stated that the alternative payment
methodology for DRGs 209, 210, and 211 described in the proposed rule
would not pay the full DRG amount until one day after the geometric
mean length of stay for the DRG. This result is contrary to the usual
per diem payment methodology where the full DRG payment is received one
day before the geometric mean length of stay.
    Response: The alternative payment methodology in the proposed rule
was described as ``50 percent of the DRG payment for the first day of
the stay, and 50 percent of the per diem for the remaining days of the
stay.'' This wording imprecisely described our proposed policy. The
alternative payment methodology proposed for DRGs 209, 210, and 211 is
equal to 50 percent of the DRG payment plus 50 percent of the amount
which would be paid under our per diem methodology. Under this formula,
on day one of a postacute care transfer, hospitals would receive one-
half the DRG payment amount plus the per diem payment for the DRG (one-
half the usual transfer payment of double the per diem for day one).
For each subsequent day prior to transfer, hospitals receive one-half
the per diem up to the full DRG payment, which is reached one day prior
to the geometric mean length of stay for the DRG. We note that,
although we inaccurately described the methodology, we used the correct
formula in calculating the budget neutrality factors and outlier
thresholds in the proposed rule.
    Comment: One commenter believed that the alternative payment
methodology used for DRGs 209, 210, and 211 should be used for all 10
of the DRGs selected under the postacute care transfer provision. The
commenter argued that for postacute care transfers, unlike transfers
under our current transfer policy, the hospital provides all necessary
acute care services to the patient, regardless of length of stay,
before transferring the patient to postacute care.
    Response: As noted above, we believe care previously provided in
the acute care setting increasingly has been shifted to the postacute
setting. Therefore, we do not agree with the commenter's belief that
these cases are significantly different from those considered transfers
under our current definition of transfers; in both situations, the
length of stay is reduced and presumably a hospital furnished fewer
services and incurs lower costs relative to a typical discharge.
Furthermore, as demonstrated in the tables comparing average payments
and costs for these DRGs in Appendix D, the seven DRGs that will be
paid under the current per diem methodology have a gradual increase in
costs as length of stay rises, consistent with the gradual increase in
payments under our current per diem methodology. Therefore, we are not
expanding the application of the alternative payment methodology beyond
the three DRGs identified in the proposed rule.
    Comment: MedPAC suggested we may wish to evaluate whether the
alternative payment methodology for postacute transfers in DRGs 209,
210, and 211 should be expanded to our policy for transfers between two
acute care hospitals.
    Response: We have evaluated our transfer payment formula for our
current transfer policy in the past and revised it to pay double the
per diem amount for the first day of a transfer stay. Because the
majority of cases that are transferred from one acute care hospital to
another result in the case being assigned to a medical DRG, our
analysis indicated that the current per diem payment (with a double
payment on the first day) accurately reflects the costs of these cases,
as it does for the seven DRGs paid under the per diem methodology under
the postacute transfer provision. Although we do not plan further
changes in the payment methodology for transfers to another acute care
hospital, we will continue to evaluate the potential for further
refinements in this policy, particularly in light of the changes
introduced in this final rule.
    Comment: One commenter requested clarification of how the indirect
medical education (IME) and disproportionate share hospital (DSH)
adjustments are treated under the transfer payment methodology. This
commenter also requested clarification regarding the outlier payment
calculation for transfer cases and recommended that the transfer
payment rather than the DRG payment serve as the comparative basis for
determining whether a transfer case qualifies as an outlier.
    Commenters also indicated some confusion as to when full payment
would be made under the transfer methodology in situations where the
geometric mean length of stay for a DRG is not a whole number, for
example, 9.8 days.
    Response: The IME and DSH payments are determined in accordance
with Secs. 412.105(e) and 412.106(a)(2), respectively, by applying the
IME and DSH adjustment factors calculated under those sections to the
DRG revenue. In the case of a transfer occurring before the average
length of stay, the applicable IME or DSH factor would be applied to
the DRG revenue determined under the applicable transfer payment
methodology.
    With respect to outliers for transfer cases, the methodology
suggested by the commenter is actually the methodology we use to
determine outliers for these cases. In the September 1, 1995 Federal
Register, we described how the cost outlier threshold is calculated for
transfers (60 FR 45804). The outlier threshold for transfer cases
reflects the fact that transfer cases receive a reduced payment amount.
Specifically, the threshold for transfers paid under the current per
diem methodology is equal to the fixed loss outlier threshold for all
cases ($11,100 for FY 1999) divided by the geometric mean length of
stay for the DRG, multiplied by the length of stay prior to transfer,
plus one day. For postacute transfers in DRGs 209, 210, and 211, the
outlier threshold is determined by dividing the fixed loss outlier
threshold for all cases by the geometric mean length of stay for the
DRG, multiplied by the sum of half the geometric mean and half the
length of stay for the case, plus one. We note that we are making a
conforming change in Sec. 412.80(b), which describes outlier payments
for transfers, to incorporate the revisions we are making in the
transfer policy.
    Finally, in the case of a DRG with a geometric mean length of stay
of 9.8 days, full payment would be received on day 9. The following
table illustrates this point, using DRGs 209 and 236 with geometric
mean lengths of stay of 4.9 and 4.1 days, respectively.

[[Page 40983]]

------------------------------------------------------------------------
                   DRG                          209             236
------------------------------------------------------------------------
Full DRG Payment Amount \1\.............       $8,400.32       $2,790.60
Per Diem Amount.........................        2,048.86          680.63
Payment for Transfer on Day 1 \2\.......        6,249.02        1,361.26
Payment for Transfer on Day 2...........        7,273.45        2,041.89
Payment for Transfer on Day 3...........        8,297.88        2,722.52
Payment for Transfer on Day 4 \3\.......        8,400.32       2,790.60
------------------------------------------------------------------------
\1\ This amount is determined using the other areas national
  standardized amount from Table 1A in Section VI of the addendum to
  this final rule. The respective relative DRG weights are taken from
  Table 5. For DRG 209, the relative weight is 2.1803, and for DRG 236
  it is 0.7243. It assumes a wage index of 1.0, and no IME or DSH
  payments. Any IME or DSH payments would be factored into the transfer
  amount as described above.
\2\ For DRG 209, the payment amount is equal to one-half of the full DRG
  payment amount ($4,200.16) plus the per diem amount ($2,048.86). For
  DRG 236, the payment amount is equal to double the per diem amount.
\3\ Total payment is limited to the full DRG amount (with the exception
  of outlier cases), rather the result of an additional per diem amount
  (or half the per diem).

    Comment: A few commenters stated that because average lengths of
stay vary by geographic region, the transfer policy punishes those
regions with average lengths of stay less than the mean. They
recommended that an adjustment factor be developed to recognize this
disparity or that regional averages should be used to compute the per
diem amount.
    Response: We recognize that lengths of stay vary by region and are
generally lower in the west, particularly compared to the northeast. In
addition, regions with shorter lengths of stay tend to also have lower
average costs due to the fewer number of days that patients spend in
the hospital. One of the reasons for this variation is the greater
reliance on postacute care earlier in the stay in those areas with
lower average lengths of stay.
    We do not believe it would be appropriate to base the transfer
payment methodology on regional average lengths of stay. The national
standardized amounts, which apply across all regions, reflect costs and
lengths of stay across all regions. If a hospital in one region has a
case with certain patient characteristics and a hospital in another
region has a case with identical patient characteristics (including the
same length of stay), we see no reason to have a rule under which one
hospital would receive the full DRG payment but the other hospital
would receive a transfer payment.
    Comment: One commenter believed that, in lieu of expanding the
transfer definition, it would make more sense to recalibrate the 10
DRGs to better reflect the recent reductions in lengths of stay and
costs for these categories.
    Response: All of the DRGs are recalibrated annually, using the
latest available charge data for Medicare beneficiaries. Because of the
recalibration process, a reduction in the relative weights of certain
DRGs results in an increase in the weights of other DRGs. Therefore,
there are no overall reductions in Medicare payments to hospitals. That
is, although the hospital will receive a reduced payment through lower
weights for the DRGs affected by the shift toward greater utilization
of postacute care early in a stay, it will receive greater payment for
the DRGs in which the weight is increased because there is no reduction
in overall costs. In addition, any reduction in payment for the
selected DRGs is shared by all hospitals including those that have not
reduced their average length of stay and costs through the increased
use of postacute care. We believe that any change in Medicare payment
because of the early transfer of acute care patients to postacute care
should be targeted at those hospitals that have actually incorporated
this practice into their patient care.
    Comment: Another commenter noted that, if these cases are to be
treated as transfers for payment, they should be treated that way for
recalibration as well.
    Response: We agree. In the proposed rule, we did not revise the
discussion of the recalibration process to specifically mention the
postacute transfers, but we did treat these cases as transfers during
the recalibration process that resulted in the DRG weights set forth in
that rule. For purposes of the DRG recalibration, transfer cases,
including the postacute transfer cases, are counted as a fraction of a
discharge based on the length of stay, thereby reducing proportionately
the contribution of the charges for the case toward the average charges
for the DRG. This process effectively inflates the charges of a
transfer case to what they would have been had the patient's length of
stay been equal to the geometric mean length of stay. If we do not
perform this calculation, these cases would receive reduced payment
because they are transfers, but be treated as discharges in
recalibration, lowering the relative weights for affected DRGs.
    Comment: One commenter questioned whether the postacute care
transfer provision will have any effect on the payments made by
Medicare to the postacute providers.
    Response: The only payment implication of this provision is to
affect the prospective payment for the acute inpatient hospitalization.
Medicare payment to any postacute providers involved in the stay are
not affected by this policy.

B. Rural Referral Centers (Sec. 412.96)

    Under the authority of section 1886(d)(5)(C)(I) of the Act,
Sec. 412.96 sets forth the criteria a hospital must meet in order to
receive special treatment under the prospective payment system as a
rural referral center. For discharges occurring before October 1, 1994,
rural referral centers received the benefit of payment based on the
other urban rather than the rural standardized amount. As of that date,
the other urban and rural standardized amounts were the same. However,
rural referral centers continue to receive special treatment under both
the disproportionate share hospital payment adjustment and the criteria
for geographic reclassification.
    One of the criteria under which a rural hospital may qualify as a
rural referral center is to have 275 or more beds available for use. A
rural hospital that does not meet the bed size criterion can qualify as
a rural referral center if the hospital meets two mandatory criteria
(specifying a minimum case-mix index and a minimum number of
discharges) and at least one of the three optional criteria (relating
to specialty composition of medical staff, source of inpatients, or
volume of referrals). With respect to the two mandatory criteria, a
hospital may be classified as a rural referral center if its--
    <bullet> Case-mix index is at least equal to the lower of the
median case-mix index for urban hospitals in its census region,
excluding hospitals with approved teaching programs, or the median
case-mix index for all urban hospitals nationally; and

[[Page 40984]]

    <bullet> Number of discharges is at least 5,000 discharges per year
or, if fewer, the median number of discharges for urban hospitals in
the census region in which the hospital is located. (The number of
discharges criterion for an osteopathic hospital is at least 3,000
discharges per year.)
1. Case-Mix Index
    Section 412.96(c)(1) provides that HCFA will establish updated
national and regional case-mix index values in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. The methodology we use to determine the
proposed national and regional case-mix index values, is set forth in
regulations at Sec. 412.96(c)(1)(ii). The proposed national case-mix
index value included all urban hospitals nationwide, and the proposed
regional values were the median values of urban hospitals within each
census region, excluding those with approved teaching programs (that
is, those hospitals receiving indirect medical education payments as
provided in Sec. 412.105).
    These values were based on discharges occurring during FY 1997
(October 1, 1996 through September 30, 1997) and include bills posted
to HCFA's records through December 1997. Therefore, in addition to
meeting other criteria, for hospitals with fewer than 275 beds, we
proposed that to qualify for initial rural referral center status for
cost reporting periods beginning on or after October 1, 1998, a
hospital's case-mix index value for FY 1997 would have to be at least--
    <bullet> 1.3578; or
    <bullet> Equal to the median case-mix index value for urban
hospitals (excluding hospitals with approved teaching programs as
identified in Sec. 412.105) calculated by HCFA for the census region in
which the hospital is located. (See the table set forth in the May 8,
1998 proposed rule at 63 FR 25593.)
    Based on the latest data available (FY 1997 bills received through
March 31, 1998), the final national case-mix value is 1.3590 and the
median case-mix values by region are set forth in the table below:

------------------------------------------------------------------------
                                                                Case-mix
                            Region                               index
                                                                 value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)......................     1.2490
2. Middle Atlantic (PA, NJ, NY)..............................     1.2519
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).......     1.3474
4. East North Central (IL, IN, MI, OH, WI)...................     1.2711
5. East South Central (AL, KY, MS, TN).......................     1.3042
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...........     1.2325
7. West South Central (AR, LA, OK, TX).......................     1.3326
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY).................     1.3726
9. Pacific (AK, CA, HI, OR, WA)..............................     1.3427
------------------------------------------------------------------------

    For the benefit of hospitals seeking to qualify as referral centers
or those wishing to know how their case-mix index value compares to the
criteria, we are publishing each hospital's FY 1997 case-mix index
value in Table 3C in section VI. of the Addendum to this final rule. In
keeping with our policy on discharges, these case-mix index values are
computed based on all Medicare patient discharges subject to DRG-based
payment.
2. Discharges
    Section 412.96(c)(2)(I) provides that HCFA will set forth the
national and regional numbers of discharges in each year's annual
notice of prospective payment rates for purposes of determining
referral center status. As specified in section 1886(d)(5)(C)(ii) of
the Act, the national standard is set at 5,000 discharges. However, we
proposed to update the regional standards. The proposed regional
standards were based on discharges for urban hospitals' cost reporting
periods that began during FY 1996 (that is, October 1, 1995 through
September 30, 1996). That is the latest year for which we have complete
discharge data available.
    Therefore, in addition to meeting other criteria, we proposed that
to qualify for initial rural referral center status for cost reporting
periods beginning on or after October 1, 1998, the number of discharges
a hospital must have for its cost reporting period that began during FY
1997 would have to be at least--
    <bullet> 5,000; or
    <bullet> Equal to the median number of discharges for urban
hospitals in the census region in which the hospital is located. (See
the table set forth in the May 8, 1998 proposed rule at 63 FR 65594.)
    Based on the latest discharge data available for FY 1996, the final
median numbers of discharges for urban hospitals by census region areas
are as follows:

------------------------------------------------------------------------
                                                               Number of
                           Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).....................       6,672
2. Middle Atlantic (PA, NJ, NY).............................       8,676
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)......       7,753
4. East North Central (IL, IN, MI, OH, WI)..................       7,346
5. East South Central (AL, KY, MS, TN)......................       6,741
6. West North Central (IA, KS, MN, MO, NE, ND, SD)..........       5,346
7. West South Central (AR, LA, OK, TX)......................       5,251
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................       7,992
9. Pacific (AK, CA, HI, OR, WA).............................       5,993
------------------------------------------------------------------------

    We note that the number of discharges for hospitals in each census
region is greater than the national standard of 5,000 discharges.
Therefore, 5,000 discharges is the minimum criterion for all hospitals.
    We reiterate that, to qualify for rural referral center status for
cost reporting periods beginning on or after October 1, 1998, an
osteopathic hospital's number of discharges for its cost reporting
period that began during FY 1996 would have to be at least 3,000.
    We received no comments on the rural referral center criteria.

C. Payments to Disproportionate Share Hospitals: Conforming Change
Regarding Interpretation of Medicaid Patient Days Included in
Disproportionate Patient Percentage (Sec. 412.106)

    Effective for discharges beginning on or after May 1, 1986,
hospitals that treat a disproportionately large number of low-income
patients receive additional payments through the disproportionate share
(DSH) adjustment. One means of determining a hospital's DSH payment
adjustment for a cost reporting period requires calculation of its
disproportionate patient percentage for the period. The
disproportionate patient percentage is the sum of a prescribed Medicare
fraction and a Medicaid fraction for the hospital's fiscal period.
Under clause (I) of section 1886(d)(5)(F)(vi) of the Act and
Sec. 412.106(b)(2), the Medicare fraction is determined by dividing the
number of the hospital's patient days for patients who were entitled
(for such days) to benefits under both Medicare Part A and Supplemental
Security Income (SSI) under Title XVI of the Act, by the total number
of the hospital's patient days for the patients who were entitled to
Medicare Part A. The Medicaid fraction is determined, in accordance
with clause (II) of section 1886(d)(5)(F)(vi) of

[[Page 40985]]

the Act and Sec. 412.106(b)(4), by dividing the number of the
hospital's patient days for patients who (for such days) were eligible
for medical assistance under a State Medicaid plan approved under Title
XIX of the Act but who were not entitled to Medicare Part A, by the
total number of the hospital's patient days for that period.
    Initially, HCFA calculated the Medicaid fraction by interpreting
section 1886(d)(5)(F)(vi)(II) of the Act to recognize as Medicaid
patient days only those days for which the hospital received Medicaid
payment for inpatient hospital services. See 51 Fed. Reg. 31454, 31460
(1986). The agency's interpretation was declared invalid by four
Federal circuit courts of appeals. See Cabell Huntington Hosp., Inc. v.
Shalala, 101 F.3d 984, 990-91 (4th Cir. 1996) (following three other
circuits). These courts held that the statute requires, for purposes of
calculating the Medicaid fraction, inclusion of each patient day of
service for which a patient was eligible on that day for medical
assistance under an approved State Medicaid plan. Specifically, the
statute requires inclusion of each hospital patient day for a patient
eligible for Medicaid on such day, regardless of whether particular
items or services were covered or paid under the State Medicaid plan.
    On February 27, 1997, the HCFA Administrator issued HCFA Ruling 97-
2, which acquiesced in the four adverse appellate court decisions. The
Ruling changed the agency's statutory construction to comport with
those decisions, in order to facilitate nationwide uniformity in the
calculation of the Medicaid fraction. Like the court decisions, the
Ruling provides that a hospital's Medicaid patient days include each
patient day of service for which a patient was eligible on such day for
medical assistance under an approved State Medicaid plan, regardless of
whether particular items or services were covered or paid under the
State plan. The Ruling also reflects the hospital's burden of
furnishing data adequate to prove each claimed Medicaid patient day,
and of verifying with the State that a patient was eligible for
Medicaid during each day of the inpatient hospital stay.
    The Ruling further provides that the agency's new interpretation is
effective February 27, 1997 for each cost reporting period that: (1)
Begins on or after that effective date; (2) was not settled, as of that
date, on the Medicaid patient days issue, by means of an applicable
notice of program reimbursement (NPR) (see Sec. 405.1803); or (3) was
settled through such an NPR as of the Ruling's effective date and is
the subject of a pending administrative appeal or civil action that
satisfies all applicable jurisdictional requirements of the Medicare
statute and regulations. The Ruling also provides, however, that the
change in statutory interpretation effected by the Ruling is not a
basis for reopening a hospital cost reporting period (see
Secs. 405.1885-405.1889) that was finalized previously on the same
matter at issue.
    We proposed to revise Sec. 412.106(b)(4) in order to conform the
Medicare regulations to the new statutory construction issued in HCFA
Ruling 97-2. These revisions are necessary to ensure that the
regulations comport with the four appellate court decisions that
declared invalid the agency's prior interpretation and led to the
issuance of the HCFA Ruling. The proposed revisions would further
facilitate nationwide uniformity in the calculation of the Medicaid
fraction.
    Since the proposed revisions were intended simply to conform the
regulations to HCFA Ruling 97-2 (and hence to the four adverse court
decisions), revised Sec. 412.106(b)(4) would reiterate the Ruling's
change of interpretation that the Medicaid fraction under section
1886(d)(5)(F)(vi)(II) of the Act includes each hospital patient day for
a patient eligible for Medicaid on such day, regardless of whether
particular items or services were covered or paid under the State
Medicaid Plan. Our proposed revisions to Sec. 412.106(b)(4), like the
Ruling, would continue to place on the hospital the burdens of
production, proof, and verification as to each claimed Medicaid patient
day.
    Under our proposal, revised Sec. 412.106(b)(4) would apply to cost
reporting periods beginning on or after October 1, 1998. HCFA Ruling
97-2, which includes the same provisions as proposed
Sec. 412.106(b)(4), would continue to apply to any cost reporting
period beginning before October 1, 1998 provided that, as of February
27, 1997, there is for such period: no submitted cost report; no cost
report settled on the Medicaid patient days issue through an applicable
NPR; or a cost report settled on that issue, which is also the subject
of a jurisdictionally proper administrative appeal or civil action on
the issue.
    We received no comments in response to this proposal. Therefore, we
are incorporating the proposed conforming change in this final rule.

D. Payment for Bad Debts (Sec. 413.80)

    Section 4451 of the Balanced Budget Act of 1997 reduces the payment
for enrollee bad debt for hospitals. Specifically, this provision
reduces the amount of bad debts otherwise treated as allowable costs,
attributable to the deductibles and coinsurance amounts under this
title, by 25 percent for cost reporting periods beginning during fiscal
year 1998, by 40 percent for cost reporting periods beginning during
fiscal year 1999, and by 45 percent for cost reporting periods
beginning during a subsequent fiscal year. We proposed to conform the
regulations to the statute.
    Section 4451 of the Balanced Budget Act of 1997 also provides that
in determining such reasonable costs for hospitals, any copayments
reduced under the election available for hospital outpatient services
under section 1833(t)(5)(B) of the Act will not be treated as a bad
debt. This provision will be implemented in the outpatient prospective
payment system regulation that implements sections 4521, 4522, and 4523
of the Balanced Budget Act of 1997, to be published later this year.
    We received one comment regarding the reduction in Medicare bad
debt reimbursement which is discussed below.
    Comment: One commenter requested that the regulations and/or cost
report forms (HCFA 2552-96) be modified to clarify that hospital-based
skilled nursing facility bad debts will continue to be 100 percent
reimbursable since freestanding skilled nursing facilities are not
subject to the reduction in reimbursement and skilled nursing
facilities are not mentioned in the law at section 1861(v)(1)(T). The
commenter believed that in the BBA committee reports describing changes
in reimbursement for Medicare bad debts, it seemed clear the changes
were to apply to all providers, yet the law clearly stated that
hospitals are the sole provider type subject to reductions in
reimbursement. The commenter also noted that in reviewing the new
hospital cost report forms, HCFA 2552-96, the commenter believed that
the forms would apply the reduction in reimbursement to hospital-based
skilled nursing facilities.
    Response: The HCFA 2552-96 hospital cost report forms do not apply
the reduction in bad debt reimbursement to hospital-based skilled
nursing facilities. Page 36-159, Line 26 and Page 36-164, Line 40
require entering the reduction for ``hospitals only''. Section 4451 of
the BBA, and these implementing regulations, apply only to hospitals
and any subprovider units settled through the hospital cost report,
whether or not they have a separate provider number. Included in this
are rehabilitation units, psychiatric

[[Page 40986]]

units, and childrens' hospitals, which are considered hospital
providers. Cost reports for skilled nursing facilities, home health
agencies, outpatient therapy, comprehensive outpatient rehabilitation
facilities, community mental health centers, federally qualified health
centers, and rural health clinics (after January 1, 1998) are
separately settled and bad debts for these providers are not reduced.
The bad debt reduction does not apply to ambulatory surgical centers
because they are paid on another basis (fee schedule). End stage renal
disease bad debts are computed separately and are not reduced.

E. Payment for Direct Costs of Graduate Medical Education to Hospitals
and Qualified Nonhospital Providers (Secs. 405.2468, 413.85, and
413.86)

1. Statutory Background
    Since its inception in 1965, Medicare has provided payment only to
hospitals for the costs of graduate medical education (GME) training.
The BBA allows for direct GME payment to qualified nonhospital
providers to encourage training of future physicians in nonhospital
settings.
    Under section 1886(k) of the Act, as added by section 4625 of the
BBA, the Secretary is now authorized, but not required, to pay
qualified nonhospital providers for the direct costs of GME training.
The Conference Report also notes that the Conferees believe this
authority may help alleviate physician shortages in underserved rural
areas. We believe that providing Medicare payment directly to qualified
nonhospital providers may facilitate more training and better quality
training in nonhospital sites.
    Section 1886(k) of the Act states: ``For cost reporting periods
beginning on or after October 1, 1997, the Secretary may establish
rules for payment to qualified nonhospital providers for their direct
costs of medical education, if those costs are incurred in the
operation of an approved medical residency training programs described
in subsection (h).'' The statute further provides that, to the extent
the Secretary exercises this broad discretionary authority, the rules
``shall specify the amounts, form, and manner in which such payments
will be made and the portion of such payments that will be made from
each of the trust funds under this title.''
    a. Payments only to ``qualified nonhospital providers''. The
statute confers broad discretion on the Secretary regarding whether and
how to pay qualified nonhospital providers for direct GME costs.
However, the statute does specify the entities whom the Secretary can
pay--``qualified nonhospital providers.'' Section 1886(k)(2) of the Act
defines ``qualified nonhospital providers'' to include: Federally
Qualified Health Centers (FQHCs), as defined in section 1861(aa)(4);
Rural Health Centers (RHCs), as defined in section 1861(aa)(2);
Medicare+Choice organizations; and such other providers (other than
hospitals) as the Secretary determines to be appropriate.
    b. Payments only for the ``direct costs'' of training. The statute
also specifies the costs the Secretary can pay for under section
1886(k) of the Act. Medicare pays hospitals for both the direct and
indirect costs of medical education under sections 1886(h) and
1886(d)(5)(B) of the Act respectively, but section 1886(k) of the Act
provides for payment to qualified nonhospital providers only for the
direct costs of medical education. In addition, section 1886(k) of the
Act provides for payment for the direct costs of training medical
residents only if those costs are incurred in the operation of an
``approved medical residency training program.'' Accordingly, the
statute authorizes Medicare payments to qualified nonhospital providers
only for the costs of training medical residents, not for the costs of
training other health professionals.
    In addition to adding section 1886(k) of the Act, section 4625 of
the BBA amends section 1886(h)(3)(B) of the Act to prohibit double
payments for direct GME to a hospital and a qualified nonhospital
provider. This prohibition on double payments requires that the
Secretary reduce a hospital's GME payments (the ``aggregate approved
amount'' as defined in section 1886(h)(3)(b) of the Act) to the extent
we pay a qualified nonhospital provider for GME under section 1886(k)
of the Act.
2. Payment to Hospitals for GME
    Under sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) of the Act, a
hospital may include the time a resident spends in nonprovider settings
in its indirect medical education (IME) and direct GME full-time
equivalent count if it incurs ``all or substantially all'' of the costs
of training residents in the nonhospital site. Under Secs. 412.105(f)
and 413.86(f)(1)(iii), a hospital may count resident training time in
nonhospital sites for indirect and direct GME respectively if the
resident is involved in patient care and there is a written agreement
between the hospital and the nonhospital site that states that the
resident's compensation for training time spent outside the hospital
setting is to be paid by the hospital.
3. Proposed Policies
    Pursuant to section 4625 of the BBA, we proposed to provide
Medicare payment to qualified nonhospital providers for the direct
costs of GME training, effective for portions of cost reporting periods
occurring on or after January 1, 1999. We proposed Medicare would make
GME payments to the following ``qualified nonhospital providers''--
FQHCs, RHCs, and Medicare+Choice organizations. Under the authority of
section 1886(k)(2)(D) of the Act, the Secretary may expand the
definition of a ``qualified nonhospital provider'' to include such
other providers (other than hospitals) as the Secretary determines to
be appropriate. Once we have gained experience providing direct GME
payments to FQHCs, RHCs, and Medicare+Choice organizations, we may
consider including other types of nonhospital providers in the
definition of a ``qualified nonhospital provider.''
    Additionally, we proposed that, under certain circumstances, a
hospital may continue to receive GME payments for residents who train
in the nonhospital setting. In those instances where a hospital is
eligible to continue receiving GME payments for residents who train in
the nonhospital setting, the nonhospital site could receive payment
from the hospital for costs they incur in training medical residents.
Thus, our proposed policy would promote the intent of section 4625 of
the BBA to provide financial support, either directly from Medicare or
through the hospital, to qualified nonhospital providers for the direct
costs of training residents in the nonhospital site.
    a. ``All or substantially all'' of the costs of training. Similar
to our current policy of paying hospitals for training in nonhospital
sites, we proposed that a qualified nonhospital provider may receive
payment for the direct costs of GME if it incurs ``all or substantially
all'' of the training costs. Although we proposed to pay the qualified
nonhospital provider only when it incurred ``all or substantially all''
of the costs of training, we solicited comment on possible methods for
allocating the GME payments for training in the nonhospital site where
neither the hospital nor the qualified nonhospital provider is
incurring ``all or substantially all'' of the costs of the training
program. Under the proposed system, we would pay either the hospital or
the qualified nonhospital provider for the cost of training in the
nonhospital site, depending on which

[[Page 40987]]

entity incurs ``all or substantially all'' of the costs of training in
the nonhospital site. We proposed to revise the definition of ``all or
substantially all'' of the costs, which currently applies only to
hospitals. Under the proposed redefinition, a hospital or qualified
nonhospital provider would incur ``all or substantially all'' of the
costs for the training program in the nonhospital setting if it pays
for, at a minimum: that portion of the costs of the teaching
physicians' salaries and fringe benefits that are related to the time
spent in teaching and supervision of residents; and residents' salaries
and fringe benefits (including travel and lodging expenses where
applicable).
    b. Definition of ``direct costs'' of medical education for
qualified nonhospital providers. Section 4625 of the BBA provides for
payment to qualified nonhospital providers only for the direct costs of
training residents. Our proposed definition of ``direct costs'' for
qualified nonhospital providers is comparable to the direct costs for
hospitals under section 1886(h) of the Act. Under our proposed policy,
direct GME costs include costs incurred by the nonhospital site for the
education and training of medical residents in approved programs. We
proposed to include the following costs in the definition of direct
costs:
    <bullet> residents' salaries and fringe benefits (including related
travel and lodging expenses where applicable);
    <bullet> that portion of costs of the teaching physicians' salaries
and fringe benefits that are related to the time spent in teaching and
supervision of residents; and
    <bullet> other related GME overhead costs.

Consistent with our policies on direct GME costs for hospitals, we
proposed direct GME costs for qualified nonhospital providers will not
include normal operating costs or the marginal increase in costs that
the nonhospital site experiences as a result of having an approved
medical residency training program. For example, a decrease in
productivity and increased intensity in treatment patterns as the
result of a training program do not constitute ``direct costs'' of
training residents in the nonhospital setting; rather, these are the
``indirect costs'' of such training.
    Also consistent with our policies for direct GME payments to
hospitals, we proposed to pay qualified nonhospital providers only for
training that is related to the delivery of patient care services.
    We also proposed that direct GME costs for qualified nonhospital
providers, like direct GME costs for hospitals, would include only that
portion of costs of the teaching physicians' salaries and fringe
benefits associated with time spent in teaching and supervising
residents. Specifically, a physician's time spent on teaching of a
general nature would constitute a direct GME cost while activities
spent in direct patient care which involve residents do not constitute
direct costs. In addition, we proposed that direct costs in the
qualified nonhospital provider would include that portion of teaching
physicians' salaries and fringe benefits associated with time spent
developing resident schedules and evaluating or rating the residents.
Direct costs may also include the portion of a teaching physician's
office costs allocated to GME.
    We stated that direct GME costs for qualified nonhospital providers
would not include the following: a teaching physician's time spent in
the care of individual patients which results in billable services;
teaching physicians' activities that are related to the education of
other health professionals (i.e., classroom instruction in connection
with approved activities other than GME such as provider-operated
nursing programs); teaching physicians' time spent on administrative
and supervisory services to the qualified nonhospital provider that are
unrelated to approved educational activities (i.e. operating costs);
and teaching physician activities that involve nonallowable costs such
as research and medical school activities that are not related to
patient care in the nonhospital setting. Costs associated with the
providing teaching services to undergraduate medical students are also
not include in direct graduate medical education costs.
    GME overhead costs include only those costs that are allocable to
direct GME and that are not used in patient care. For example, a
portion of administrative and general costs could be appropriately
allocated to an RHC's or FQHC's GME cost center. Similarly, a
conference room that is dedicated specifically for the training of
residents could be appropriately allocated to an RHC or FQHC's GME cost
center. By contrast, patient care rooms added to an RHC or an FQHC
cannot be appropriately allocated to an RHC's or FQHC's GME cost
center.
    One of the advantages of the proposed definition of ``direct
costs'' is that it is administratively feasible. Our definition of
``direct costs'' for qualified nonhospital providers is comparable to
the direct costs that are included in the per resident amount paid to
hospitals under section 1886(h) of the Act. At present, there is
limited information regarding the actual costs of training residents in
nonhospital sites. After we gain experience providing direct GME
payments to qualified nonhospital providers and have reviewed the GME
costs separately reported by these qualified nonhospital providers, we
may revise the definition of ``direct costs.'' We solicited comments on
other elements that may constitute direct costs of GME in the qualified
nonhospital provider that can be identified, reported, and verified as
directly attributable to GME activities through the cost reporting
process. We were interested in comments on whether we should include
other costs in the definition of ``direct costs'' for qualified
nonhospital providers and on the administrative feasibility of
identifying the GME portion of those costs.
    c. Determining direct costs. One of our major concerns in
developing policies for paying qualified nonhospital providers for the
direct costs of GME is the administrative feasibility of determining
the amount of direct costs incurred by the qualified nonhospital
provider. It is our understanding that, currently, hospitals and
nonhospital sites often share, to varying degrees, the costs of
training residents in the nonhospital site. Because of the difficulty
in apportioning costs between the hospital and the nonhospital for the
training in the nonhospital site, we believe that it is not
administratively feasible to pay both the hospital and the nonhospital
site for the cost of training in the nonhospital site. We have been
unable to devise a method for accurately apportioning costs between the
two entities.
    Furthermore, the potential for both the hospital and the qualified
nonhospital provider to be paid for the same direct GME expenses poses
a significant problem for complying with section 1886(h)(3)(B) of the
Act, as amended by the BBA, which specifically prohibits double
payments. Under this provision, the Secretary shall reduce the
hospital's GME payment (the ``aggregate approved amount'') to the
extent we pay the qualified nonhospital provider for GME costs under
section 1886(k) of the Act. Consequently, our policy must ensure that
Medicare does not pay two entities for the same training time in the
nonhospital site.
    Given that the hospital's per resident amount can include, but is
not necessarily based on the costs of training in the nonhospital site,
we were not able to devise an equitable way of reducing the hospital's
per resident payment to reflect payments made

[[Page 40988]]

under section 1886(k) of the Act. It may not be equitable to subtract
the exact amount of payment made to the qualified nonhospital provider
from the hospital's per resident payment because the payment made to
the nonhospital site may be unrelated to the hospital's per resident
amount. We believe that the residents' salaries, teaching physicians'
salaries, and overhead costs for the nonhospital setting will
constitute a different proportion of the total GME costs in the
nonhospital setting as compared with the hospital setting. Rather, it
may be more equitable to determine the proportion of costs incurred by
each entity and reduce the hospital's per resident payment by the
proportion of GME costs incurred by the nonhospital site; however,
since specific components of the per resident amount were not
identified in the hospital's GME base year (1984), we cannot accurately
determine the appropriate amount to reduce the current year hospital
per resident payment amount. Moreover, to reduce the hospital's GME
payments based solely on the amount paid to the qualified nonhospital
provider could result in inequitable payments to the hospital, which
has ongoing costs even when the resident is training in the nonhospital
site. In fact, it could leave the hospital at risk of receiving no
payment for the GME costs it has incurred.
    In order to encourage training in nonhospital sites, it is
important to develop a policy that, while providing payment to
qualified nonhospital providers, would also be equitable to hospitals.
We believe that paying only the qualified nonhospital provider for the
training costs could result in hospitals choosing not to rotate their
residents to the nonhospital site. We have been unable to devise an
equitable and accurate method for dividing the GME payment for training
in the nonhospital site if neither the hospital, nor the nonhospital
site incurs ``all or substantially all'' of the costs. As such, we
solicited comment on possible methods for allocating the GME payments
for training in the nonhospital site where neither the hospital nor the
qualified nonhospital provider agrees who is incurring ``all or
substantially all'' of the costs for the training program. We believe
that the policies discussed below are equitable to both hospital and
qualified nonhospital providers and will achieve Congress' objective of
encouraging and supporting training in the nonhospital setting.
    Given our concerns about administrative feasibility, the statutory
prohibition on double payments, and developing policies that are
equitable to hospitals as well as qualified nonhospital providers, we
believe the only feasible way to pay for training in nonhospital
settings is to pay either the hospital or the nonhospital provider.
Currently, hospitals may receive payment for the time residents spend
in the nonhospital setting if the hospital incurs ``all or
substantially all'' of the training costs. We proposed to adopt a
similar policy for qualified nonhospital providers; that is, a
qualified nonhospital provider may receive payment for the direct costs
of GME if it incurs ``all or substantially all'' of the training costs.
    d. Payment to FQHC's and RHC's. We proposed to pay FQHC's or RHC's
for direct GME costs based on reasonable costs if the FQHC or RHC
incurs ``all or substantially all'' of the costs of training the
resident in the nonhospital setting. The FQHC or RHC would have to
report direct GME costs in a reimbursable cost center on its cost
report under the proposal. Conversely, where an FQHC or RHC did not
incur ``all or substantially all'' of the costs of training residents
in the nonhospital site, the FQHC or RHC would report direct GME costs
in a nonreimbursable cost center on the cost report.
    We proposed that the FQHC's and RHC's allowable direct GME costs be
subject to reasonable cost principles in 42 CFR part 413 and other
relevant provisions referenced in part 413. In addition, the FQHC's and
RHC's direct GME costs would be subject to the Reasonable Compensation
Equivalency limits under Secs. 415.60 and 415.70.
    Also, Medicare would pay only for its share of the direct costs of
training in the qualified nonhospital provider. We proposed that the
FQHC's and RHC's Medicare share equal the qualified nonhospital
provider's ratio of Medicare visits to total visits. Thus, the amount
of Medicare payment would equal the product of the clinic's Medicare
allowed reasonable direct GME costs and the clinic's ratio of Medicare
visits to total visits.
    For FQHC's and RHC's that incur ``all or substantially all'' of the
costs for the training program in the nonhospital setting, we proposed
that the direct GME costs would not be subject to the existing per
visit payment caps for reimbursement under sections 505.1 and 505.2 of
the Medicare Rural Health Clinic and Federally Qualified Health Centers
Manual. We also proposed that, where payment is available under section
1886(k) of the Act for residents working in either an FQHC or an RHC,
the FQHC's and RHC's do not need to include residents as health care
staff in the calculation of productivity standards under section 503 of
the Manual.
    e. Payment to Medicare+Choice organizations. We proposed making
direct GME payment to Medicare+Choice organizations which incur ``all
or substantially all'' of the costs of training in a nonhospital site.
The Medicare+Choice organization would be eligible to receive payment
on a reasonable costs basis for residents' salaries and fringe benefits
only for the time that the resident spends in the nonhospital setting.
In addition, we proposed that the Medicare+Choice organization's
allowed costs include only that portion of the teaching physician
salaries and fringe benefits that is related to training in the
nonhospital setting. We proposed limiting payment to Medicare+Choice
organizations to residents' salaries and fringe benefits and
supervisory teaching physician compensation which can be allocated to
direct GME. We did not propose to pay Medicare+Choice organizations for
the costs of overhead that may be associated with a GME program. We
solicited suggestions for creating a methodology for allocating and
reporting overhead costs for Medicare+Choice organizations and
suggestions for mechanisms for the audit and review of the costs for
Medicare+Choice organizations.
    Similar to our proposed policy for paying FQHCs and RHCs for direct
costs of GME, we proposed that the Medicare+Choice organization's
reimbursement for residents' salaries and fringe benefits (including
related travel and lodging expenses where applicable) would be subject
to the reasonable cost principles in 42 CFR part 413 and any other
relevant provisions referenced in part 413. In addition, we proposed
the Medicare+Choice organization's GME reimbursement would also be
subject to the Reasonable Compensation Equivalency limits under
Secs. 415.60 and 415.70.
    We proposed to allow the Medicare+Choice organization to receive
direct GME payment only for the direct costs of training in the
nonhospital site that are associated with the delivery of patient care
services. In determining the amount of direct GME payments to
Medicare+Choice organizations, we proposed adjusting for Medicare's
share of those education costs. Medicare's share would equal the ratio
of the total number of Medicare enrollees in the Medicare+Choice
organization to total enrollees in the Medicare+Choice organization.
    We proposed that, in order to receive the direct GME payment, the

[[Page 40989]]

Medicare+Choice organization must produce a contractual agreement
between itself and the nonhospital sites. Medicare+Choice organizations
may contract with any nonhospital patient care site, including
freestanding clinics, nursing homes, and physicians' offices in
connection with approved programs. The contract between the
Medicare+Choice organization and the nonhospital site must indicate
that, for the time that residents spend in the nonhospital site, the
Medicare+Choice organization agrees to pay for the cost of residents'
salaries and fringe benefits. In addition, the contract must indicate
that the Medicare+Choice organization agrees to pay the portion of the
costs of teaching physicians' salaries and fringe benefits that is
related to the time spent in teaching and supervision of residents and
is unrelated to the volume of services provided by the physician. The
contract must stipulate the portion of each teaching physician's time
that will be spent training residents in the nonhospital setting.
Moreover, the contract must indicate that the Medicare+Choice
organization agrees to identify an amount for the cost of the teaching
physician's salary based on the time that the resident spends in the
nonhospital setting, not based upon a capitated rate for the delivery
of physician services.
    f. Payment to hospitals. A hospital may include a resident's
training time in a nonhospital setting in its FTE counts for direct GME
and for IME if the hospital incurs ``all or substantially all'' of the
costs for training in the nonhospital setting. We proposed that, in
order for a hospital to include residents' training time in a
nonhospital setting, the hospital and the nonhospital site must have a
written contract which indicates the hospital is assuming financial
responsibility for, at a minimum, the cost of residents' salaries and
fringe benefits (including travel and lodging expenses where
applicable) and the costs for that portion of teaching physicians'
salaries and fringe benefits related to the time spent in teaching and
supervision of residents.
    The contract must indicate that the hospital is assuming financial
responsibility for these costs directly or that the hospital agrees to
reimburse the nonhospital site for such costs. The contract must also
contain an acknowledgment on the part of the qualified nonhospital
provider if the nonhospital site is an FQHC or RHC that, since the
residents' time is being counted by the hospital, the nonhospital site
must report GME costs on the Medicare cost report in a nonreimbursable
GME costs center. In addition, in order to determine teaching physician
compensation that may be allocated to direct GME, the FQHC and RHC will
have to specify the portion of the teaching physicians' time that will
be spent training residents in the nonhospital setting. Under
Sec. 413.86(f)(1)(iii), hospitals may contract with any nonhospital
patient care site such as freestanding clinics, nursing homes, and
physicians' offices in connection with approved programs. Payment to
the hospital for the direct costs of GME training in the nonhospital
setting will continue to reflect Medicare's share, which equals the
hospital's ratio of Medicare inpatient days to total inpatient days.
5. Trust Funds
    Under section 1886(k)(1) of the Act, the rules established by the
Secretary for paying qualified nonhospital providers for GME must
specify the portion of Medicare payments that will be made from each of
the Medicare trust funds. We proposed that GME payments made directly
to an FQHC, RHC, or Medicare+Choice organization would be made from the
Federal Supplementary Medical Insurance Trust Fund.
6. Proposed Effective Dates
    We proposed that the effective date of these provisions for FQHCs,
RHCs, Medicare+Choice organizations, and hospitals would be January 1,
1999. Of the provisions affecting hospitals, the policies for IME
payments would apply to discharges occurring on or after January 1,
1999. The policies concerning medical education payments to FQHCs,
RHCs, and hospitals would apply to portions of cost reporting periods
occurring on or after January 1, 1999. We proposed that Medicare+Choice
organizations could begin receiving payments for direct GME costs
incurred on or after January 1, 1999.
7. Responses to Comments Received on Proposed Policies and Final Rule
Provisions
    Below we are summarize the comments we received on the proposed
policies and provide our responses to those comments.
    a. Definition of qualified nonhospital provider. Comment: One
commenter stated that HCFA should expand the definition of a qualified
nonhospital provider to include preventive medicine residencies. This
commenter quoted the Conference Report statement:

    The Conferees also note that preventive medicine residency
training occurs most often in nonhospital settings and the Conferees
encourage the Secretary to examine carefully the opportunities to
provide support to such training programs.

The commenter further noted that a small number of residency programs
would benefit if we adopted the suggestion.
    Response: Consistent with the direction of the Conference Report,
we have examined how to encourage preventive medicine training through
the Medicare program. We understand that preventive medicine training
consists of one year of clinical training, one year of academic study,
and a practicum year. To the extent that the one year of clinical
training is provided in patient care sites that qualify to receive
medical education payments, Medicare provides payment for training much
in the same way we provide payment for all other specialty programs. A
hospital can count a preventive medicine resident who receives training
in all areas of the hospital complex. The hospital may also count a
preventive medicine resident who receives training in a nonhospital
site if the resident is involved in direct patient care and there is a
written agreement between the hospital and the nonhospital site that
the hospital is incurring ``all or substantially all'' of the costs of
training the resident in the nonhospital site. FQHCs, RHCs, and
Medicare+Choice organizations can receive payment on a reasonable cost
basis for costs associated with training preventive medicine residents
if the entity incurs ``all or substantially all'' of the costs.
    Since the year of academic study does not involve direct patient
care, a hospital or qualified nonhospital provider cannot receive
Medicare payment for that year of preventive medicine training. A
fundamental principle of Medicare payment for education is that the
residents must participate in patient care services to patients at the
health care site. Although we believe that preventive medicine
residents are engaging in activities that will benefit all patients,
not just Medicare patients in general, the year of academic study does
not constitute patient care services which would qualify for Medicare
payment for GME.
    We understand the clinical training that preventive medicine
residents receive may also occur in patient care sites that do not
receive payments from Medicare, such as public health clinics. Even if
the clinics were included under the definition of qualified nonhospital
provider, Medicare payment to clinics for GME would likely still be
very low because it would reflect the share of services provided by the
clinic to

[[Page 40990]]

Medicare beneficiaries as compared to all services it provides. We do
not believe that Medicare beneficiaries make significant use of public
health clinics for Medicare covered services since these services are
also available through their regular doctor. If we were to provide
payments to public health clinics associated with the training of
preventive medicine residents, we would also have to resolve technical
problems related to providing payments to entities that have never had
a relationship with Medicare. As we stated above, where a hospital or
qualified nonhospital provider incurs ``all or substantially all'' of
the costs of the clinical training in that nonhospital site, Medicare
will make payments for GME costs associated with training preventive
medicine residents.
    Comment: One commenter urged HCFA to consider including nonhospital
dental clinics in the definition of qualified nonhospital providers.
One commenter urged us to expand the definition of a qualified
nonhospital provider to make payment of both direct and indirect GME
directly to nursing homes and hospices. One commenter requested
clarification as to whether our definition of a qualified nonhospital
provider includes community mental health centers. If not, the
commenter requested that we consider including community mental health
centers in the definition of qualified nonhospital provider.
    Response: As we stated in the proposed rule, we believe that it is
appropriate to have more experience with providing payments to the
qualified nonhospital providers listed in the statute before we expand
the definition to include other sites such as those stated by these
commenters. We note that even if nonhospital dental clinics were
included in the definition of a qualified nonhospital provider, a
dental clinic's low Medicare share means the benefit of the provision
would be small. Dental clinics are likely to have a low Medicare share
because Medicare covers few dental services.
    Currently, our definition of qualified nonhospital provider does
not include community mental health centers per se, but it may be
possible for a community mental health center to meet the criteria for
being designated as a rural health clinic under section 1861(aa)(2) of
the Act and section 405.2402.
    We would note that a hospital or Medicare+Choice organization may
receive payment associated with resident rotations through the
nonhospital sites suggested by these commenters if the hospital or
Medicare+Choice organization incurs ``all or substantially all'' of the
costs at the clinic. In this way the clinic will be paid by the
hospital for GME costs.
    Comment: One commenter argued that Congress specified that a
qualified nonhospital provider includes FQHC's, RHC's, and managed care
plans to ensure that these organizations were included but that
Congress did not intend to limit qualified nonhospital providers to
these organizations. The commenter believed that excluding other
nonhospital sites from the definition of a qualified nonhospital
provider is contrary to Congress' intent.
    Response: As we have stated, we will consider other nonhospital
sites in the definition of qualified nonhospital providers once we have
experience with these policies. We disagree that the proposal to limit
the definition of a qualified nonhospital provider at this time to the
entities listed in the statute is inconsistent with Congressional
intent. The statute defines qualified nonhospital provider to include
``such other providers (other than hospitals) as the Secretary
determines to be appropriate.'' Thus, the statute authorizes but does
not require the inclusion of other entities.
    Comment: One commenter stated that educational consortia are
becoming important models for community-based graduate medical and
nursing training and suggested that we expand the definition of
qualified nonhospital provider to include consortia.
    Response: We are interested in learning more about the development
of GME programs through educational consortia. Section 4628 of the BBA
requires the Secretary to establish a demonstration project under which
GME payments will be made to consortia. We will consider changes to our
GME payment policies based on our evaluation of any future
demonstration projects.
    Comment: One commenter urged us to expand the definition of a
qualified nonhospital provider to include Osteopathic Postdoctoral
Training Institutions (OPTIs), community based health care consortia
consisting of one or more colleges accredited by the American
Osteopathic Association (AOA), one or more AOA accredited hospitals,
and other health care facilities such as nursing homes, ambulatory
clinics, community health centers, and managed care organizations. The
commenter suggested that payments be made directly to the OPTI based on
the number of residents participating in OPTI hospitals or a national
average payment. The commenter stated that the OPTI would distribute
the payments among the consortia members.
    Response: An OPTI includes hospital and nonhospital sites as well
as educational institutions and we believe an OPTI is a consortium. As
we stated above, we will be studying GME payments to consortia in a
demonstration project required by section 4628 of BBA.
    b. Definition of direct costs.
    Comment: One commenter suggested that direct costs of training in
nonhospital sites should include mileage associated with travel between
multiple clinic sites. The commenter also stated that direct costs
should include the costs of telemedicine, including telephone, fax,
videoconference, and the internet because these electronic
communication mechanisms enable primary care residents in nonhospital
sites to be trained for practice outside of the resource-rich,
multispecialty hospital setting.
    Response: We agree that travel costs may be an element of direct
costs when residents work in multiple nonhospital sites or when
residents travel from a hospital training site to remote clinics. We
disagree that the cost associated with telecommunication services
should be allowable as training costs. Although telecommunication
services may be integral to providing services to patients while
residents are training in nonhospital sites, these services are not
principally designed to be used as GME training tools. Rather, the
telecommunication services to which the commenter is referring, like
the use of a stethoscope or an examining room, are compensated as
operating costs through Medicare's payments for patient care services.
    Comment: Several commenters stated that the effect of training on
indirect costs is similar in nonhospital clinics and hospitals. One
commenter suggested that indirect costs are easily identifiable and
should be separately reimbursable in nonhospital settings.
    Response: The statute states that the ``Secretary may establish
rules for payment to qualified nonhospital providers for the direct
costs of medical education if those costs are incurred in operation of
an approved medical residency training program described in subsection
(h).'' The statute clearly limits payment to qualified nonhospital
providers under section 1886(k) of the Act for the direct costs of GME.
    Comment: One commenter stated that the proposed regulations fail to
reflect that FQHCs are eligible for Part B payments for allowable
teaching costs even without the new methodology

[[Page 40991]]

established pursuant to the new BBA provision. Because FQHCs are
governed by cost reimbursement principles that include teaching costs,
FQHCs are already allowed to claim all training-related costs,
including direct faculty and resident costs. This commenter suggested
that FQHCs that participate in teaching programs should be able to
recapture higher operating costs caused by lower productivity and
increased overhead. According to this commenter, we should consider
including the following in direct costs:

--Slowdown in productivity;
--Facilities and space for training;
--Transportation and living costs for residents;
--Availability of lab and radiology equipment and services;
--Administrative overhead;
--Increased intensity in treatment patterns used in training;
--Equipment costs;
--Library (either onsite or electronic access);
--Capital costs for startup of residency program;
--Increased complexity at teaching FQHCs; and
--Increased social complexity of patient case mix.

    Response: The costs of resident salaries and fringe benefits and
supervising physicians may be allowable costs under Sec. 405.2470. If
the RHC or FQHC were to have a written agreement with a hospital where
the hospital provides compensation for these costs to the clinic, these
costs would become nonreimbursable costs. However, FQHCs and RHCs that
have an all-inclusive rate that exceeds the cap under sections 505.1
and 505.2 of the Medicare Rural Health Clinic and Federally Qualified
Health Centers Manual would still benefit from the proposed policy in
that costs above the cap that would otherwise be nonreimbursable by
Medicare can now be compensated as direct GME costs through the
agreement with the hospital. That is, if the FQHC or RHC incurs ``all
or substantially all'' of the costs and receives payment directly from
Medicare, these costs are GME costs that are treated separately in
applying the caps on the all-inclusive rate under sections 505.1 and
505.2 of the Medicare Rural Health Clinic and Federally Qualified
Health Centers Manual.
    An additional benefit in the situation where we pay the FQHC or RHC
directly for GME is that residents do not need to be included as health
care staff in the calculation of productivity standards under section
503 of the Manual. We further believe that residents should be excluded
from productivity standards in situations where the hospital is being
paid for training time and GME costs are not reimbursable costs for the
FQHC or RHC. We are adopting this policy in this final rule and will
modify section 503 of the Manual accordingly. Among the items listed in
this comment, we believe that costs which are directly related to the
operation of a medical residency training program (facilities and space
exclusively dedicated to training, resident travel costs between remote
clinic sites) in addition to facility overhead which can be allocated
to a medical education cost center constitute allowable direct GME
costs for which the FQHC or RHC can receive payment directly from
Medicare. We believe the remaining items listed are either indirect
costs of training or allowable cost for patient care services under
Sec. 405.2468(a) through (e) which can only be reimbursed as non-GME
operating costs.
    Comment: One commenter was opposed to the application of reasonable
compensation equivalents to physicians in FQHCs and RHCs. The commenter
stated that the BBA required HCFA to subject RHCs to productivity
standards and the per-visit cost limit. According to the commenter, if
Congress had intended for the RCE limits to be imposed on RHCs, the BBA
would have required such a policy. The commenter stated that, by
definition, RHCs and FQHCs are located in areas where it is difficult
to attract physicians and that the providers must pay compensation that
exceeds the RCE limits to attract qualified physicians. The commenter
requested that the limits not be imposed on FQHC and RHC services to
individual patients.
    Response: For purposes of making indirect GME payments to FQHCs and
RHCs, the RCE limits will only apply to the portion of a teaching
physician's compensation that is attributable to direct GME. We are not
applying the RCE limit to physician compensation that is related to
providing services to individual patients. Because we intend to pay for
these GME costs on a reasonable cost basis, it is necessary to apply
the RCE limits to assure that GME costs will be reasonable.
    Comment: One commenter stated that if HCFA intends to compute the
fixed cost for nonhospital training of all health professionals from
the cost reimbursement data received over the next few years from
qualified nonhospital providers, costs associated with training of
nonphysician health practitioners should also be reported. This
commenter stated that it will be difficult to collect these data at a
later date.
    Response: FQHCs and RHCs seeking payment from Medicare for direct
GME must appropriately classify those costs to a GME cost center on the
cost report. These payments are limited to the direct costs the FQHC or
RHC incurs for an approved medical residency training program as
described under section 1886(h) of the Act. Training of non-physician
health professionals are not included in these programs. Therefore, in
submitting costs reports, FQHCs and RHCs must clearly distinguish the
costs of training residents from the cost of training other health
professionals in nonhospital sites. Although FQHCs and RHCs will need
to document costs of approved medical residency programs to be
allocated to the GME cost center, we do not believe the information
benefit associated with obtaining data on training of other health
practitioners would justify imposing an additional administrative
burden on FQHCs and RHCs to report costs for which they will receive no
payment.
    c. Revised definition of ``all or substantially all'' of the costs.
Comment: A number of commenters felt the proposed redefinition of ``all
or substantially all'' of the costs will be counterproductive and
result in less training in nonhospital settings. One commenter stated
that the current standard of ``or substantially all'' has helped to
facilitate resident training in nonhospital sites. This commenter
stated that there is strong anecdotal evidence that resident training
in ambulatory sites has been increasing and recommended that any
changes to existing policies be tested for the likelihood that they
promote expanded ambulatory GME.
    Response: We disagree with the commenters who suggested that the
proposed redefinition of ``all or substantially all'' of the costs of
training residents in the nonhospital sites will result in less
training in nonhospital settings. First, we do not believe that
hospitals themselves will be discouraged from continuing to rotate
residents to nonhospital sites. Hospitals must consider accreditation
and other program requirements in addition to purely financial
considerations. We have reviewed the program requirements for residency
education in family practice and internal medicine in the 1997-1998 GME
Directory. The Directory specifies that family practice residents must
spend specified amounts of time and see a minimum number of patients in
the family practice center in each residency program year. Similarly,
the Directory specifies that at least 25

[[Page 40992]]

percent of the 3 year residency program for internal medicine must be
in an ambulatory care setting. Given these requirements for primary
care training programs, we do not believe that hospitals will respond
to the revised definition of ``all or substantially all'' of the costs
by rotating fewer residents to nonhospital sites. Moreover, a hospital
that meets the ``all or substantially all'' criterion may count the
resident's training time in the nonhospital site for direct GME as well
as IME.
    Second, we believe that our proposal will encourage more ambulatory
sites to participate in training. To the extent our policies would
allow qualified nonhospital providers to receive payments directly from
Medicare, more qualified nonhospital providers may be willing to become
training sites. In addition, the hospital may incur supervisory
teaching physician costs that previously might have been borne by the
nonhospital site. Therefore, the nonhospital site either will receive
revenues for costs that the site itself incurs or will no longer incur
those costs.
    Comment: Several commenters agreed that it is appropriate to
provide GME payment to the entity that incurs ``all or substantially
all'' of the costs whether it be the hospital or the qualified
nonhospital provider. Many of these commenters, however, believe that
``all or substantially all'' of the costs should be limited to resident
salaries and fringe benefits.
    Response: We disagree. Section 1886(h)(4)(E) of the Act states that
hospitals may include residents in their FTE counts for direct GME if
the hospital incurs ``all or substantially all of the costs of the
training program in that setting.'' Section 1886(d)(5)(B)(iv) of the
Act allows hospitals to count residents for IME effective October 1,
1997 if the hospital ``incurs all or substantially all of the costs for
the training program in that setting.'' As we stated previously and in
the preamble to the proposed rule (63 FR 25597), we reviewed data on
resident costs from recent Medicare hospital cost reports and found
that, on average, resident salaries and fringe benefits account for
less than half of total direct GME costs. We believe that the revised
policy, which requires hospitals to incur a higher percentage of total
training costs in the nonhospital setting than are accounted for by
resident compensation reflect a better measure of ``all or
substantially all'' of the costs than current policy.
    Comment: One commenter argued that the rationale for the proposal
is insufficient to merit a change in current policy. This commenter
stated that our proposal focused only cost data from hospitals and not
nonhospital sites. This commenter believed that, because our proposal
addressed training in nonhospital sites, it would be more appropriate
to analyze resident salaries and fringe benefits as a share of overall
training costs at nonhospital sites. The commenter acknowledged that
these data are not available at the present time, but believed that
resident compensation is likely to be a substantial component of
overall training costs in nonhospital sites. The commenter noted that
the preamble to the proposed rule indicates that residents' salaries
and supervisory costs would likely ``constitute a different proportion
of the total GME costs in the nonhospital setting as compared with the
hospital setting.'' (63 FR 25597). The commenter added that direct GME
payments to hospitals are based on 1984 hospital costs that may not
accurately reflect current costs.
    Response: Our analysis is based on recent cost report data
submitted to us by hospitals. That data shows that resident salaries
and fringe benefits are less than half of total resident costs for
hospitals. At this time, based on available data as well as a desire to
treat hospitals and nonhospital sites equitably, we believe the
hospital cost report data is a useful proxy for purposes of applying a
standard of ``all or substantially all'' to nonhospital sites. We agree
that it would be appropriate to analyze data on the cost of training
from nonhospital sites and we will consider revisions to our policies
as we obtain cost data from nonhospital sites.
    We note that, if resident compensation is, in fact, a larger
percentage of total costs in the nonhospital site relative to the
hospital, as suggested by this commenter, this would mean that costs
other than resident compensation are a smaller proportion of total
costs. The hospital would have to assume relatively modest additional
costs through arrangements with nonhospital sites to continue counting
the residents for indirect and direct GME. We also note that
preliminary data by researchers studying costs incurred by a
nonhospital site to train residents has shown that resident salary and
fringe benefits are a smaller ratio of total costs at the nonhospital
site relative to the hospital. If this conclusion is accurate, it would
provide additional evidence that our revised definition is a better
measure of ``all or substantially all'' of the costs.
    Comment: One commenter acknowledged that we revised the definition
of ``all or substantially all'' to address a concern that nonhospital
sites do not have sufficient resources to support their medical
education activities, but argued that the proposed change in policy
will not improve the ability of nonhospital sites to support training
and may compromise existing and developing relationships between
hospital and nonhospital GME sites. This commenter stated that the
relationship between the hospital and nonhospital site should be
voluntary and that it is up to the parties to define the appropriate
parameters of their relationships, including how costs beyond the
resident stipend and benefits should be accommodated.
    Response: As we stated earlier, we do not believe that this revised
policy will compromise existing training relationships between
hospitals and nonhospital sites. We agree with the commenter that
arrangements between hospitals and nonhospital sites for training
should be voluntary and the entities should be responsible for
negotiating the parameters of their relationship. If a hospital and
nonhospital site cannot agree on an arrangement regarding costs, the
hospital may pursue an agreement with another nonhospital site for
training. Similarly, if a nonhospital site cannot reach agreement with
a hospital, it does not have to allow its facility to be used as a
training site and can pursue a training arrangement with another
hospital.
    Comment: One commenter asked why a nonhospital site would claim
costs, and report an offset to those costs, if the hospital incurs the
GME costs for training in the nonhospital site.
    Response: In response to this comment, in this final rule we are
modifying the requirements for both hospitals and qualified nonhospital
providers. As stated previously, hospitals are required to furnish a
written agreement between the hospital and the nonhospital site that
indicates that the hospital is incurring the cost of the resident's
compensation in the nonhospital site and that the hospital is providing
reasonable compensation for teaching activities to the nonhospital
site. The agreement must also indicate the amounts being furnished to
the nonhospital site for teaching activities. If the resident is
working at an FQHC or RHC and there is a written agreement that allows
the hospital to count the resident for indirect and direct GME, the
FQHC or RHC must report its direct GME costs in a nonreimbursable cost
center. The FQHC or RHC is not required to offset from those GME costs
revenues received from the hospital.

[[Page 40993]]

    We are requiring the FQHC or RHC to report its direct GME costs in
a nonreimbursable cost center because these costs will no longer be
allowable costs under Sec. 405.2468(a) through (e). As stated earlier,
direct GME costs will not be subject to the cap on the all-inclusive
rate under section 503 of the RHC and FQHC Manual. The reporting of
direct GME costs in a separate cost center on the FQHC and RHC cost
report will also allow us to receive data on the costs of training in
nonhospital sites.
    Comment: Some commenters argued that our proposal would impose
undue administrative burden on hospitals and nonhospital sites by
requiring them to report all of the GME costs they incur. One commenter
stated that HCFA should retain the current definition of ``all or
substantially all'' of the costs because it is logical,
straightforward, and appropriate. This commenter asserted that it is
difficult to isolate and quantify costs other than resident salaries
and fringe benefits are incurred in nonhospital sites. According to
this commenter, resident salaries and fringe benefits are easy to
identify and their administration and recordkeeping can be monitored
uniformly across the GME community. The commenter suggested that in
assuming responsibility for resident compensation, the teaching
hospital assumes responsibility for assuring that all residents are
provided appropriate educational environments, supervision, and support
for their training.
    Another commenter argued that the proposed redefinition of ``all or
substantially all'' of the costs does not reflect certain services or
costs (e.g. house staff credentialing and related functions) just as
the per resident amounts do not reflect services or costs that are
included in the proposal (e.g. resident travel and lodging). These
commenters suggested that resident salaries and fringe benefits should
suffice as a proxy that appropriate educational services at an
appropriate cost are being delivered by the hospital for the
nonhospital training. Another commenter stated that it is a managed
care organization that pays the resident salaries and fringe benefits
and that this should be sufficient for receiving GME payment in the
nonhospital site. According to these commenters, the entity that incurs
the costs of the resident compensation should be considered to be
incurring ``all or substantially all'' of the costs and be eligible to
count the resident for direct and indirect GME.
    Response: We do not believe that we are establishing a burdensome
regulatory structure with tremendous documentation requirements. For
hospitals seeking to count the time of residents training in the
nonhospital site, we are requiring a written agreement between the
hospital and the nonhospital site stating that the hospital will incur
``all or substantially all'' of the costs. The written agreement must
indicate that the hospital is incurring the cost of the resident
salaries and providing compensation for supervisory teaching physician
costs. The agreement must also specify the amounts paid to the
nonhospital site. These agreements and amounts paid by the hospital to
the nonhospital site may be the product of negotiation between the
hospital and nonhospital site. The hospital does not have to report the
nonhospital site's GME costs. We anticipate that in the course of any
negotiation between the hospital and nonhospital site, the nonhospital
site may need to identify its training costs. However, this is a matter
between the hospital and nonhospital.
    If a hospital seeks to count the time of residents training in
FQHC's and RHC's, the FQHC or RHC must identify its training costs in a
nonreimbursable GME cost center. FQHC's and RHC's must separately
report GME costs in order to distinguish these costs from other patient
care costs that are paid for by Medicare on the basis of reasonable
costs through the all inclusive rate. Under this final rule, we are not
requiring FQHC's and RHC's to report the offset to those costs for
payments received from the hospital. Requiring FQHC's and RHC's to
report costs without offsetting revenues received from the hospital
will allow us to obtain gross cost data on the costs of training in
nonhospital sites.
    RHC's and FQHC's must identify teaching physician costs and
allocate overhead to the direct GME cost center, in addition to the
current cost reporting requirements for these entities. These entities
are currently paid on the basis of costs, and we do not believe the
additional cost reporting requirements will be substantial.
    We disagree with the comment that resident compensation should
suffice as a proxy that appropriate educational services, at an
appropriate cost, are being delivered and should be the sole criterion
for determining which entity receives payment. Our concern in
developing this policy is not whether we are paying for appropriate
educational services but whether the entities that incur training costs
are appropriately paid. Regardless of which entity incurs the cost of
the resident's compensation, Medicare should only pay for appropriate
educational services. Other regulations independent of the ``all or
substantially all'' criterion ensure that Medicare pays for accredited
educational programs.
    Comment: One commenter stated that teaching physicians in
nonhospital sites may be remunerated through a variety of different
arrangements, including ``in kind'' compensation for continuing
education or through voluntary contributions. According to this
commenter, the proposed policies would require hospitals and
nonhospital sites to identify financial transactions which may not
exist. The commenter further stated that there is no established
methodology for defining or quantifying supervisory costs. The
commenter noted that even if the costs could be identified, the costs
would vary depending upon specialty and the year of residency training,
which would require a sophisticated accounting infrastructure. The
commenter also asserted that community-based physicians would be
discouraged from training residents because of the administrative
burden of documenting the precise number of hours they spend teaching
or supervising residents.
    Response: We recognize that there could be a variety of financial
arrangements between hospitals and nonhospital sites with regard to
training. The hospital and the nonhospital site can take into account
those types of arrangements in negotiating an agreement.
    Although there will be some additional cost reporting requirements
imposed on FQHC's and RHC's that receive payment for direct GME through
the hospital or directly from Medicare, there are established cost
reporting principles for identifying these costs in providers.
Medicare+Choice organizations, in addition to producing a written
agreement with nonhospital sites, will have to report GME costs when
they incur ``all or substantially all'' of the costs. We are developing
a modest one page cost statement that will allow the Medicare+Choice
organizations to claim direct GME costs that are eligible for payment.
If an FQHC or RHC incurs ``all or substantially all'' of the costs of
the program, and is therefore eligible to be paid directly for GME, we
do not believe the burden of documenting supervisory physician time
spent in GME activities will be substantial. Our expectation is that
physicians will need to estimate the number of hours they will spend in
GME and non-GME activities during the course of the year and verify the
estimates with a limited time study. This is similar to the
documentation that was required of hospitals to allocate teaching
physician costs between Part A

[[Page 40994]]

and Part B and between operating costs and direct medical education.
    Comment: Several commenters suggested that we initiate
demonstration projects addressing payment for GME in nonhospital sites.
One commenter suggested that we analyze our proposed revision to ``all
or substantially all'' of the costs through a demonstration project
before implementing the changes on a nationwide basis. Such a
demonstration project would indicate whether the proposed change would
encourage or discourage training in nonhospital sites. Another
commenter suggested that our proposed policy may adversely affect many
GME programs and should be tested prior to being implemented on a
national basis.
    Response: Congress established a provision in the BBA authorizing
the Secretary to provide payment to nonhospital sites and we do not
believe a demonstration project is necessary. Furthermore, since this
policy is more stringent than existing regulations, we are doubtful
that hospitals would participate voluntarily in a demonstration
project.
    Comment: One commenter objected to the revision of the ``all or
substantially all'' criteria and stated that the proposed policy would
constrain the ability of teaching hospitals and Medicare+Choice
organizations to develop reasonable rotations in hospitals and managed
care plans. The commenter suggested an alternative under which a
Medicare+Choice organization could submit a short application that
would contain agreements between hospitals and Medicare+Choice
organization addressing, among other things, the amount of time
residents would spend at each site.
    Under this approach, we would pay the qualified nonhospital
provider based on the product of a per resident amount, the number of
FTE residents, and the Medicare share. Each resident would be counted
as a partial FTE based for the hospital and for the qualified
nonhospital provider based on the percentage of time worked at each
site. A Medicare+Choice organization would be paid its FTE percentage
times a portion of the hospital per resident payment amount or a
national average per resident amount. This commenter argued that this
approach would meet the Congressional objective of allowing residents
to receive training in hospitals and Medicare+Choice organizations
while prohibiting double payment without establishing a cumbersome new
set of cost reporting requirements.
    Response: We considered the approach suggested by this commenter
but we believe it would not facilitate training in qualified
nonhospital providers. FQHC's, RHC's, and Medicare+Choice organizations
generally provide a low percentage of total services to Medicare
beneficiaries. The commenter's approach would to some extent substitute
the Medicare share of the qualified nonhospital provider for the
Medicare share of the hospital, and we believe this would result in
lower Medicare payments overall for training in nonhospital sites.
Also, we believe this approach would be inequitable to hospitals in
that they would lose both the direct and indirect medical education
payments for the proportion of time residents spend in the qualified
nonhospital provider even though they have ongoing training costs while
the residents train in the nonhospital site.
    We believe that it is reasonable to pay the hospital or qualified
nonhospital provider which incurs ``all or substantially all'' of the
costs. Furthermore, the revised definition reflects a better measure of
``all or substantially all'' of the costs and will result in
appropriate payment to hospitals for training in qualified nonhospital
providers and other nonhospital sites.
    As we stated in the May 8 proposed rule (63 FR 25597), we also have
concerns that it would not be equitable to eliminate the hospital's
payment entirely for the time resident's spend in nonhospital sites
because the hospital may continue to incur some of the costs associated
with training residents in nonhospital sites. We believe that the
policies we are adopting are equitable to both hospital and nonhospital
sites and will achieve Congress' objective of encouraging training in
nonhospital sites.
    Comment: One commenter stated that there might be important
differences in the accounting and administrative systems of various
categories of qualified nonhospital providers that might present some
difficulties in identifying the cost data necessary to accurately
complete cost reporting forms. Other commenters stated that hospitals
will have difficulty obtaining the necessary data from the nonhospital
sites to complete the agreements or that the revised definition of
``all or substantially all'' would impose undue administrative burden.
Another commenter stated that the revised definition of ``all or
substantially all'' creates a major problem in identifying the portion
of time office physicians spend in teaching and supervising residents
and is another administrative burden placed on physicians.
    Response: As stated before, we do not believe we are imposing undue
administrative burden. Direct GME costs for FQHC's and RHC's will have
to be separately identified and reported. Although this will require
the development of a mechanism for FQHC's and RHC's to allocate
overhead and supervisory physician costs to the GME costs center, we do
not believe that our policy will create significant administrative
difficulties for FQHC's and RHC's, which already prepare cost reports
for Medicare. As stated previously, we do not believe this process will
generate a substantial burden on supervising physicians in FQHC's and
RHC's beyond a written agreement between the clinic and the physician
regarding the amount of time the physician expects to spend in GME
activities and a time study verifying the allocation.
    The submission of a cost statement for GME will be a new
responsibility for Medicare+Choice organizations which do not have
experience with reporting costs. However, as stated above, we are
developing a one page cost statement of GME expenses to limit the
administrative burden on Medicare+Choice organizations.
    With regard to the concern expressed about creating a burdensome
set of new cost reporting requirements, we reiterate that a condition
of payment to the hospital for training in the nonhospital site is the
production of the written agreement between the hospital and the
nonhospital site. We are not requiring hospitals to submit cost data to
Medicare as a precondition to counting the resident for indirect and
direct GME.
    Comment: One commenter noted that some arrangements between
hospitals and nonhospital settings for the training of residents
predate the GME base year. This commenter stated that hospitals did not
compensate nonhospital sites for supervisory teaching physician costs
and it would not be fair to shift these costs to teaching hospitals.
The commenter also stated that teaching hospitals have already entered
into written agreements with nonhospital sites under the existing
rules. According to the commenter, the proposed rule would necessitate
renegotiation of thousands of agreements, imposing tremendous
transaction costs upon the academic medical community. The commenter
noted that if the agreements are not renegotiated prior to the
effective date, the hospital will be unable to count the residents for
direct and indirect GME, and this will have a lasting effect because of
the 3 year averaging rules. Another commenter stated that there are
many complex

[[Page 40995]]

contractual arrangements between hospital based programs and
nonhospital sites regarding the placement, training and patient service
utilization of residents, and any change in Medicare GME payment policy
could have significant and unknown impacts on these current training
structures.
    Response: The GME provisions of this final rule will be effective
January 1, 1999. All other provisions of this final rule are effective
October 1, 1998. By making a later effective date for the GME
provisions, hospitals and nonhospital sites will have 5 months
following publication of this final rule to negotiate agreements that
will allow hospitals to continue counting residents training in
nonhospital sites for indirect and direct GME. These agreements are
related solely to financial arrangements for training in nonhospital
sites. We do not believe that the agreements regarding these financial
transactions will necessitate changes in the placement and training of
residents.
    In response to the comment that it is unfair to shift costs to the
hospital, we believe it is appropriate to include supervisory costs in
the nonhospital site as part of ``all or substantially all'' of the
costs that hospitals must incur to count the resident. Currently, the
hospital is able to count the resident even though its costs for that
resident may be lower during the time the resident trains outside the
hospital. At the same time, the nonhospital site may have incurred
costs for which it received no compensation. We believe that requiring
the hospital to incur the costs associated with training in the
nonhospital site is equitable to both the hospital and nonhospital site
and is consistent with the statutory requirement that the hospital must
incur ``all or substantially all'' of the costs.
    Comment: One commenter argued that we should not use reasonable
costs as the basis for making payment to qualified nonhospital
providers. This commenter stated that Medicare+Choice organizations do
not submit cost reports and it would be extraordinarily expensive and
cumbersome to report accounting costs. Several commenters also objected
to our proposal to the extent we would allow overhead costs for FQHCs,
RHCs, and hospitals but not Medicare+Choice organizations. These
commenters believed that the policy cannot be justified on the basis
that Medicare+Choice organizations do not submit cost reports. One
commenter suggested that HCFA use predetermined payment amounts that do
not require the subsequent submission of cost reports. The commenter
noted that the proposed rule itself notes that direct GME payments are
based on average per resident costs from 1984 that might bear little or
no relation to accounting costs in 1998. Another commenter suggested
that Medicare+Choice organizations should be paid an overhead factor
for direct GME costs based on square footage of the clinic and a number
of other factors. Alternatively, this commenter suggested use of an
average overhead factor based on the number of residents trained until
actual overhead expenses for Medicare+Choice organizations can be
identified.
    Response:  Medicare+Choice organizations will typically contract
with clinics for the provision of services to beneficiaries. In these
situations, we can make payment directly to the Medicare+Choice
organization if the plan produces a written agreement with the clinics
where training occurs that the plan will incur ``all or substantially
all'' of the costs associated with training in the nonhospital site. We
are requiring a written agreement between the Medicare+Choice
organization and the nonhospital sites. We believe that the primary
components of GME costs are resident compensation and supervisory
teaching physician costs and that facility overhead costs which can be
allocated to direct GME are a smaller component of direct GME costs.
Nevertheless, we agree that we should not limit allowable direct GME
costs for Medicare+Choice organizations to resident compensation and
supervisory physician costs. If the Medicare+Choice organization can
document other direct GME costs that directly relate to a training
program, we will allow these costs. We note that, at this time, it is
not feasible to develop an average overhead factor which can be paid to
Medicare+Choice organizations that incur ``all or substantially all''
of the costs of a training program in a nonhospital site. This is
because our data systems on hospital GME costs do not distinguish
between supervisory teaching physician costs and overhead costs
attributable to direct GME.
    In response to the comment that we use square footage or other
mechanisms as a basis for allocating overhead to GME costs for
Medicare+Choice organizations, we are concerned about developing a
sophisticated cost allocation process for determining Medicare+Choice
allowable direct GME costs since Medicare+Choice organizations do not
submit cost reports. However, we are revising our proposal to require
the written agreement to state that the Medicare+Choice organization
will incur the costs of residents' salaries and fringe benefits and
provide reasonable compensation for the remaining costs of the training
program in the nonhospital site. Based on the statement of costs, the
Medicare+Choice organization will report its costs to HCFA and we will
provide payment based on the lower of the Medicare+Choice
organization's cost per resident or a national average of the hospital
per resident amounts.
    Comment: Several commenters were concerned that if neither the
hospital or nonhospital site incurs ``all or substantially all'' of the
costs, neither setting would receive payment even though each entity
incurs a portion of the training costs. One commenter suggested that
there will be difficulty allocating costs under our proposed definition
of ``incurring costs'' and stated that we should encourage affiliations
and provide simpler and clearer guidance for institutions.
    Response: Under this final rule, an entity must incur ``all or
substantially all'' of the costs to receive payments for the time the
resident spends in the nonhospital site. Since we do not conduct cost-
finding to determine who bears ``all or substantially all'' of the
graduate medical education costs, we are generally dependent on
hospital and non-hospital provider agreements to determine who bears
them. As stated earlier in this final rule as well as in the proposed
rule, we do not believe it would be administratively feasible to
apportion payments appropriate to the hospital and nonhospital site in
situations where neither the hospital or nonhospital site agree on who
incurs ``all or substantially all'' of the costs. We must also consider
the statutory prohibition on double payments in these situations.
Furthermore, although it may be appropriate to provide payment for GME
costs where the nonhospital site incurs only a portion of the training
costs, we do not believe it would be equitable to allow a nonhospital
site to be paid where it was incurring only a portion of the costs but
only allow payment to a hospital when it incurs ``all or substantially
all'' of the costs.
    In response to the commenter who suggested that we should encourage
``affiliations,'' we believe the revised definition of ``all or
substantially all'' of the costs provides incentives for hospitals and
nonhospital sites to reach agreement with regard to financial
arrangements for training in nonhospital sites to avoid the situation
where neither entity receives payment for GME.
    Comment: One commenter asked whether hospitals would be eligible to
receive payments in situations where the teaching faculty volunteers
their

[[Page 40996]]

services and neither the hospital or nonhospital entity incurs costs
for supervisory teaching physicians, but the hospital incurs the costs
of resident salaries and fringe benefits (including travel and lodging
expenses where applicable). The commenter asked whether the contract
should state that there are no teaching physician costs incurred and
the remainder of the costs represent ``all or substantially all'' of
the costs. Another commenter stated that the ``all or substantially
all'' definition creates special problems where community physicians
voluntarily serve in a teaching capacity without compensation. The
commenter stated that the implication of the proposed policy is that
some portion of the community physician's earnings must be included in
the calculation and asked that we either delete the proposed change or
specify that voluntary supervision of training residents does not need
to be included in the definition of ``all or substantially all'' of the
costs.
    Response: We have received anecdotal information that some
supervisory teaching physicians participate in teaching activities
without compensation in nonhospital clinics. Although there may be
situations where a supervising physician is participating in teaching,
we do not believe that lack of explicit compensation for teaching
activities means that physicians are necessarily volunteering their
time. Rather, we believe that the physician's compensation in the
clinic encompasses both teaching and nonteaching activities.
Nevertheless, for purposes of satisfying the requirement of a written
agreement, the written agreement between a hospital and a nonhospital
site may specify that there is no payment to the clinic for supervisory
activities because the clinic does not have these costs.
    Comment: One commenter stated that a hospital was permitted to
include, within in its GME base period costs, teaching physician costs
related to the hospital by common ownership or control under
Sec. 413.17. Citing the GME consistency principle at
Sec. 412.113(b)(3), this commenter requested that we clarify that the
same policy applies in the context of GME payment to nonhospital sites.
That is, the regulation should include specific language which states
that costs incurred by an organization related to the hospital under
Sec. 413.17 will be recognized as if incurred by the hospital in
applying the expanded definition of ``all or substantially all'' of the
costs.
    Response: The consistency principle under Sec. 412.113(b)(3)
required consistent treatment of medical education costs during the
transition to the inpatient hospital PPS during the 1980s. This rule
was intended to prevent medical education costs from being included in
hospital payments for operating costs and also being paid on a
reasonable costs basis to hospitals as GME during the early years of
the PPS. We do not see a relationship between the consistency rule and
our proposed policies with regard to payment for GME training in
nonhospital sites.
    With regard to the costs of related parties under Sec. 413.17, our
policy was not to include costs associated with training in nonhospital
clinics in the per resident amount even though certain direct GME costs
of related parties could have been allowable. We also do not believe
that Sec. 413.17 has applicability to our proposed policy. We are
requiring a written agreement between hospitals and nonhospital sites
for purposes of this final rule, even where the hospital and
nonhospital site are related organizations under Sec. 413.17. In
practice, since we are requiring an agreement between hospitals and
nonhospital sites that are under common ownership or control, the
agreements should be a formality.
    Comment: One commenter stated that the necessary statutory and
regulatory incentives do not exist for teaching hospitals to provide
compensation to nonhospital sites for their GME costs.
    Response: We disagree. The proposed rule requires a written
agreement between the hospital and nonhospital site that the hospital
will provide compensation to the nonhospital site for certain types of
GME costs. Without this agreement, the hospital will be unable to count
the resident for indirect and direct GME. As stated earlier, the
agreements must also indicate the amounts the hospital will actually
pay to the nonhospital site for GME training.
    Comment: One commenter stated the definition of ``all or
substantially all'' of the costs should not include residents' travel
and lodging costs. This commenter stated that there is no rationale for
this change and that the criteria imposes significant reporting burdens
with no offsetting benefits. The commenter also stated that the phrase
``where applicable'' is vague and requires additional definition
language (related to distance, means of travel) if entities are to
understand their reporting obligations.
    Response: Our intent in adding the phrase ``including residents
travel and lodging costs, where applicable'' was to provide for the
inclusion of direct GME costs that may be more prevalent in a
nonhospital setting than in the hospital setting. The phrase ``where
applicable'' means that depending on the specific arrangement in some
cases, residents will be responsible for paying their own travel and
lodging costs while serving at the nonhospital site. In other cases, it
is possible that the site will pay for the residents to travel to the
site and for lodging while at the site. This is basically a fringe
benefit paid by the site for the resident. Therefore, in situations
where travel and lodging is an expense of the nonhospital site while
the resident is training there, the written agreement must indicate
that the hospital will incur these costs. In determining whether the
hospital has incurred ``all or substantially all'' of the costs of the
program, the hospital must include this ``unique'' fringe benefit if it
was paid for by the nonhospital site.
    Comment: One commenter stated that the proposed regulations
effectively deny payments to FQHC's unless they incur ``all or
substantially all'' of the costs of the program. The commenter stated
that since the FQHC does not typically pay the residents' salaries, the
proposed rule does not significantly increase the ability of the FQHC
to recover GME costs. This commenter stated that it is eminently
possible to devise a method under which hospitals that utilize
qualified nonhospital providers would report costs showing allowable
FQHC costs. In these situations, costs would be apportioned to the
proper cost center.
    Response: We disagree. The FQHC can recover its GME costs either
directly from Medicare if it incurs ``all or substantially all'' of the
costs, or from the hospital through the written agreement. Without a
written agreement that specifies the amounts the hospital will pay the
nonhospital site for training in the nonhospital site, the hospital
will be unable to count the resident for indirect and direct GME.
    d. Medicare share. Comment: One commenter stated that the
limitation of direct GME payments to FQHC's based on Medicare's share
at the FQHC will seriously constrain participation because only 8
percent of FQHC patients are Medicare patients. The commenter quoted
the Conference Report which states that ``the Conferees believe this
authority may help alleviate physician shortages in rural areas.''
According to this commenter, the combination of requiring the FQHC to
incur ``all or substantially all'' of the costs in order to receive
payment and the limitation to Medicare share does little to provide
sufficient resources to allow FQHC's to train physicians in underserved
rural areas. The commenter believed the limitation of payments based on
Medicare's share is not

[[Page 40997]]

required by the BBA provision authorizing GME to qualified nonhospital
providers and is contrary to the intent of the law.
    Response: It is a fundamental and longstanding principle that, to
the extent Medicare pays for certain types of costs, the Medicare
program should pay only its fair share. This principle applies not only
in the context of Medicare payment for medical education, but also to
Medicare payment in general.
    Comment: One commenter stated that Medicare enrollees use 3.5 times
the number of outpatient services as non-enrollees. The commenter
suggested that it would be more equitable to base Medicare's share for
Medicare+Choice organizations on the ratio of outpatient expenses for
Medicare enrollees to total enrollees. As an alternative, this
commenter suggested using Medicare visits to total visits to calculate
Medicare share, consistent with the calculation in the inpatient
setting of Medicare inpatient days to total inpatient days.
    Response: We believe that either of the proposals suggested by this
commenter would impose significant additional reporting
responsibilities on Medicare+Choice organizations which receive payment
from Medicare for direct GME. Basing the Medicare share calculation on
the ratio of outpatient expenses attributable to Medicare beneficiaries
to total expenses would require Medicare+Choice organizations to
provide a sophisticated report of expenses not unlike the Medicare cost
report. In situations where the Medicare+Choice organization is
contracting for services provided in a clinic, this would require the
Medicare+Choice organization to document costs which are not even its
own. We considered using the ratio of Medicare enrollee to total
enrollee visits in the Medicare share calculation, but have concerns
that this approach would also be burdensome in that it would require
Medicare+Choice organizations to furnish utilization data for clinics
or physician offices that they do not own or control.
    e. National average per resident amounts. Comment: One commenter
argued that national average per resident amounts are not appropriate
for the nonhospital setting. According to the commenter, residency
training differs from other types of services because it involves
complicated transactions with nongovernmental entities such as medical
schools that may sponsor a hospital's programs and compensate
physicians directly, and accreditation bodies that may require a
certain content and curriculum in training programs.
    Response: We did not propose the use of national average per
resident amounts in the nonhospital setting but will consider whether a
national average per resident amount is appropriate after we have
experience with the provision and have reliable data on the costs of
training in the nonhospital setting.

f. Technical errors concerning GME policy published in the May 12, 1998
final rule.

    In the May 12, 1998 final rule for the FY 1998 inpatient hospital
prospective payment system, we set forth certain policies on GME. The
portion of the May 12, 1998 final rule concerning counting residents
for direct medical education (beginning at (63 FR 26327)) contained the
following technical errors:
    <bullet> Merged Hospitals--On page 26329, third column, we stated
that the FTE cap of merged hospitals would be the aggregation of the
FTE cap for each hospital participating in the merger. We stated that
Sec. 413.86 would be modified to reflect this policy, but we did not
modify the regulations text. We do not believe a change to the
regulations text is necessary.
    <bullet> Application of the FTE Cap--There is a discrepancy between
the methodologies described in the August 29, 1997 final rule with
comment period (62 FR 46005) and the May 12, 1998 final rule (63 FR
26330) for application of the FTE cap in situations where a hospital
has more residents than the cap. The methodology described in the May
12, 1998 final rule is incorrect. The correct methodology is described
in the August 29, 1997 final rule with comment period.
    <bullet> New Medical Residency Training Program--On page 26332, in
the first column, we stated, ``for these reasons, we believe it is
appropriate to consider a medical residency training program to be
newly established if the program received initial accreditation or
began training residents on or after January 1, 1995.'' We are
clarifying that, for hospitals that trained residents prior to January
1, 1995, we will adjust the FTE caps for programs were accredited or
began training residents on or after January 1, 1995 and prior to
August 5, 1997.
    <bullet> Application of the FTE Cap to an Affiliated Group--On page
26341, in the third column, we stated, ``If the combined FTE counts for
the individual hospitals do not exceed the aggregate cap, we will pay
each hospital based on its FTE cap as adjusted per agreements.'' That
sentence should have read as follows: ``If the combined FTE counts for
the individual hospitals exceed the aggregate cap, we will pay each
hospital based on its FTE cap as adjusted per agreements.''

V. Changes to the Prospective Payment System for Capital-Related
Costs

A. Cap on the Capital Indirect Medical Education Adjustment Ratio
(Sec. 417.322)

    Under section 1886(g) of the Act, the Secretary has broad
discretion in implementing the capital prospective payment system.
Section 412.322 of the regulations specifies the formula for the
capital indirect medical education (IME) adjustment factor. The capital
IME adjustment is intended to pay the Medicare capital prospective
payment system share of the indirect costs of medical education to
teaching hospitals. The formula was incorporated in the August 30, 1991
final rule for the capital prospective payment system (56 FR 43380),
and uses the ratio of interns and residents to average daily census
(defined as total inpatient days divided by the number of days in the
cost reporting period). Section 1886(d)(5)(B) of the Act requires the
use of the ratio of residents-to-beds to calculate the IME adjustment
for the operating prospective payment system. However, pursuant to our
authority under section 1886(g) of the Act, we adopted the resident to
average daily census ratio for the capital prospective payment system
because we believed it was a more appropriate method for measuring
teaching intensity, and because we believed it was less subject to
manipulation.
    The IME adjustment factor increases by approximately 2.8 percentage
points for each 0.10 increase in the hospital's ratio of residents to
average daily census. The IME adjustment for inpatient capital-related
costs for hospitals paid under the prospective payment system takes the
form of [e raised to the power (.2822 x ratio of interns and residents
to average daily census)-1] where e is the natural antilog of 1, based
on the total cost regression results. In order to determine the Federal
rate portion of the hospital's payment, the IME adjustment factor is
multiplied by the standard Federal rate, the DRG weight, the geographic
adjustment factor, and any other relevant payment adjustments such as
the DSH adjustment or the large urban add-on. The formula is 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).

[[Page 40998]]

    In the May 8, 1998 proposed rule (63 FR 25600) we indicated that it
had come to our attention that because of the application of the
capital IME adjustment, one hospital would receive a capital IME
payment greater than its total hospital costs. We also stated that of
the approximately 1,200 teaching hospitals in the United States, based
on December 1997 data, 8 hospitals had a resident to average daily
census ratio of more than 1.5. A resident to average daily census ratio
of 1.5 results in a capital IME adjustment factor of 0.53, which
increases the Federal rate portion of the hospital's capital payment by
53 percent.
    To address this unintended effect of the capital IME methodology,
we proposed capping the capital IME ratio at 1.5. A ratio greater than
1.5 means a hospital has, on average, considerably more residents than
inpatients. Capping the ratio at 1.5 would allow for one resident per
patient on the inpatient side plus some outpatient training, and would
keep capital IME payments more consistent with the costs incurred.
Because the operating IME ratio is based on the number of beds, it has
only slightly exceeded 1.0 in two cases. This change would ensure that
the capital IME adjustment is more in line with hospital costs.
    We received no comments on our proposed change. We have decided to
implement this policy as proposed. Effective October 1, 1998, the
capital IME ratio will be capped at 1.5.

B. Payment Methodology for Mergers Involving New Hospitals
(Sec. 412.331)

    The August 30, 1991 final rule (56 FR 43418), which implemented the
capital prospective payment system, established special payment
provisions for new hospitals. Under Sec. 412.324(b), a new hospital is
paid 85 percent of its allowable Medicare capital-related costs through
its first cost reporting period ending at least 2 years after the
hospital accepts its first patient. The first cost reporting period
beginning at least 1 year after the hospital accepts its first patient
is the hospital's base year for purposes of determining its hospital-
specific rate. Section 412.302(b) defines a new hospital's old capital
costs as allowable capital-related costs for land and depreciable
assets that were put in use for patient care on or before the last day
of the hospital's base year cost reporting period. Beginning with the
third year, the hospital is paid under the fully prospective or hold-
harmless payment methodology, as appropriate. If the hospital is paid
under the hold-harmless payment methodology, the hospital's hold-
harmless payments for its old capital costs can continue for up to 8
years.
    In the August 30, 1991 final rule, we defined a new hospital as one
that had operated (under previous or present ownership) for less than 2
years and did not have a 12-month cost reporting period that ended on
or before December 31, 1990. In the September 1, 1992 final rule (57 FR
39789), as a result of situations brought to our attention after
publication of the original prospective payment system final rule, we
clarified that the new hospital exemption would not apply in situations
where the facility was not truly a new hospital.
    In the May 8, 1998 proposed rule (63 FR 25600), we indicated that
questions had arisen regarding application of our rules for payment of
new hospitals in merger situations. We stated that consistent with our
previously stated policy, we were proposing to further clarify the new
hospital payment provisions. We proposed that, if during the period it
is eligible for payment as a new hospital (as defined at
Sec. 412.300(b) and Sec. 412.328(b)), a new hospital merges with one or
more existing hospitals, and the merger meets the existing capital-
related reasonable cost rules regarding the criteria for recognizing a
merger at Sec. 413.134 and the new hospital is the surviving
corporation (as defined in Sec. 413.134(l)(2)), we would treat as old
capital only those assets of the existing hospital that met the
definition of old capital (as defined in Sec. 412.302(b)) prior to the
merger, for purposes of determining payments after the merger.
    Any assets of the existing hospital that were considered new
capital prior to the merger would still be considered new capital after
the merger. However, the merger cannot be used to convert the existing
hospital's new capital into old capital. After the merger, the
discharges of each campus of the merged entity would maintain their
pre-merger payment methodology until the end of the 2-year period that
the new hospital campus is eligible for reasonable cost reimbursement
as defined at Sec. 412.324(b). That is, the discharges at the new
hospital would be paid based on 85 percent of its allowable Medicare
hospital capital-related costs, while discharges from the existing
hospital would continue to be paid under that hospital's methodology,
that is, fully prospective or hold-harmless. At the end of this period,
the intermediary would calculate a hospital specific rate for the
``new'' campus of the merged hospital. Finally, the calculation
methodology for hospital mergers at new Sec. 412.331(a)(1) and (2)
would be performed and a combined hospital-specific rate would be
determined and a payment methodology selected for the merged hospital
as a whole.
    The calculation at Sec. 412.331(a)(1) and (2) uses each hospital's
base year old capital costs. Any new capital of the previously existing
hospital would not be used in the determination. If the merged entity
qualifies for the hold-harmless payment methodology, only the capital
which meets the definition of old capital at Sec. 412.302(b) would be
eligible for hold-harmless payments.
    We received one comment on our proposal.
    Comment: One hospital association commented on the policy that only
the assets of the existing hospital that met the definition of old
capital prior to the merger would be treated as old capital after the
merger, even if all of the capital had been acquired and put into use
during the new hospital's base year. They also stated that the proposal
changes the regulatory definition of a new hospital's old capital,
revises its payment methodology determination, and creates special
payment rules for new hospitals that merge with existing hospitals. The
commenter also states that a hospital in a situation similar to that
described in our example was told that after a merger between a new
hospital and an existing hospital, all assets acquired by the new
hospital in the base year would become old capital costs. The commenter
suggests that if HCFA will not reconsider the proposed change, at least
it should not be applied retroactively.
    Response: As indicated in the proposed rule, we addressed this
issue because questions have arisen regarding application of our rules
for payment for new hospitals in merger situations. Accordingly, we
proposed to clarify the application of our rules in merger situations.
Before the proposed rule, we had not specifically addressed in the
Federal Register the issue of mergers between an ``existing'' hospital
and a ``new'' hospital, but our clarification is consistent with
existing rules; the clarification does not reflect new policy or a
change in policy that can only be applied prospectively.
    The commenter is correct that with regard to the capital of the
existing hospital that merges with a new hospital, our proposal would
treat as old capital only capital that qualified as old capital prior
to the merger. Any capital that was new capital of the existing
hospital prior to the merger would remain new capital after the merger.
The new hospital will be paid 85 percent of its allowable Medicare
inpatient hospital capital-related costs through its

[[Page 40999]]

cost reporting period ending at least two years after the hospital
accepts its first patient. In our September 1, 1992 final rule (57 FR
39789), we clarified that the new hospital exemption under the capital
prospective payment system would not apply to a facility that opened as
an acute care hospital if that hospital had previously operated under
current or prior ownership and had a historic asset base. We also
clarified that even a hospital that replaced its entire facility (with
or without a change of ownership) would not qualify for a new hospital
exemption and that a previously existing PPS-excluded hospital (paid
under section 1886(b) of the Act) that became an acute care hospital
(paid under section 1886(d)) of the Act would not qualify as a new
hospital. With this current proposal we are clarifying our rules as
they apply to a new hospital which merges with an existing hospital.
    When a new hospital merges with an existing hospital that has
already had the benefit of reasonable cost reimbursement prior to the
inception of capital PPS, on October 1, 1991, we believe it would be
inappropriate for all of the capital assets of a previously existing
hospital to be eligible for payment as old capital simply because it
merged with a new hospital. As with the other situations that we
clarified in 1992, this current clarification of the regulation at
Sec. 412.331(a)(3) is consistent with the principle that the new
hospital exemption should only be available to those hospitals that had
not received reasonable cost payments in the past and needed special
payment protection during their initial period of operation. Our policy
seeks to ensure that when a new hospital acquires the assets of an
existing hospital through a merger, any assets of the existing hospital
that were previously considered new capital prior to the merger are not
transformed to old capital, as a result of the merger. The new hospital
will still be paid 85 percent of its allowable Medicare capital-related
costs for all other assets it acquires through the end of its base
period.
    The commenter fails to note that our current payment rules at
Sec. 412.331(a)(3) for merger situations already provide that only the
existing capital-related costs related to the assets of each merged or
consolidated hospital as of December 31, 1990 are recognized as old
capital costs during the transition period. If the merged hospital is
paid under the hold-harmless methodology after merger or consolidation,
only that original base year old capital is eligible for hold-harmless
payments. These rules mean that in cases of a merger between two
existing hospitals, only the capital assets which were recognized as
old capital prior to December 31, 1990 are eligible for payment as old
capital after the merger. We are clarifying that this principle would
also apply to the situation of merger between an existing hospital and
a new hospital. The regulation that defines a new hospital's old
capital was not intended to apply to capital acquired through merger
with an existing hospital subject to capital PPS.
    Finally, the commenter is mistaken that HCFA has previously ruled
that the new capital assets of an existing hospital could be paid as
old capital after a merger with a new hospital. In fact, our policy is
consistent with our regulation at Sec. 412.331(a)(3) cited above, in
that only the existing capital-related costs related to the assets of
each merged or consolidated hospital as of December 31, 1990 are
recognized as old capital costs during the transition period.
    We are implementing this clarification as proposed. For an example
of how our policy works, see the May 8, 1998 proposed rule (63 FR
25601).

C. Special Exceptions Process

    As described in Sec. 412.348(g) of the regulations, an additional
payment may be made for up to 10 years beyond the end of the capital
PPS transition period for eligible hospitals that meet: (1) a project
need requirement, (2) a project size requirement, and, (3) in the case
of certain urban hospitals, an excess capacity test. The regulation
establishing this special exceptions provision, and describing the
criteria by which eligible hospitals qualify, was published on
September 1, 1994 (59 FR 45385). At that time we described the purpose
of the special exceptions process as ``* * * narrowly defined, focusing
on a small group of hospitals who found themselves in a disadvantaged
position. The target hospitals were those who had an immediate and
imperative need to begin major renovations or replacements just after
the beginning of the capital prospective payment system. These
hospitals would not be eligible for protection under the old capital
and obligated capital provisions, and would not have been allowed any
time to accrue excess capital prospective payments to fund these
projects.''
    The special exceptions process is available to certain classes of
hospitals that meet the eligibility criteria described at
Sec. 412.348(g)(1). The eligible classes of hospitals are sole
community hospitals; urban hospitals with at least 100 beds that either
have a disproportionate share percentage of 20.2 percent or receive at
least 30 percent of their revenue from State or local funds for
indigent care; and hospitals with a combined inpatient Medicare and
Medicaid utilization of at least 70 percent.
    Eligible hospitals must satisfy a project need requirement as
described at Sec. 412.348(g)(2) and a project size requirement as
described at Sec. 412.348(g)(5). For hospitals in States with
Certificate of Need (CON) requirements, the project need requirement is
satisfied by obtaining CON approval. For other hospitals, the project
need requirement is satisfied by meeting an age of assets test. The
project size requirement is satisfied if the hospital completes the
qualifying project during the period beginning on or after its first
cost reporting period beginning on or after October 1, 1991 to the end
of its last cost reporting period beginning before October 1, 2001, and
the project meets certain cost thresholds specified in the regulations.
    The minimum payment level for qualifying hospitals is 70 percent of
allowable capital-related costs. A qualifying hospital may receive
payments for up to ten years from the year which it completes a
qualifying project. Finally, the regulations at Sec. 412.348(g)(8)
describe the cumulative payment comparison and offsetting amounts which
are used to determine a qualifying hospital's exception payment.
    A few hospitals have expressed concern with the required completion
date of October 1, 2001, and other qualifying criteria for the special
exceptions. When we established the special exceptions process, we
selected the hospital's cost reporting period beginning before October
1, 2001 as the project completion date, because hospitals are eligible
to receive special exceptions payments for up to ten years from the
year in which they complete their project. If a project is completed by
September 30, 2001, then exceptions payments could continue up to
October 30, 2011. We intended to limit cost-based exceptions payments
to the period not more than ten years beyond the end of the transition
to fully prospective payment for capital. When we adopted the criteria
for the special exceptions process, we selected the project completion
date with the goal of not extending this transition unnecessarily. In
addition, we believed that eligible hospitals will not have had the
opportunity to reserve prior year capital PPS payments for financing
projects begun in the early years of PPS.

[[Page 41000]]

    In order for us to analyze the impact of potential changes in the
special exceptions policies, we are soliciting the following
information on major capital construction projects as defined at
Sec. 412.348(g)(5) that will be put to use for patient care on or after
October 1, 1996:
    (1) Name, address, phone number and provider number of hospital;
    (2) Cost of capital project;
    (3) Date of CON approval, if required;
    (4) Start date of project; and
    (5) Anticipated completion date.
    Please forward this information by September 30, 1998 to the
Division of Acute Care, Attention: Cassandra Black at the following
address: HCFA, C4-01-26, 7500 Security Blvd., Baltimore, Md. 21244-
1850. We will analyze the data to determine whether any changes in the
special exceptions policies are necessary. Any changes, if necessary,
would be included in next year's FY 2000 proposed rule for hospital
PPS.

VI. Changes for Hospitals and Units Excluded From the Prospective
Payment System

Limits on and Adjustments to the Target Amounts for Excluded Hospitals
and Units (Sec. 413.40(g))

1. Updated Caps
    Section 1886(b)(3) of the Act as amended by section 4414 of the BBA
established caps on the target amounts for excluded hospitals and units
for cost reporting periods beginning on or after October 1, 1997,
through September 30, 2002. The caps on the target amounts apply to the
following three categories of excluded hospitals: psychiatric hospitals
and units, rehabilitation hospitals and units, and long-term care
hospitals. 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.
    A discussion of how the caps on the target amounts were calculated
for cost reporting periods beginning during FY 1998 can be found in the
August 29, 1997, final rule with comment period (62 FR 46018). On March
6, 1998, we published a correction notice correcting the caps for FY
1998 (63 FR 11148).
    In the May 8 proposed rule for FY 1999, we published proposed caps
for cost reporting periods beginning during FY 1999 (63 FR 25601);
however, the caps that we published inadvertently reflected updates to
the amounts published on August 29, 1997, rather than the corrected
amounts published on March 6, 1998 (see May 13, 1998 correction notice,
63 FR 26565). Thus, as corrected, the proposed caps for FY 1999 were as
follows:

(1) Psychiatric hospitals and units: $10,797
(2) Rehabilitation hospitals and units: $19,582
(3) Long-term care hospitals: $38,630

These proposed caps reflected an update of 2.5 percent, the projected
market basket percentage increase at the time we developed the proposed
rule.
    The final projection of the market basket percentage for excluded
hospitals and units for FY 1999, based on the most recent data
available, is 2.4 percent. Accordingly, the final caps on the target
amounts for existing hospitals for cost reporting periods beginning
during FY 1999 are as follows:

(1) Psychiatric hospitals and units: $10,787
(2) Rehabilitation hospitals and units: $19,562
(3) Long-term care hospitals: $38,593
2. New Excluded Hospitals and Units (Sec. 413.40(f))
    Section 1886(b)(7) of the Act establishes a new statutory payment
methodology for new psychiatric hospitals and units, rehabilitation
hospitals and units, and long-term care hospitals. Under the statutory
methodology, for a hospital that is within a class of hospitals
specified in the statute and which first receives payments on or after
October 1, 1997, the amount of payment will be determined as follows.
For each of the first two cost reporting periods, the amount of payment
is lesser of (1) the operating costs per case, or (2) 110 percent of
the national median of target amounts for the same class of hospitals
for cost reporting periods ending during FY 1996, updated and adjusted
for differences in area wage levels.
    In the August 29, 1997 final rule with comment period, we published
the figures for 110 percent of the national median of target amounts
for each class of hospital (62 FR 46020). In the May 12, 1998 final
rule for FY 1998, we revised the figure for long-term care hospitals to
$21,494 (63 FR 26347).
    The table below lists 110 percent of the wage neutral national
median target amounts for each class of excluded hospitals for cost
reporting periods beginning during FY 1999. These figures reflect
updates to the final FY 1998 figures by the projected market basket
increase of 2.4 percent. For a new provider, the labor-related share of
the target amount should be multiplied by the appropriate geographic
area wage index and added to the nonlabor-related share in order to
determine the limit on payment under the statutory payment methodology
for new providers.

------------------------------------------------------------------------
                                                      Labor-   Nonlabor-
                       Total                         related    related
                                                      share      share
------------------------------------------------------------------------
(1) Psychiatric...................................     $6,214     $2,472
(2) Rehabilitation................................     12,219      4,858
(3) Long-Term Care................................     15,749      6,261
------------------------------------------------------------------------

    3. Classification of Hospitals and Units (Sec. 413.40(c))
    In the May 8 proposed rule, we stated that, after publication of
the August 29, 1997 final rule with comment period, some excluded
facilities had suggested that if they are currently excluded as one
class of hospital or unit but also qualify for exclusion as another
class of hospital, they should be permitted to choose which
classification applies for purposes of applying the cap on target
amounts. For example, some hospitals that participate in Medicare as
psychiatric hospitals (defined under section 1861(f) of the Act, and
the special conditions of participation in 42 CFR part 482 subpart E)
have noted that they have average lengths of stay greater than 25 days.
Those hospitals have asked to be ``reclassified'' as long-term care
hospitals and given the benefit of the higher cap on target amounts
applicable to that hospital class.
    In the proposed rule, we indicated that we had considered these
hospitals' suggestions but, for reasons explained in that document,
believed it would not be appropriate to adopt them. Accordingly, in the
May 8 proposed rule, we proposed to revise Sec. 413.40(c)(4)(iii) to
specify that, for purposes of that paragraph, the classification of a
hospital that was excluded from the prospective payment system for its
cost reporting period ending in FY 1996 would be determined by its
classification (that is, the basis on which it was excluded) in FY
1996. If a hospital or unit was not excluded for a cost reporting
period ending in FY 1996, but could be excluded on more than one basis
(for example, as either a rehabilitation or long-term care hospital) in
a given cost reporting period, it would be assigned to the
classification group with the lowest limit.
    Comment: One commenter agreed that psychiatric hospitals should not
be allowed the higher cap on target amounts that is applicable to long-
term care hospitals, even if they also have average lengths of
inpatient stay greater than 25 days. The commenter pointed out that
psychiatric hospitals participate in Medicare under a provision of the
law (section 1861(f) of the Act) that is separate from the provision
applicable

[[Page 41001]]

to other excluded hospitals (section 1861(e) of the Act), and that the
exclusion criteria for psychiatric hospitals differ from those for
other hospitals. The commenter stated that because of these
differences, a psychiatric hospital could not qualify for exclusion as
another type of hospital or be eligible for the cap that applies to
another type of hospital. The commenter suggested that it is
unnecessary to specify that a psychiatric hospital cannot qualify for
the cap on target amounts applicable to long-term care or other types
of excluded hospitals.
    Response: If a hospital qualifies under more than one of the
exclusion criteria pursuant to section 1886(d)(1)(B) of the Act, we
would apply the lowest applicable cap to the hospital. For example,
where a hospital qualifies as both a rehabilitation and long-term care
hospital, we will apply the lower rehabilitation hospital cap to the
hospital. Since this rule applies to all PPS-excluded hospitals,
whether a psychiatric hospital can qualify as another type of hospital
or not, the policy of applying the lowest cap is still needed.
    Comment: One commenter pointed out that some non-psychiatric
(section 1861(e) of the Act) hospitals might be able to qualify for
exclusion either as rehabilitation or as long-term care hospitals. The
commenter stated that in many cases such facilities are excluded as
long-term care hospitals. Therefore, the commenter recommended that any
hospital in this category be given the benefit of the long-term care
hospital cap.
    Response: We understand that some hospitals may simultaneously be
able to qualify for exclusion on more than one basis. If a hospital is
excluded from PPS as a certain type of hospital, we believe the
hospital should be subject to the cap applicable for that class of
hospital, even if it qualifies for exclusion on another basis. Thus, if
a hospital qualifies for exclusion on more than one basis, then it is
subject to all applicable caps, which in turn means the hospital's
target amount cannot exceed the lowest of the applicable caps. We
believe this policy not only is appropriate, but also provides greater
incentives for efficient and cost-effective operation.
    Comment: Two commenters stated that if a hospital is classified as
one type of hospital in any period to which the limits apply, and does
not simultaneously qualify for exclusion on any other basis, the law
(section 1886(b)(3) of the Act) does not authorize application of any
cap other than the one applicable to the exclusion category to which
the hospital is assigned. One commenter stated that this is the case
even if the basis for the hospital's exclusion in a given cost
reporting period is different than the basis for its exclusion for the
cost reporting period ending during FY 1996 (for example, a hospital
may have been excluded as a rehabilitation hospital during that period
and later qualified for exclusion as a long-term care hospital).
    Response: We agree with the commenter that, if the basis for a
hospital's exclusion for a given cost reporting period is different
than the basis for the hospital's exclusion for the cost reporting
period ending during FY 1996, the earlier basis of exclusion should not
control which cap applies. We are revising Sec. 413.40(c)(4)(iv)
accordingly. Thus, in applying the caps to excluded hospitals (or
units), we will consider only the current basis (or bases) for
exclusion. As stated above, if a hospital qualifies for more than one
type of exclusion, its target amount may not exceed the lowest of the
applicable caps.
    We note that, for the reasons explained in the proposed rule, we
continue to be concerned that hospitals and units may seek changes in
their basis of exclusion solely to take advantage of a higher cap, and
that the resulting changes could compromise the effectiveness of the
caps. We will monitor this situation carefully and may seek further
legislative changes to the extent necessary to preserve the
effectiveness of the caps.
    Comment: One commenter recommended that the regulations be revised
to state that where two hospitals who are subject to different caps on
TEFRA limits merge, the TEFRA cap that applies is the cap of the
surviving hospital.
    Response: If two hospitals merge, the cap that applies depends on
the status of the surviving entity. However, we do not believe that the
regulations as described above, can be interpreted in any other way.
Therefore, we do not agree that the regulations need to be revised to
specifically address this situation.
    Comment: One commenter suggested that if a new hospital subject to
the limits revised under Sec. 413.40(f)(2)(ii) changes the basis on
which it is excluded from the PPS (for example, from being a
rehabilitation hospital to a long-term care hospital), the cap applied
for purposes of the comparison should be the cap applicable to the
hospital's ``current'' exclusion category, not the hospital's previous
exclusion category.
    Response: We agree that the cap applied should be based on the
exclusion category for which the hospital currently qualifies. In light
of the changes made in response to comments described above, we do not
believe the regulations need to be further revised.
4. Exceptions
    The August 29, 1997 final rule with comment period (62 FR 46018)
specified that a hospital that has a target amount that is capped at
the 75th percentile, would not be granted an adjustment payment to the
target amount (also referred to as an exception payment) as governed by
Sec. 413.40(g)(3) based solely on a comparison of its costs or patient
mix in its base year to its costs or patient mix in the payment year.
Since the hospital's target amount would not be determined based on its
own experience in a base year, any comparison of costs or patient mix
in its base year to costs or patient mix in the payment year would be
irrelevant.
    In addition, in the May 8, 1998 proposed rule, we proposed to
clarify that, to the extent we grant an exception in accordance with
Sec. 413.40(g)(3) to a hospital not affected by the cap, the amount of
the exception would be limited to the cap on the hospital's target
amount. By establishing caps on TEFRA target amounts, Congress has
limited payments to individual hospitals based on amounts that reflect
the cost experience of other hospitals. Therefore, in determining the
extent of any adjustment paid to a hospital as an exception under our
regulations at Sec. 413.40(g)(3), we believe it is consistent with
Congressional intent to limit the extent of the adjustment to the
hospital's cap on its target amount.
    We proposed to revise Sec. 413.40(g)(1) in order to set forth the
limitation on the adjustment payments.
    Comment: One commenter stated that the proposed rule conflicts with
section 1886(b)(4)(A)(i) of the Act, which requires HCFA to provide for
adjustments to providers who exceed their TEFRA ceiling. The commenter
also believed that our proposed provision limiting the TEFRA exception
to the TEFRA cap is inconsistent with HCFA's past TEFRA adjustment
processing practices. The commenter also stated that the proposed rule
would adversely affect beneficiaries by limiting the scope and extent
of services that hospitals in high wage areas are financially able to
deliver. For these reasons, the commenter requested that HCFA modify
the proposed rule to permit the granting of exceptions to the TEFRA
cap.
    Response: Section 1886(b)(4)(A)(i) of the Act provides that the
Secretary

[[Page 41002]]

``shall provide'' for exceptions and adjustments ``where events beyond
the hospital's control or extraordinary circumstances, including
changes in the case mix of such hospital, create a distortion in the
increase in costs for a cost reporting period.'' Prior to the enactment
of Public Law 105-33, the payment for each excluded hospital was
limited by a hospital-specific target amount, which was updated each
year. The exceptions and adjustments provision provided for payments
above the hospital's target amount if the hospital experienced ``a
distortion in the increase in costs'' for a given period. Thus, a
hospital could receive an exception based on its cost experience.
    The BBA enacted a system of caps which significantly changed the
TEFRA payment system. Under the new system of TEFRA caps, a hospital's
payments are not based solely on its own cost experience; instead, a
hospital is now subject to a cap based on the cost experience of other
hospitals.
    We believe our policies harmonize the exceptions provision and the
cap provision. Under our policies, a hospital whose target amount is
below the cap may receive an exception up to the cap. Thus, consistent
with the mandate of section 1886(b)(4) of the Act, we continue to
provide for exceptions, contrary to the assertion of the commenter.
However, by establishing caps on TEFRA target amounts, Congress has
limited payments to individual hospitals based on amounts that reflect
the cost experience of other hospitals. Therefore, in determining the
extent of any adjustment paid to a hospital as an exception under our
regulations, we believe it is consistent with Congressional intent to
limit the extent of the adjustment to the hospital's cap on its target
amount. If a hospital's otherwise applicable target amount is above the
cap, it cannot receive an exception based solely on a comparison of its
current year costs or patient mix to base year costs or patient mix.

VII. MedPAC Recommendations

    As required by law, we have reviewed the March 1998 report
submitted by MedPAC to Congress and gave its recommendations careful
consideration in conjunction with the proposals set forth in the
proposed rule. We also responded to the individual recommendations in
the proposed rule. The comments we received on the treatment of the
MedPAC recommendations are set forth below along with our responses to
those comments. However, if we received no comments from the public
concerning a MedPAC recommendation or our response to that
recommendation, we have not repeated the recommendation and response in
the discussion below. Recommendations concerning the update factors for
inpatient operating costs and for hospitals and hospital distinct-part
units excluded from the prospective payment system are discussed in
Appendix C, of this final rule.

Potential Effects of Target Amount Caps

    Recommendation: The wage-related portion of the excluded hospital
target amount caps should be adjusted by the appropriate hospital wage
index to account for geographic differences in wages. (For more
information see Volume 1, chapter 7, page 71 of the March 1998 report.)
    Response in the Proposed Rule: As MedPAC indicated in its
recommendation, legislation would be required to adjust the target
amount caps in such a substantial manner as to adjust for differences
in area labor costs.
    Comment: Several commenters believed that the caps on the target
amounts should be wage adjusted in order to recognize the different
labor markets. They believe to do otherwise would be unfair and
inequitable and may cause hospitals to cut back on services they
provide to their Medicare beneficiaries.
    Response: We previously addressed this issue in the final rule
published in the Federal Register on May 12, 1998 (63 FR 26345). Our
decision, as expressed in our response in that final rule, remains
unchanged.

VIII. Other Required Information

Requests for Data From the Public

    In order to respond promptly to public requests for data related to
the prospective payment system, we have set up a process under which
commenters can gain access to the raw data on an expedited basis.
Generally, the data are available in computer tape format or
cartridges; however, some files are available on diskette, and on the
Internet at HTTP://WWW.HCFA.GOV/STATS/PUBFILES.HTML. In our May 8
proposed rule, we published a list of data files that are available for
purchase (63 FR 25603).

List of Subjects

42 CFR Part 405

    Administrative practice and procedure, Health facilities, Health
professions, Kidney diseases, Medicare, Reporting and recordkeeping
requirements, Rural areas, X-rays.

42 CFR Part 412

    Administrative practice and procedure, Health facilities, Medicare,
Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Puerto Rico,
Reporting and recordkeeping requirements.

    42 CFR Chapter IV is amended as set forth below:
    A. Part 405 is amended as follows:

PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED

    1. The authority citation for part 405 is revised to read as
follows:

    Authority: Secs. 1102, 1861, 1862(a), 1871, 1874, 1881, and
1886(k) of the Social Security Act (42 U.S.C. 1302, 1395x, 1395y(a),
1395hh, 1395kk, 1395rr and 1395ww(k)), and sec. 353 of the Public
Health Service Act (42 U.S.C. 263a), unless otherwise noted.

Subpart X--Rural Health Clinic and Federally Qualified Health
Center Services

    2. In Sec. 405.2468, a new paragraph (f) is added to read as
follows:

Sec. 405.2468  Allowable costs

* * * * *
    (f) Graduate medical education. (1) Effective for that portion of
cost reporting periods occurring on or after January 1, 1999, if an RHC
or an FQHC incurs ``all or substantially all'' of the costs for the
training program in the nonhospital setting as defined in
Sec. 413.86(b) of this chapter, the RHC or FQHC may receive direct
graduate medical education payment for those residents.
    (2) Direct graduate medical education costs are not included as
allowable cost under Sec. 405.2466(b)(1)(i); and therefore, are not
subject to the limit on the all-inclusive rate for allowable costs.
    (3) Allowable graduate medical education costs must be reported on
the RHC's or the FQHC's cost report under a separate cost center.
    (4) Allowable graduate medical education costs are non-reimbursable
if payment for these costs are received from a hospital or a
Medicare+Choice organization.
    (5) Allowable direct graduate medical education costs under
paragraphs (f)(6) and (f)(7)(i) of this section, are subject to
reasonable cost principles under part 413 and the reasonable
compensation equivalency limits in Secs. 415.60 and 415.70 of this
chapter.
    (6) The allowable direct graduate medical education costs are those
costs

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