```

[Federal Register Volume 76, Number 87 (Thursday, May 5, 2011)]
[Proposed Rules]
[Pages 25788-26084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-9644]

[[Page 25787]]

Vol. 76

Thursday,

No. 87

May 5, 2011

Part II

Department of Health and Human Services

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 Centers for Medicare & Medicaid Services

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42 CFR Parts 412, 413, and 476

Medicare Program; Proposed Changes to the Hospital Inpatient 
Prospective Payment Systems for Acute Care Hospitals and the Long-Term 
Care Hospital Prospective Payment System and Fiscal Year 2012 Rates; 
Proposed Rule

Federal Register / Vol. 76, No. 87 / Thursday, May 5, 2011 / Proposed 
Rules

[[Page 25788]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, and 476

[CMS-1518-P]
RIN 0938-AQ24

Medicare Program; Proposed Changes to the Hospital Inpatient 
Prospective Payment Systems for Acute Care Hospitals and the Long-Term 
Care Hospital Prospective Payment System and Fiscal Year 2012 Rates

AGENCY: Centers for Medicare and Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient 
prospective payment systems (IPPS) for operating and capital-related 
costs of acute care hospitals to implement changes arising from our 
continuing experience with these systems and to implement certain 
statutory provisions contained in the Patient Protection and Affordable 
Care Act and the Health Care and Education Reconciliation Act of 2010 
(collectively known as the Affordable Care Act) and other legislation. 
These changes would be applicable to discharges occurring on or after 
October 1, 2011. We also are setting forth the proposed update to the 
rate-of-increase limits for certain hospitals excluded from the IPPS 
that are paid on a reasonable cost basis subject to these limits. The 
proposed updated rate-of-increase limits would be effective for cost 
reporting periods beginning on or after October 1, 2011.
    We are proposing to update the payment policy and the annual 
payment rates for the Medicare prospective payment system (PPS) for 
inpatient hospital services provided by long-term care hospitals 
(LTCHs) and implement certain statutory changes made by the Affordable 
Care Act. These changes would be applicable to discharges occurring on 
or after October 1, 2011.

DATES: Comment Period: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
EDT on June 20, 2011.

ADDRESSES: When commenting, please refer to file code CMS-1518-P. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation at http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the file code CMS-1518-P to submit 
comments on this proposed rule.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1518-P, P.O. Box 8011, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1518-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses:
    a. Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Tzvi Hefter, (410) 786-4487, and Ing-Jye Cheng, (410) 786-4548, 
Operating Prospective Payment, MS-DRGs, Hospital Acquired Conditions 
(HAC), Wage Index, New Medical Service and Technology Add-On Payments, 
Hospital Geographic Reclassifications, Capital Prospective Payment, 
Excluded Hospitals, Medicare Disproportionate Share Hospital (DSH), and 
Postacute Care Transfer Issues.
Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, 
Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG 
Relative Weights Issues.
Bridget Dickensheets, (410) 786-8670, Rebasing and Revising of the 
Market Basket for LTCHs Issues.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Program Issues.
James Poyer, (410) 786-2261, Inpatient Quality Reporting--Program 
Administration, Validation, and Reconsideration Issues.
Shaheen Halim, (410) 786-0641, Inpatient Quality Reporting--Measures 
Issues Except Hospital Consumer Assessment of Healthcare Providers and 
Systems Issues; and Readmission Measures for Hospitals Issues.
Elizabeth Goldstein, (410) 786-6665, Inpatient Quality Reporting--
Hospital Consumer Assessment of Healthcare Providers and Systems 
Measures Issues.
Mary Pratt, (410) 786-6867, LTCH Quality Data Reporting Issues.
Kim Spaulding Bush, (410) 786-3232, Hospital Value-Based Purchasing 
Efficiency Measures Issues.

SUPPLEMENTARY INFORMATION: 
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions at that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection, generally beginning approximately 3 weeks after publication 
of a document, at the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, 
Monday through Friday of each week from 8:30 a.m. to 4:00 p.m. To 
schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

    This Federal Register document is also available from the Federal 
Register

[[Page 25789]]

online database through GPO Access, a service of the U.S. Government 
Printing Office. Free public access is available on a Wide Area 
Information Server (WAIS) through the Internet and via asynchronous 
dial-in. Internet users can access the database by using the World Wide 
Web, (the Superintendent of Documents' home Web page address is http://www.gpoaccess.gov/), by using local WAIS client software, or by telnet 
to swais.access.gpo.gov, then login as guest (no password required). 
Dial-in users should use communications software and modem to call 
(202) 512-1661; type swais, then login as guest (no password required).

Tables Available Only Through the Internet on the CMS Web Site

    In the past, a majority of the tables referred to throughout this 
preamble and in the Addendum to this proposed rule were published in 
the Federal Register as part of the annual proposed and final rules. 
However, beginning in FY 2012, some of the IPPS tables and LTCH PPS 
tables will no longer be published as part of the annual IPPS/LTCH PPS 
proposed and final rules. Instead, these tables will be available only 
through the Internet. The IPPS tables for this proposed rule are 
available only through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the link 
on the left side of the screen titled, ``FY 2012 IPPS Proposed Rule 
Home Page'' or ``Acute Inpatient--Files for Download''. The LTCH PPS 
tables for this FY 2012 proposed rule are available only through the 
Internet on the CMS Web site at: http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the list item for 
Regulation Number CMS-1518-P. For complete details on the availability 
of the tables referenced in this proposed rule, we refer readers to 
section VI. of the Addendum to this proposed rule. Readers who 
experience any problems accessing any of the tables that are posted on 
the CMS Web sites identified above should contact Nisha Bhat at (410) 
786-4487.

Acronyms

3M 3M Health Information System
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
AHA American Hospital Association
AHIC American Health Information Community
AHIMA American Health Information Management Association
AHRQ Agency for Healthcare Research and Quality
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
AMA American Medical Association
AMGA American Medical Group Association
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ARRA American Recovery and Reinvestment Act of 2009, Public Law 111-
5
ASC Ambulatory surgical center
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
ASITN American Society of Interventional and Therapeutic 
Neuroradiology
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554
BLS Bureau of Labor Statistics
CAH Critical access hospital
CARE [Medicare] Continuity Assessment Record & Evaluation 
[Instrument]
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCR Cost-to-charge ratio
CDAC [Medicare] Clinical Data Abstraction Center
CDAD Clostridium difficile-associated disease
CIPI Capital input price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 
99-272
COLA Cost-of-living adjustment
CoP [Hospital] condition of participation
CPI Consumer price index
CRNA Certified Registered Nurse Anesthetist
CY Calendar year
DPP Disproportionate patient percentage
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EDB [Medicare] Enrollment Database
EHR Electronic health record
EMR Electronic medical record
FAH Federation of Hospitals
FDA Food and Drug Administration
FFY Federal fiscal year
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HACs Hospital-acquired conditions
HCAHPS Hospital Consumer Assessment of Healthcare Providers and 
Systems
HCFA Health Care Financing Administration
HCO High-cost outlier
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HICAN Health Insurance Claims Account Number
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HPMP Hospital Payment Monitoring Program
HSA Health savings account
HSCRC [Maryland] Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-CM International Classification of Diseases, Tenth Revision, 
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Revision, 
Procedure Coding System
ICR Information collection requirement
IGI IHS Global Insight, Inc.
IHS Indian Health Service
IME Indirect medical education
I-O Input-Output
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS [Acute care hospital] inpatient prospective payment system
IRF Inpatient rehabilitation facility
IQR Inpatient Quality Reporting
LAMCs Large area metropolitan counties
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MA Medicare Advantage
MAC Medicare Administrative Contractor
MCC Major complication or comorbidity
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MIEA-TRHCA Medicare Improvements and Extension Act, Division B of 
the Tax Relief and Health Care Act of 2006, Public Law 109-432
MIPPA Medicare Improvements for Patients and Providers Act of 2008, 
Public Law 110-275

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MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MRHFP Medicare Rural Hospital Flexibility Program
MRSA Methicillin-resistant Staphylococcus aureus
MSA Metropolitan Statistical Area
MS-DRG Medicare severity diagnosis-related group
MS-LTC-DRG Medicare severity long-term care diagnosis-related group
NAICS North American Industrial Classification System
NALTH National Association of Long Term Hospitals
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NQF National Quality Forum
NTIS National Technical Information Service
NTTAA National Technology Transfer and Advancement Act of 1991 
(Public Law 104-113)
NVHRI National Voluntary Hospital Reporting Initiative
OACT [CMS'] Office of the Actuary
OBRA 86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting [System]
PMSAs Primary metropolitan statistical areas
POA Present on admission
PPACA Patient Protection and Affordable Care Act, Public Law 111-148
PPI Producer price index
PPS Prospective payment system
PRM Provider Reimbursement Manual
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PRTFs Psychiatric residential treatment facilities
PSF Provider-Specific File
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RCE Reasonable compensation equivalent
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution
RPL Rehabilitation psychiatric long-term care (hospital)
RRC Rural referral center
RTI Research Triangle Institute, International
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
TEP Technical expert panel
TMA TMA [Transitional Medical Assistance], Abstinence Education, and 
QI [Qualifying Individuals] Programs Extension Act of 2007, Public 
Law 110-90
UHDDS Uniform hospital discharge data set

Table of Contents

I. Background
    A. Summary
    1. Acute Care Hospital Inpatient Prospective Payment System 
(IPPS)
    2. Hospitals and Hospital Units Excluded From the IPPS
    3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    4. Critical Access Hospitals (CAHs)
    5. Payments for Graduate Medical Education (GME)
    B. Provisions of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) and the Health Care and Education Reconciliation 
Act of 2010 (Pub. L. 111-152) Applicable to FY 2012
    C. Major Contents of This Proposed Rule
    1. Proposed Changes to MS-DRG Classifications and Recalibrations 
of Relative Weights
    2. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals
    3. Other Decisions and Proposed Changes to the IPPS for 
Operating Costs and GME Costs
    4. Proposed FY 2012 Policy Governing the IPPS for Capital-
Related Costs
    5. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    6. Proposed Changes to the LTCH PPS
    7. Proposed Changes to the Electronic Prescribing (eRx) 
Incentive Program
    8. Determining Proposed Prospective Payment Operating and 
Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals
    9. Determining Proposed Prospective Payments Rates for LTCHs
    10. Impact Analysis
    11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    12. Discussion of Medicare Payment Advisory Commission 
Recommendations
II. Proposed Changes to Medicare Severity Diagnosis-Related Group 
(MS-DRG) Classifications and Relative Weights
    A. Background
    B. MS-DRG Reclassifications
    1. General
    2. Yearly Review for Making MS-DRG Changes
    C. Adoption of the MS-DRGs in FY 2008
    D. Proposed FY 2012 MS-DRG Documentation and Coding Adjustment, 
Including the Applicability to the Hospital-Specific Rates and the 
Puerto Rico-Specific Standardized Amount
    1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    2. Prospective Adjustment to the Average Standardized Amounts 
Required by Section 7(b)(1)(A) of Public Law 110-90
    3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Pub. L. 110-90
    4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data
    5. Prospective Adjustment for FY 2010 and Subsequent Years 
Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 
1886(d)(3)(vi) of the Act
    6. Recoupment or Repayment Adjustment for FY 2010 Authorized by 
Section 7(b)(1)(B) of Public Law 110-90
    7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    8. Documentation and Coding Adjustment to the Hospital-Specific 
Rates for FY 2011 and Subsequent Fiscal Years
    9. Application of the Documentation and Coding Adjustment to the 
Puerto Rico-Specific Standardized Amount
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    2. Summary of the RTI Study of Charge Compression and CCR 
Refinement
    3. Summary of Policy Changes Made in FY 2011
    4. Discussion for FY 2012
    F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections
    1. Background
    a. Statutory Authority
    b. HAC Selection
    c. Collaborative Process
    d. Application of HAC Payment Policy to MS-DRG Classifications
    e. Public Input Regarding Selected and Potential Candidate HACs
    f. POA Indicator Reporting
    2. Proposed Additions and Revisions to the HAC Policy for FY 
2012
    a. Contrast-Induced Acute Kidney Injury
    b. New Diagnosis Codes Proposed To Be Added to Existing HACs
    c. Revision to HAC Subcategory Title
    d. Conclusion
    3. RTI Program Evaluation Summary
    a. Background
    b. FY 2009 Data Analysis
    c. FY 2010 Data Analysis
    G. Proposed Changes to Specific MS-DRG Classifications
    1. Pre-Major Diagnostic Categories (Pre-MDCs)
    a. Noninvasive Mechanical Ventilation
    b. Debridement With Mechanical Ventilation Greater Than 96 Hours 
With Major Operating Room (O.R.) Procedure
    c. Autologous Bone Marrow Transplant
    2. MDC 1 (Diseases and Disorders of the Nervous System): 
Rechargeable Dual Array Deep Brain Stimulation System
    3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and 
Throat): Skull Based Surgeries

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    4. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Percutaneous Mitral Valve Repair With Implant
    b. Aneurysm Repair Procedure Codes
    5. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue)
    a. Artificial Discs
    b. Major Joint Replacement or Reattachment of Lower Extremities
    c. Combined Anterior/Posterior Spinal Fusion
    6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous 
Tissue, and Breast): Excisional Debridement of Wound, Infection, or 
Burn
    7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and 
Disorders)
    a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles
    b. Sleeve Gastrectomy Procedure for Morbid Obesity
    8. MDC 15 (Newborns and Other Neonates with Conditions 
Originating in the Perinatal Period): Discharge Status Code 66 
(Discharged/Transferred to Critical Access Hospital (CAH))
    9. Proposed Medicare Code Editor (MCE) Changes
    10. Surgical Hierarchies
    11. Complications or Comorbidity (CC) Exclusions List
    a. Background
    b. Proposed CC Exclusions List for FY 2012
    12. Review of Procedure Codes in MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-
DRGs 987 Through 989 Into MDCs
    b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    c. Adding Diagnosis or Procedure Codes to MDCs
    13. Changes to the ICD-9-CM Coding System, Including Discussion 
of the Replacement of the ICD-9-CM System With the ICD-10-CM and 
ICD-10-PCS Systems in FY 2014
    a. ICD-9-CM Coding System
    b. Code Freeze
    c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on 
Hospital Inpatient Claims
    d. ICD-10 MS-DRGs
    14. Other Issues
    a. O.R./Non-O.R. Status of Procedures
    b. IPPS Recalled Device Policy Clarification
    H. Recalibration of MS-DRG Weights
    I. Proposed Add-On Payments for New Services and Technologies
    1. Background
    2. Public Input Before Publication of a Notice of Proposed 
Rulemaking on Add-On Payments
    3. FY 2012 Status of Technologies Approved for FY 2011 Add-On 
Payments
    a. Spiration[supreg] IBV Valve System
    b. Cardio WestTM Temporary Artificial Heart System 
(Cardio WestTM TAH-t)
    c. Auto Laser Interstitial Thermal Therapy 
(AutoLITTTM) System
    4. FY 2012 Applications for New Technology Add-On Payments
    a. AxiaLIF[supreg] 2L+TM System
    b. ChampionTM HF Monitoring System
    c. PerfectCLEAN With Micrillon[supreg]
III. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals
    A. Background
    B. Core-Based Statistical Areas for the Hospital Wage Index
    C. Proposed Occupational Mix Adjustment to the FY 2012 Wage 
Index
    1. Development of Data for the Proposed FY 2012 Occupational Mix 
Adjustment Based on the 2007-2008 Occupational Mix Survey
    2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index
    3. Calculation of the Proposed Occupational Mix Adjustment for 
FY 2012
    D. Worksheet S-3 Wage Data for the Proposed FY 2012 Wage Index
    1. Included Categories of Costs
    2. Proposal for Changes to the Reporting Requirements for 
Pension Costs for the Medicare Wage Index
    a. Background
    b. Proposal for Allowable Pension Cost for the Medicare Wage 
Index
    3. Excluded Categories of Costs
    4. Use of Wage Index Data by Providers Other Than Acute Care 
Hospitals Under the IPPS
    E. Verification of Worksheet S-3 Wage Data
    F. Method for Computing the Proposed FY 2012 Unadjusted Wage 
Index
    1. Steps for Computation
    2. Expiration of the Imputed Floor Policy
    3. Proposed FY 2012 Puerto Rico Wage Index
    G. Analysis and Implementation of the Proposed Occupational Mix 
Adjustment and the Proposed FY 2012 Occupational Mix Adjusted Wage 
Index
    H. Revisions to the Wage Index Based on Hospital Redesignations 
and Reclassifications
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2012 MGCRB Reclassifications
    a. FY 2012 Reclassification Requirements and Approvals
    b. Applications for Reclassifications for FY 2013
    4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of 
the Act
    5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    6. Reclassifications Under Section 508 of Public Law 108-173
    7. Waiving Lugar Redesignation for the Out-Migration Adjustment
    8. Other Geographic Reclassification Issues
    a. Requested Reclassification for Single Hospital MSAs
    b. Requests for Exceptions to Geographic Reclassification Rules
    I. Proposed FY 2012 Wage Index Adjustment Based on Commuting 
Patterns of Hospital Employees
    J. Process for Requests for Wage Index Data Corrections
    K. Labor-Related Share for the Proposed FY 2012 Wage Index
IV. Other Proposed Decisions and Changes to the IPPS for Operating 
Costs and GME Costs
    A. Hospital Inpatient Quality Reporting Program
    1. Background
    a. Overview
    b. Statutory History and History of Measures Adopted for the 
Hospital IQR Program
    c. Maintenance of Technical Specifications for Quality Measures
    d. Public Display of Quality Measures
    2. Retirement of Hospital IQR Program Measures
    a. Considerations in Retiring Quality Measures from the Hospital 
IQR Program
    b. Proposed Retirement of Quality Measures under the Hospital 
IQR Program for the FY 2014 Payment Determination and Subsequent 
Years
    3. Proposed Quality Measures for the FY 2014 and FY 2015 Payment 
Determinations
    a. Considerations in Expanding and Updating Quality Measures 
Under the Hospital IQR Program
    b. Proposed Hospital IQR Program Quality Measures for the FY 
2014 Payment Determination
    c. Proposed Hospital IQR Program Quality Measures for the FY 
2015 Payment Determination
    4. Possible New Quality Measures and Measure Topics for Future 
Years
    5. Form, Manner, and Timing of Quality Data Submission
    a. Background
    b. Proposed Procedural Requirements for FY 2013 and Subsequent 
Years
    c. Proposed General Data Collection and Submission Requirements
    d. Proposed Data Submission Requirements for Chart-Abstracted 
Measures
    e. Proposed Sampling and Case Thresholds
    f. Proposed HCAHPS Requirements for the FY 2013, FY 2014, and FY 
2015 Payment Determinations
    g. Proposed Procedures for Claims-Based Measures
    h. Proposed Data Submission Requirements for Structural Measures
    i. Proposed Data Submission and Reporting Requirements for 
Healthcare-Associated Infection (HAI) Measures Reported via NHSN
    6. Proposed Chart Validation Requirements for Chart-Abstracted 
Measures
    a. Proposed Chart Validation Requirements and Methods for the FY 
2012 Payment Determination
    b. Proposed Supplements to the Chart Validation Process for the 
FY 2013 Payment Determination and Subsequent Years
    7. Proposed QIO Regulation Changes for Provider Medical Record 
Deadlines Possibly Including Serious Reportable Events
    8. Proposed Data Accuracy and Completeness Acknowledgement 
Requirements for the FY 2012 Payment Determination and Subsequent 
Years
    9. Proposed Public Display Requirements for the FY 2013 Payment 
Determination and Subsequent Years
    10. Proposed Reconsideration and Appeal Procedures for the FY 
2012 Payment Determination

[[Page 25792]]

    11. Proposed Hospital IQR Program Disaster Waivers
    12. Electronic Health Records
    a. Background
    b. HITECH Act EHR Provisions
    B. Hospital Value-Based Purchasing (VBP) Program
    1. Background
    2. Overview of the Hospital VBP Program Proposed Rule
    3. Proposed FY 2014 Hospital VBP Program Measures
    a. Background
    b. Proposed Efficiency Measure--Medicare Spending per 
Beneficiary Measure--for the FY 2014 Hospital VBP Program
    4. Proposed Efficiency Domain (Medicare Spending per Beneficiary 
Measure) Performance Period and Baseline Period
    C. Hospital Readmission Reduction Program
    1. Background
    a. Overview
    b. Statutory Basis for the Hospital Readmission Reduction 
Program
    2. Implementation of the Hospital Readmission Reduction Program
    a. Overview
    b. Proposed Provisions in the FY 2012 IPPS/LTCH PPS Rulemaking
    c. Proposed Provisions To Be Included in the FY 2013 IPPS/LTCH 
PPS Proposed Rule
    d. Proposed Expansion of the Applicable Conditions To Be 
Included in the Future Rulemaking
    3. Proposed Provisions of the Hospital Readmission Reduction 
Program
    a. Proposed Applicable Conditions for FY 2013 Hospital 
Readmission Reduction Program
    b. Proposed Definition of ``Readmissions''
    c. Proposed Readmission Measures and Related Methodology
    D. Rural Referral Centers (RRCs) (Sec.  412.96)
    1. Case-Mix Index (CMI)
    2. Discharges
    E. Payment Adjustment for Low-Volume Hospitals (Sec.  412.101)
    1. Background
    2. Temporary Changes for FYs 2011 and 2012
    3. Proposed Discharge Data Source to Identify Qualifying Low-
Volume Hospitals and Calculate the Payment Adjustment (Percentage 
Increase) for FY 2012
    F. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2012
    G. Payment Adjustment for Medicare Disproportionate Share 
Hospitals (DSHs) and Indirect Medical Education (IME) (Sec. Sec.  
412.105 and 412.106)
    1. Background
    2. Proposed Policy Change Relating to Exclusion of Hospice Beds 
and Patient Days From the Medicare DSH Calculation
    H. Medicare-Dependent, Small Rural Hospitals (MDHs) (Sec.  
412.108)
    1. Background
    2. Extension of the MDH Program
    I. Certified Register Nurse Anesthetists (CRNA) Services 
Furnished in Rural Hospitals and CAHs (Sec.  412.113)
    J. Additional Payments for Qualifying Hospitals with Lowest per 
Enrollee Medicare Spending
    1. Background
    2. Method for Identifying Qualifying Hospitals and Eligible 
Counties
    3. Determination of Annual Payment Amounts
    4. Eligible Counties and Qualifying Hospitals
    5. Payment Determination and Distributions for FY 2011 and FY 
2012
    K. Proposed Changes in the Inpatient Hospital Update
    1. FY 2012 Inpatient Hospital Update
    2. FY 2012 Puerto Rico Hospital Update
    3. Productivity Adjustment
    L. Additional Payments to Hospitals With High Percentage of End-
Stage Renal Disease (ESRD) Discharges (Sec.  412.104)
    M. Proposal for Changes to the Reporting Requirements for 
Pension Costs for Medicare Cost-Finding Purposes
    1. Background
    2. Proposal for Allowable Defined Benefit Pension Plan Cost for 
Medicare Cost-Finding Purposes
    N. Rural Community Hospital Demonstration Program
    1. Background
    2. Changes to the Demonstration Program Made by the Affordable 
Care Act
    3. Proposed FY 2012 Budget Neutrality Adjustment
    a. Component of the Proposed FY 2012 Budget Neutrality 
Adjustment That Accounts for Estimated Demonstration Program Costs 
of the ``Pre-Expansion'' Participating Hospitals
    b. Portion of the Proposed FY 2012 Budget Neutrality Adjustment 
That Accounts for Estimated FY 2012 Demonstration Program Costs for 
Hospitals Newly Selected to Participate in the Demonstration Program
    c. Portion of the Proposed FY 2012 Budget Neutrality Adjustment 
to Offset the Amount by Which the Costs of the Demonstration Program 
in FYs 2007 and 2008 Exceeded the Amount That Was Identified in the 
FYs 2007 and 2008 IPPS Final Rules as the Budget Neutrality Offset 
for FYs 2007 and 2008
    O. Bundling of Payments for Services Provided to Outpatients Who 
Later Are Admitted as Inpatients: 3-Day Payment Window
    1. Background
    2. Establishment of Condition Code 51 (Attestation of Unrelated 
Outpatient Nondiagnostic Services)
    3. Applicability of the Payment Window Policy to Services 
Furnished at Physicians' Practices
    P. Proposed Changes to MS-DRGs Subject to the Postacute Care 
Transfer Policy
    Q. Hospital Services Furnished under Arrangements
V. Proposed Changes to the IPPS for Capital-Related Costs
    A. Overview
    B. Exception Payments
    C. New Hospitals
    D. Hospitals Located in Puerto Rico
    E. Proposed Changes for FY 2012: MS-DRG Documentation and Coding 
Adjustment
    F. Other Proposed Changes for FY 2012
VI. Proposed Changes for Hospitals Excluded From the IPPS
    A. Excluded Hospitals
    B. Critical Access Hospital (CAH) Payment for Ambulance Services
    1. Background
    2. Requirement for CAH Ambulance Within a 35-Mile Location of a 
CAH or Entity
VII. Proposed Changes to the Long-Term Care Hospital Prospective 
Payment System (LTCH PPS) for FY 2012
    A. Background of the LTCH PPS
    1. Legislative and Regulatory Authority
    2. Criteria for Classification as a LTCH
    a. Classification as a LTCH
    b. Hospitals Excluded From the LTCH PPS
    3. Limitation on Charges to Beneficiaries
    4. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
    B. Proposed Medicare Severity Long-Term Care Diagnosis-Related 
Group (MS-LTC-DRG) Classifications and Relative Weights
    1. Background
    2. Patient Classifications into MS-LTC-DRGs
    a. Background
    b. Proposed Changes to the MS-LTC-DRGs for FY 2012
    3. Development of the Proposed FY 2012 MS-LTC-DRG Relative 
Weights
    a. General Overview of the Development of the MS-LTC-DRG 
Relative Weights
    b. Development of the Proposed MS-LTC-DRG Relative Weights for 
FY 2012
    c. Data
    d. Hospital-Specific Relative Value (HSRV) Methodology
    e. Proposed Treatment of Severity Levels in Developing the MS-
LTC-DRG Relative Weights
    f. Proposed Low-Volume MS-LTC-DRGs--Steps for Determining the 
Proposed FY 2012 MS-LTC-DRG Relative Weights
    C. Proposed Quality Reporting Program for LTCHs
    1. Background and Statutory Authority
    2. Proposed Quality Measures for the LTCH Quality Reporting 
Program for FY 2014
    a. Considerations in the Selection of the Proposed Quality 
Measures
    b. Proposed LTCH Quality Measures for FY 2014 Payment 
Determination
    3. Possible LTCH Quality Measures under Consideration for Future 
Years
    4. Proposed Data Submission Methods and Timelines
    a. Proposed Method of Data Submission for HAIs
    b. Proposed Timeline for Data Reporting Related to HAIs
    c. Proposed Method of Data Collection and Submission for the 
Pressure Ulcer Measure Data
    d. Proposed Timeline for Data Reporting Related to Pressure 
Ulcers
    5. Public Reporting and Availability of Data Submitted
    D. Proposed Rebasing and Revising of the Market Basket Used 
Under the LTCH PPS
    1. Background

[[Page 25793]]

    2. Overview of the Proposed FY 2008-Based RPL Market Basket
    3. Proposed Rebasing and Revising of the RPL Market Basket
    a. Development of Cost Categories
    b. Final Cost Category Computation
    c. Selection of Price Proxies
    d. Proposed Methodology for Capital Portion of the RPL Market 
Basket
    e. Proposed FY 2012 Market Basket Update for LTCHs
    f. Proposed Labor-Related Share
    E. Proposed Changes to the LTCH Payment Rates and Other Proposed 
Changes to the FY 2012 LTCH PPS
    1. Overview of Development of the LTCH Payment Rates
    2. Proposed FY 2012 LTCH PPS Annual Market Basket Update
    a. Overview
    b. Revision of Certain Market Basket Updates as Required by the 
Affordable Care Act
    c. Proposed Market Basket Under the LTCH PPS for FY 2012
    d. Productivity Adjustment
    e. Proposed Annual Market Basket Update for LTCHs for FY 2012
    3. Proposed Budget Neutrality Adjustment for the Changes to the 
Area Wage Level Adjustment
    4. Proposed Budget Neutrality Adjustment for the Changes to the 
Area Wage Level Adjustment
    5. Greater Than 25 Day Average Length of Stay Requirement for 
LTCHs
    a. Determining the Average Length of Stay When There Is a Change 
of Ownership
    b. Inclusion of Medicare Advantage (MA) Days in the Average 
Length of Stay Calculation
    F. Proposed Application of LTCH Moratorium on the Increase in 
Beds at Section 114(d)(1)(B) of Public Law 110-173 (MMSEA) to LTCHs 
and LTCH Satellite Facilities Established or Classified as Such 
Under Section 114(d)(2) of Public Law 110-173
VIII. MedPAC Recommendations
IX. Other Required Information
    A. Requests for Data From the Public
    B. Collection of Information Requirements
    1. Legislative Requirement for Solicitation of Comments
    2. ICRs for Add-On Payments for New Services and Technologies
    3. ICRs for the Hospital Inpatient Quality Reporting (IQR) 
Program
    4. ICRs for the Occupational Mix Adjustment to the Proposed FY 
2012 Index (Hospital Wage Index Occupational Mix Survey)
    5. Hospital Applications for Geographic Reclassifications by the 
MGCRB
    6. ICRs for the Proposed Quality Reporting Program for LTCHs
    C. Response to Public Comments
Regulation Text
Addendum--Proposed Schedule of Standardized Amounts, Update Factors, 
and Rate-of-Increase Percentages Effective With Cost Reporting 
Periods Beginning on or After October 1, 2011
     I. Summary and Background
II. Proposed Changes to the Prospective Payment Rates for Hospital 
Inpatient Operating Costs for Acute Care Hospitals for FY 2012
    A. Calculation of the Proposed Adjusted Standardized Amount
    B. Proposed Adjustments for Area Wage Levels and Cost-of-Living
    C. Proposed MS-DRG Relative Weights
    D. Calculation of the Proposed Prospective Payment Rates
III. Proposed Changes to Payment Rates for Acute Care Hospital 
Inpatient Capital-Related Costs for FY 2012
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    B. Calculation of the Proposed Inpatient Capital-Related 
Prospective Payments for FY 2012
    C. Capital Input Price Index
IV. Proposed Changes to Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages for FY 2012
V. Proposed Changes to the Payment Rates for the LTCH PPS for FY 
2012
    A. Proposed LTCH PPS Standard Federal Rate for FY 2012
    B. Proposed Adjustment for Area Wage Levels Under the LTCH PPS 
for FY 2012
    C. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) 
Cases
    D. Computing the Proposed Adjusted LTCH PPS Federal Prospective 
Payments for FY 2012
VI. Tables Referenced in This Proposed Rulemaking and Available 
Through the Internet on the CMS Web Site
Appendix A--Regulatory Impact Analysis
I. Overall Impact
II. Objectives of the IPPS
III. Limitations of Our Analysis
IV. Hospitals Included in and Excluded From the IPPS
V. Effects on Hospitals and Hospital Units Excluded From the IPPS
VI. Quantitative Effects of the Proposed Policy Changes Under the 
IPPS for Operating Costs
    A. Basis and Methodology of Estimates
    B. Analysis of Table I
    C. Impact Analysis of Table II
VII. Effects of Other Proposed Policy Changes
    A. Effects of Proposed Policy on HACs, Including Infections
    B. Effects of Proposed Policy Changes Relating to New Medical 
Service and Technology Add-On Payments
    C. Effects of Requirements for Hospital Inpatient Quality 
Reporting (IQR) Program
    D. Effects of Additional Proposed Hospital Value-Based 
Purchasing (VBP) Program Requirements
    E. Effects of Proposed Requirements for Hospital Readmissions 
Reduction Program
    F. Effects of Proposed Policy Changes Relating to Payment 
Adjustments for Medicare Disproportionate Share Hospitals (DSHs) and 
Indirect Medical Education (IME)
    G. Effects of the FY 2012 Low-Volume Hospital Payment Adjustment
    H. Effects of Proposed Changes Relating to MDHs
    I. Effects of Proposed Policy Relating to CRNA Services 
Furnished in Rural Hospitals and CAHs
    J. Effects of Proposed Changes Relating to ESRD Add-On Payment
    K. Effects of Proposed Changes Relating to the Reporting 
Requirements for Pension Costs for Medicare Cost-Finding and Wage 
Reporting Purposes
    L. Effects of Implementation of Rural Community Hospital 
Demonstration Program
    M. Effects of Proposed Changes to List of MS-DRGs Subject to the 
Postacute Care Transfer and DRG Special Pay Policy
    N. Effects of Proposed Changes Relating to Hospital Services 
Furnished Under Arrangements
    O. Effects of Proposed Change Relating to CAH Payment for 
Ambulance Services
VIII. Effects of Proposed Changes in the Capital IPPS
    A. General Considerations
    B. Results
IX. Effects of Proposed Payment Rate Changes and Policy Changes 
Under the LTCH PPS
    A. Introduction and General Considerations
    B. Impact on Rural Hospitals
    C. Anticipated Effects of Proposed LTCH PPS Payment Rate Change 
and Policy Changes
    D. Effect on the Medicare Program
    E. Effect on Medicare Beneficiaries
X. Alternatives Considered
XI. Overall Conclusion
    A. Acute Care Hospitals
    B. LTCHs
XII. Accounting Statements
    A. Acute Care Hospitals
    B. LTCHs
XIII. Executive Order 12866
Appendix B: Recommendation of Update Factors for Operating Cost 
Rates of Payment for Inpatient Hospital Services
I. Background
II. Inpatient Hospital Update for FY 2012
    A. Proposed FY 2012 Inpatient Hospital Update
    B. Proposed Update for SCHs and MDHs for FY 2012
    C. Proposed FY 2012 Puerto Rico Hospital Update
    D. Proposed Update for Hospitals Excluded From the IPPS
III. Secretary's Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system (PPS). Under these PPSs, 
Medicare payment

[[Page 25794]]

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).
    The base payment rate is comprised of a standardized amount that is 
divided into a labor-related share and a nonlabor-related share. The 
labor-related share is adjusted by the wage index applicable to the 
area where the hospital is located. If the hospital is located in 
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the 
DRG relative weight.
    If the hospital treats a high percentage of certain low-income 
patients, it receives a percentage add-on payment applied to the DRG-
adjusted base payment rate. This add-on payment, known as the 
disproportionate share hospital (DSH) adjustment, provides for a 
percentage increase in Medicare payments to hospitals that qualify 
under either of two statutory formulas designed to identify hospitals 
that serve a disproportionate share of low-income patients. For 
qualifying hospitals, the amount of this adjustment varies based on the 
outcome of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any eligible outlier payment is added to the DRG-adjusted base payment 
rate, plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid in whole or in part based on their hospital-specific rate, which 
is determined from their costs in a base year. For example, sole 
community hospitals (SCHs) receive the higher of a hospital-specific 
rate based on their costs in a base year (the highest of FY 1982, FY 
1987, FY 1996, or FY 2006) or the IPPS Federal rate based on the 
standardized amount. Through and including FY 2006, a Medicare-
dependent, small rural hospital (MDH) received the higher of the 
Federal rate or the Federal rate plus 50 percent of the amount by which 
the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 
hospital-specific rate. As discussed below, for discharges occurring on 
or after October 1, 2007, but before October 1, 2012, an MDH will 
receive the higher of the Federal rate or the Federal rate plus 75 
percent of the amount by which the Federal rate is exceeded by the 
highest of its FY 1982, FY 1987, or FY 2002 hospital-specific rate. 
SCHs are the sole source of care in their areas, and MDHs are a major 
source of care for Medicare beneficiaries in their areas. Specifically, 
section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that 
is located more than 35 road miles from another hospital or that, by 
reason of factors such as isolated location, weather conditions, travel 
conditions, or absence of other like hospitals (as determined by the 
Secretary), is the sole source of hospital inpatient services 
reasonably available to Medicare beneficiaries. In addition, certain 
rural hospitals previously designated by the Secretary as essential 
access community hospitals are considered SCHs. Section 
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is 
located in a rural area, has not more than 100 beds, is not an SCH, and 
has a high percentage of Medicare discharges (not less than 60 percent 
of its inpatient days or discharges in its cost reporting year 
beginning in FY 1987 or in two of its three most recently settled 
Medicare cost reporting years). Both of these categories of hospitals 
are afforded this special payment protection in order to maintain 
access to services for beneficiaries.
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining capital prospective payments is set 
forth in our regulations at 42 CFR 412.308 and 412.312. Under the 
capital IPPS, payments are adjusted by the same DRG for the case as 
they are under the operating IPPS. Capital IPPS payments are also 
adjusted for IME and DSH, similar to the adjustments made under the 
operating IPPS. In addition, hospitals may receive outlier payments for 
those cases that have unusually high costs.
    The existing regulations governing payments to hospitals under the 
IPPS are located in 42 CFR part 412, subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
    Under section 1886(d)(1)(B) of the Act, as amended, certain 
hospitals and hospital units are excluded from the IPPS. These 
hospitals and units are: rehabilitation hospitals and units; long-term 
care hospitals (LTCHs); psychiatric hospitals and units; children's 
hospitals; and cancer hospitals. Religious nonmedical health care 
institutions (RNHCIs) are also excluded from the IPPS. Various sections 
of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-33), the Medicare, 
Medicaid and SCHIP [State Children's Health Insurance Program] Balanced 
Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA, Pub. L. 106-554) provide for the implementation of PPSs 
for rehabilitation hospitals and units (referred to as inpatient 
rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and 
units (referred to as inpatient psychiatric facilities (IPFs)). (We 
note that the annual updates to the LTCH PPS are now included as part 
of the IPPS annual update document. Updates to the IRF PPS and IPF PPS 
are issued as separate documents.) Children's hospitals, cancer 
hospitals, and RNHCIs continue to be paid solely under a reasonable 
cost-based system subject to a rate-of-increase ceiling on inpatient 
operating costs per discharge.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR parts 412 and 413.
3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    The Medicare prospective payment system (PPS) for LTCHs applies to 
hospitals described in section 1886(d)(1)(B)(iv) effective for cost 
reporting periods beginning on or after October 1, 2002. The LTCH PPS 
was established under the authority of sections 123(a) and (c) of 
Public Law 106-113 and section 307(b)(1) of Public Law 106-554 (as 
codified under section 1886(m)(1) of the Act). During the 5-year 
(optional) transition period, a LTCH's payment under the PPS was based 
on an increasing proportion of the LTCH Federal rate with a 
corresponding decreasing proportion based on

[[Page 25795]]

reasonable cost principles. Effective for cost reporting periods 
beginning on or after October 1, 2006, all LTCHs are paid 100 percent 
of the Federal rate. The existing regulations governing payment under 
the LTCH PPS are located in 42 CFR part 412, subpart O. Beginning 
October 1, 2009, we issue the annual updates to the LTCH PPS in the 
same documents that update the IPPS (73 FR 26797 through 26798).
4. Critical Access Hospitals (CAHs)
    Under sections 1814(l), 1820, and 1834(g) of the Act, payments are 
made to critical access hospitals (CAHs) (that is, rural hospitals or 
facilities that meet certain statutory requirements) for inpatient and 
outpatient services are generally based on 101 percent of reasonable 
cost. Reasonable cost is determined under the provisions of section 
1861(v)(1)(A) of the Act and existing regulations under 42 CFR parts 
413 and 415.
5. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act. The amount of payment for direct GME costs 
for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR part 413.

B. Provisions of the Patient Protection and Affordable Care Act (Pub. 
L. 111-148) and the Health Care and Education Reconciliation Act of 
2010 (Pub. L. 111-152) Applicable to FY 2012

    The Patient Protection and Affordable Care Act (Pub. L. 111-148), 
enacted on March 23, 2010, and the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152), enacted on March 30, 
2010, made a number of changes that affect the IPPS and the LTCH PPS. 
(Pub. L. 111-148 and Pub. L. 111-152 are collectively referred to as 
the ``Affordable Care Act.'') A number of the provisions of the 
Affordable Care Act affect the updates to the IPPS and the LTCH PPS and 
providers and suppliers. The provisions of the Affordable Care Act that 
were applicable to the IPPS and the LTCH PPS for FYs 2010 and 2011 were 
implemented in the following documents:
    On June 2, 2010, we issued in the Federal Register a notice (75 FR 
31118) that contained the final wage indices, hospital 
reclassifications, payment rates, impacts, and other related tables, 
effective for the FY 2010 IPPS and the RY 2010 LTCH PPS, which were 
required by or directly resulted from implementation of provisions of 
the Affordable Care Act.
    On August 16, 2010, we issued in the Federal Register a final rule 
(75 FR 50042) that implemented provisions of the Affordable Care Act 
applicable to the IPPS and LTCH/PPS for FY 2011.
    In this proposed rule, we are proposing to implement the following 
provisions (or portions of the following provisions) of the Affordable 
Care Act that are applicable to the IPPS and LTCH PPS for FY 2012:
     Section 3001 of Public Law 111-148, which provides for 
establishment of a hospital value-based purchasing program and 
applicable measures for value-based incentive payments with respect to 
discharges occurring during FY 2013.
     Section 3004 of Public Law 111-148, which provides for the 
submission of quality data for LTCHs in order to receive the full 
annual update to the payment rates and the establishment of quality 
data measures.
     Section 3025 of Public Law 111-148, which provides for a 
hospital readmissions reduction program and related quality data 
reporting measures.
     Section 3124 of Public Law 111-148, which provides for 
extension of the Medicare-dependent, small rural hospital (MDH) program 
through FY 2012.
     Section 3401 of Public Law 111-148, which provides for the 
incorporation of productivity improvements into the market basket 
updates for IPPS hospitals and LTCHs.
    In addition, we are proposing to continue in FY 2012 to implement 
the following provisions, which were initiated in FY 2011:
     Section 10324 of Public Law 111-148, which provided for a 
wage adjustment for hospitals located in frontier States.
     Sections 3401 and 10319 of Public Law 111-148 and section 
1105 of Public Law 111-152, which revise certain market basket update 
percentages for IPPS and LTCH PPS payment rates for FY 2012.
     Sections 3125 and 10314 of Public Law 111-148, which 
provides for temporary percentage increases in payment adjustments to 
low-volume hospitals for discharges occurring in FY 2012.
     Section 1109 of Public Law 111-152, which provides for 
additional payments in FY 2012 for qualifying hospitals in the lowest 
quartile of per capita Medicare spending.

C. Major Contents of This Proposed Rule

    In this proposed rule, we are setting forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs of 
acute care hospitals in FY 2012. We also are setting forth proposed 
changes relating to payments for IME costs and payments to certain 
hospitals that continue to be excluded from the IPPS and paid on a 
reasonable cost basis.
    In addition, in this proposed rule, we are setting forth proposed 
changes to the payment rates, factors, and other payment rate policies 
under the LTCH PPS for FY 2012.
    Below is a summary of the major changes that we are proposing to 
make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights
    In section II. of the preamble of the proposed rule, we include--
     Proposed changes to MS-DRG classifications based on our 
yearly review.
     Proposed application of the documentation and coding 
adjustment for FY 2012 resulting from implementation of the MS-DRG 
system.
     A discussion of the Research Triangle International, Inc. 
(RTI) reports and recommendations relating to charge compression.
     Proposed recalibrations of the MS-DRG relative weights.
     Proposed changes to hospital-acquired conditions (HACs) 
and a listing and discussion of HACs, including infections, that would 
be subject to the statutorily required quality adjustment in MS-DRG 
payments for FY 2012.
    We discussed the FY 2012 status of new technologies approved for 
add-on payments for FY 2011 and present our evaluation and analysis of 
the FY 2012 applicants for add-on payments for high-cost new medical 
services and technologies (including public input, as directed by Pub. 
L. 108-173, obtained in a town hall meeting).
2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals
    In section III. of the preamble to this proposed rule, we are 
proposing revisions to the wage index for acute care hospitals and the 
annual update of the wage data. Specific issues addressed include the 
following:

[[Page 25796]]

     The proposed FY 2012 wage index update using wage data 
from cost reporting periods beginning in FY 2008.
     Analysis and implementation of the proposed FY 2012 
occupational mix adjustment to the wage index for acute care hospitals, 
including discussion of the 2010 occupational mix survey.
     A proposal to change the reporting requirements for 
pension costs for the Medicare wage index.
     Proposed revisions to the wage index for acute care 
hospitals based on hospital redesignations and reclassifications.
     The proposed adjustment to the wage index for acute care 
hospitals for FY 2012 based on commuting patterns of hospital employees 
who reside in a county and work in a different area with a higher wage 
index.
     The timetable for reviewing and verifying the wage data 
used to compute the proposed FY 2012 hospital wage index.
     Determination of the labor-related share for the proposed 
FY 2012 wage index.
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs 
and GME Costs
    In section IV. of the preamble of this proposed rule, we discuss a 
number of the provisions of the regulations in 42 CFR parts 412, 413, 
and 476, including the following:
     The reporting of hospital quality data under the Hospital 
Inpatient Quality Reporting (IQR) Program as a condition for receiving 
the full annual payment update increase.
     The proposed implementation of the Hospital Value-Based 
Purchasing Program measures.
     The proposed establishment of hospital readmisssion 
measures for reporting of hospital quality data.
     The proposed updated national and regional case-mix values 
and discharges for purposes of determining RRC status.
     The statutorily required IME adjustment factor for FY 
2012.
     Proposed payment adjustment for low-volume hospitals.
     Proposal for counting hospice days in the formula for 
determining the payment adjustment for disproportionate share 
hospitals.
     Proposal for making additional payments for qualifying 
hospitals with lowest per enrollee Medicare spending for FY 2012.
     Proposal to clarify ESRD add-on payment requirements based 
on cost report requirements.
     Proposal relating to changes to the reporting requirements 
for pension costs for Medicare cost-finding purposes.
     Proposal to implement statutory change to the hospital 
payment update, including incorporation of a productivity adjustment.
     Discussion of the Rural Community Hospital Demonstration 
Program and a proposal for making a budget neutrality adjustment for 
the demonstration program.
     Discussion of August 2010 interim final rule with comment 
period and further proposed changes relating to the 3-day payment 
window for payments for services provided to outpatients who are later 
admitted as inpatients.
4. Proposed FY 2012 Policy Governing the IPPS for Capital-Related Costs
    In section V. of the preamble to this proposed rule, we discuss the 
proposed payment policy requirements for capital-related costs and 
capital payments to hospitals for FY 2012 and the proposed MS-DRG 
documentation and coding adjustment for FY 2012.
5. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    In section VI. of the preamble of this proposed rule, we discuss 
proposed changes to payments to certain excluded hospitals. In 
addition, we discuss proposed changes relating to payment for TEFRA 
services furnished under arrangements and payment for ambulance 
services furnished by CAH-owned and operated entities.
6. Proposed Changes to the LTCH PPS
    In section VII. of the preamble of this proposed rule, we set forth 
proposed changes to the payment rates, factors, and other payment rate 
policies under the LTCH PPS for FY 2012, including the annual update of 
the MS-LTC-DRG classifications and relative weights for use under the 
LTCH PPS for FY 2012, the proposed documentation and coding adjustment 
under the LTCH PPS for FY 2012, and the proposed rebasing and revising 
of the market basket for LTCHs. In addition, we are setting forth 
proposals for implementing the quality data reporting program for 
LTCHs. We also are proposing to clarify two policies regarding the 
calculation of the average length of stay requirement for LTCHs, and 
proposing a policy to address a LTCH moratorium issue.
7. Determining Proposed Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits for Acute Care Hospitals
    In the Addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the proposed FY 2012 
prospective payment rates for operating costs and capital-related costs 
for acute care hospitals. We also are proposing to establish the 
threshold amounts for outlier cases. In addition, we address the 
proposed update factors for determining the rate-of-increase limits for 
cost reporting periods beginning in FY 2012 for certain hospitals 
excluded from the IPPS.
8. Determining Proposed Prospective Payment Rates for LTCHs
    In the Addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the proposed FY 2012 
prospective standard Federal rate. We also are proposing to establish 
the proposed adjustments for wage levels, the labor-related share, the 
cost-of-living adjustment, and high-cost outliers, including the fixed-
loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH 
PPS.
9. Impact Analysis
    In Appendix A of this proposed rule, we set forth an analysis of 
the impact that the proposed changes would have on affected acute care 
hospitals and LTCHs.
10. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    In Appendix B of this proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provide our recommendations of the 
appropriate percentage changes for FY 2012 for the following:
     A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs of 
acute care hospitals (and hospital-specific rates applicable to SCHs 
and MDHs).
     Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by certain hospitals 
excluded from the IPPS.
     The standard Federal rate for hospital inpatient services 
furnished by LTCHs.
11. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 1 of each year, in which MedPAC 
reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2011 recommendations concerning hospital inpatient 
payment policies address the update factor for hospital inpatient 
operating costs and

[[Page 25797]]

capital-related costs under the IPPS, for hospitals and distinct part 
hospital units excluded from the IPPS. We address these recommendations 
in Appendix B of this proposed rule. For further information relating 
specifically to the MedPAC March 2011 report or to obtain a copy of the 
report, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at: 
http://www.medpac.gov.

II. Proposed Changes to Medicare Severity Diagnosis-Related Group (MS-
DRG) Classifications and Relative Weights

A. Background

    Section 1886(d) of the Act specifies that the Secretary shall 
establish a classification system (referred to as DRGs) for inpatient 
discharges and adjust payments under the IPPS based on appropriate 
weighting factors assigned to each DRG. Therefore, under the IPPS, 
Medicare pays for inpatient hospital services on a rate per discharge 
basis that varies according to the DRG to which a beneficiary's stay is 
assigned. The formula used to calculate payment for a specific case 
multiplies an individual hospital's payment rate per case by the weight 
of the DRG to which the case is assigned. Each DRG weight represents 
the average resources required to care for cases in that particular 
DRG, relative to the average resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
at least annually. These adjustments are made to reflect changes in 
treatment patterns, technology, and any other factors that may change 
the relative use of hospital resources.

B. MS-DRG Reclassifications

1. General
    As discussed in the preamble to the FY 2008 IPPS final rule with 
comment period (72 FR 47138), we focused our efforts in FY 2008 on 
making significant reforms to the IPPS consistent with the 
recommendations made by MedPAC in its ``Report to the Congress, 
Physician-Owned Specialty Hospitals'' in March 2005. MedPAC recommended 
that the Secretary refine the entire DRG system by taking severity of 
illness into account and applying hospital-specific relative value 
(HSRV) weights to DRGs.\1\ We began this reform process by adopting 
cost-based weights over a 3-year transition period beginning in FY 2007 
and making interim changes to the DRG system for FY 2007 by creating 20 
new CMS DRGs and modifying 32 other DRGs across 13 different clinical 
areas involving nearly 1.7 million cases. As described in more detail 
below, these refinements were intermediate steps towards comprehensive 
reform of both the relative weights and the DRG system as we undertook 
further study. For FY 2008, we adopted 745 new Medicare Severity DRGs 
(MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of 
the FY 2008 IPPS final rule with comment period for a full detailed 
discussion of how the MS-DRG system, based on severity levels of 
illness, was established (72 FR 47141).
---------------------------------------------------------------------------

    \1\ Medicare Payment Advisory Commission: Report to the 
Congress, Physician-Owned Specialty Hospitals, March 2005, page 
viii.
---------------------------------------------------------------------------

    Currently, cases are classified into MS-DRGs for payment under the 
IPPS based on the following information reported by the hospital: The 
principal diagnosis, up to eight additional diagnoses, and up to six 
procedures performed during the stay. (We refer readers to section 
II.G.11.c. of this proposed rule for a discussion of our efforts to 
increase our internal systems capacity to process diagnosis and 
procedures on hospital claims to 25 diagnosis codes and 25 procedure 
codes prior to the use of the International Classification of Diseases, 
10th Revision, Clinical Modification (ICD-10-CM) for diagnosis coding 
and the International Classification of Diseases, 10th Revision, 
Procedure Coding System (ICD-10 PCS) for inpatient hospital procedure 
coding, effective October 1, 2013.) In a small number of MS-DRGs, 
classification is also based on the 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) prior to October 1, 
2013. We refer readers to section II.G.11.b. of this proposed rule for 
a reference to the replacement of ICD-9-CM, Volumes 1 and 2, including 
the Official ICD-9-CM Guidelines for Coding and Reporting, Volume 3, 
with the ICD-10-CM and ICD-10-PCS, including the Official ICD-10-CM and 
ICD-10-PCS Guidelines for Coding and Reporting, effective October 1, 
2013 (FY 2014).
    The process of developing the MS-DRGs was begun by dividing all 
possible principal diagnoses into mutually exclusive principal 
diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The 
MDCs were formulated by physician panels to ensure that the DRGs would 
be clinically coherent. The diagnoses in each MDC correspond to a 
single organ system or etiology and, in general, are associated with a 
particular medical specialty. Thus, in order to maintain the 
requirement of clinical coherence, no final MS-DRG could contain 
patients in different MDCs. For example, MDC 6 is Diseases and 
Disorders of the Digestive System. This approach is used because 
clinical care is generally organized in accordance with the organ 
system affected. However, some MDCs are not constructed on this basis 
because they involve multiple organ systems (for example, MDC 22 
(Burns)). For FY 2011, cases were assigned to one of 747 MS-DRGs in 25 
MDCs. The table below lists the 25 MDCs.

[[Page 25798]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.000

    In general, cases are assigned to an MDC based on the patient's 
principal diagnosis before assignment to an MS-DRG. However, under the 
most recent version of the Medicare GROUPER (Version 28.0), there are 
13 MS-DRGs to which cases are directly assigned on the basis of ICD-9-
CM procedure codes. These MS-DRGs are for heart transplant or implant 
of heart assist systems; liver and/or intestinal transplants; bone 
marrow transplants; lung transplants; simultaneous pancreas/kidney 
transplants; pancreas transplants; and tracheostomies. Cases are 
assigned to these MS-DRGs before they are classified to an MDC. The 
table below lists the 13 current pre-MDCs.

[[Page 25799]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.001

    Once the MDCs were defined, each MDC was evaluated to identify 
those additional patient characteristics that would have a consistent 
effect on hospital resource consumption. Because the presence of a 
surgical procedure that required the use of the operating room would 
have a significant effect on the type of hospital resources used by a 
patient, most MDCs were initially divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (0 to 17 years of age or greater than 17 
years of age). Some surgical and medical DRGs are further 
differentiated based on the presence or absence of a complication or 
comorbidity (CC) or a major complication or comorbidity (MCC).
    Generally, nonsurgical procedures and minor surgical procedures 
that are not usually performed in an operating room are not treated as 
O.R. procedures. However, there are a few non-O.R. procedures that do 
affect MS-DRG assignment for certain principal diagnoses. An example is 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones. Lithotripsy procedures are not routinely 
performed in an operating room. Therefore, lithotripsy codes are not 
classified as O.R. procedures. However, our clinical advisors believe 
that patients with urinary stones who undergo extracorporeal shock wave 
lithotripsy should be considered similar to other patients who undergo 
O.R. procedures. Therefore, we treat this group of patients similar to 
patients undergoing O.R. procedures.
    Once the medical and surgical classes for an MDC were formed, each 
diagnosis class was evaluated to determine if complications or 
comorbidities would consistently affect hospital resource consumption. 
Each diagnosis was categorized into one of three severity levels. These 
three levels include a major complication or comorbidity (MCC), a 
complication or comorbidity (CC), or a non-CC. Physician panels 
classified each diagnosis code based on a highly iterative process 
involving a combination of statistical results from test data as well 
as clinical judgment. As stated earlier, we refer readers to section 
II.D. of the FY 2008 IPPS final rule with comment period for a full 
detailed discussion of how the MS-DRG system was established based on 
severity levels of illness (72 FR 47141).
    A patient's diagnosis, procedure, discharge status, and demographic 
information is entered into the Medicare claims processing systems and 
subjected to a series of automated screens called the Medicare Code 
Editor (MCE). The MCE screens are designed to identify cases that 
require further review before classification into an MS-DRG.
    After patient information is screened through the MCE and further 
development of the claim is conducted, the cases are classified into 
the appropriate MS-DRG by the Medicare GROUPER software program. The 
GROUPER program was developed as a means of classifying each case into 
an MS-DRG on the basis of the diagnosis and procedure codes and, for a 
limited number of MS-DRGs, demographic information (that is, sex, age, 
and discharge status).
    After cases are screened through the MCE and assigned to an MS-DRG 
by the GROUPER, the PRICER software calculates a base MS-DRG payment. 
The PRICER calculates the payment for each case covered by the IPPS 
based on the MS-DRG relative weight and additional factors associated 
with each hospital, such as IME and DSH payment adjustments. These 
additional factors increase the payment amount to hospitals above the 
base MS-DRG 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 MS-DRG 
classification changes and to recalibrate the MS-DRG weights. However, 
in the FY 2000 IPPS final rule (64 FR 41499 and 41500), we discussed a 
process for considering non-MedPAR data in the recalibration process. 
We stated that for use of non-MedPAR data

[[Page 25800]]

to be feasible for purposes of DRG recalibration and reclassification, 
the data must, among other things: (1) Be independently verified; (2) 
reflect a complete set of cases (or a representative sample of cases); 
and (3) enable us to calculate appropriate DRG relative weights and 
ensure that cases are classified to the ``correct'' DRG, and to one DRG 
only, in the recalibration process. Further, in order for us to 
consider using particular non-MedPAR data, we must have sufficient time 
to evaluate and test the data. The time necessary to do so depend upon 
the nature and quality of the non-MedPAR data submitted. Generally, 
however, a significant sample of the non-MedPAR data should be 
submitted by mid-October for consideration in conjunction with the next 
year's proposed rule. This date allows us time to test the data and 
make a preliminary assessment as to the feasibility of using the data. 
Subsequently, a complete non-MedPAR database should be submitted by 
early December for consideration in conjunction with the next year's 
proposed rule.
    As we indicated above, for FY 2008, we made significant 
improvements in the DRG system to recognize severity of illness and 
resource usage by adopting MS-DRGs that were reflected in the FY 2008 
GROUPER, Version 25.0, and were effective for discharges occurring on 
or after October 1, 2007. Our MS-DRG analysis for this FY 2012 proposed 
rule is based on data from the September 2010 update of the FY 2010 
MedPAR file, which contained hospital bills received through September 
30, 2010, for discharges occurring through September 30, 2010.
2. Yearly Review for Making MS-DRG Changes
    Many of the changes to the MS-DRG classifications we make annually 
are the result of specific issues brought to our attention by 
interested parties. We encourage individuals with comments about MS-DRG 
classifications to submit these comments no later than early December 
of each year so they can be carefully considered for possible inclusion 
in the annual proposed rule and, if included, may be subjected to 
public review and comment. Therefore, similar to the timetable for 
interested parties to submit non-MedPAR data for consideration in the 
MS-DRG recalibration process, comments about MS-DRG classification 
issues should be submitted no later than early December in order to be 
considered and possibly included in the next annual proposed rule 
updating the IPPS.
    The actual process of forming the MS-DRGs was, and will likely 
continue to be, highly iterative, involving a combination of 
statistical results from test data combined with clinical judgment. In 
the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described 
in detail the process we used to develop the MS-DRGs that we adopted 
for FY 2008. In addition, in deciding whether to make further 
modification to the MS-DRGs for particular circumstances brought to our 
attention, we considered whether the resource consumption and clinical 
characteristics of the patients with a given set of conditions are 
significantly different than the remaining patients in the MS-DRG. We 
evaluated patient care costs using average charges and lengths of stay 
as proxies for costs and relied on the judgment of our medical advisors 
to decide whether patients are clinically distinct or similar to other 
patients in the MS-DRG. In evaluating resource costs, we considered 
both the absolute and percentage differences in average charges between 
the cases we selected for review and the remainder of cases in the MS-
DRG. We also considered variation in charges within these groups; that 
is, whether observed average differences were consistent across 
patients or attributable to cases that were extreme in terms of charges 
or length of stay, or both. Further, we considered the number of 
patients who will have a given set of characteristics and generally 
preferred not to create a new MS-DRG unless it would include a 
substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

    In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed 
a number of recommendations made by MedPAC regarding revisions to the 
DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 
through 47939; and 72 FR 47140 through 47189). As we noted in the FY 
2006 IPPS final rule, we had insufficient time to complete a thorough 
evaluation of these recommendations for full implementation in FY 2006. 
However, we did adopt severity-weighted cardiac DRGs in FY 2006 to 
address public comments on this issue and the specific concerns of 
MedPAC regarding cardiac surgery DRGs. We also indicated that we 
planned to further consider all of MedPAC's recommendations and 
thoroughly analyze options and their impacts on the various types of 
hospitals in the FY 2007 IPPS proposed rule.
    For FY 2007, we began this process. In the FY 2007 IPPS proposed 
rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 
2008 (if not earlier). Based on public comments received on the FY 2007 
IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007 
IPPS final rule (71 FR 47906 through 47912), we discussed several 
concerns raised by public commenters regarding the proposal to adopt CS 
DRGs. We acknowledged the many public comments suggesting the logic of 
Medicare's DRG system should continue to remain in the public domain as 
it has since the inception of the PPS. We also acknowledged concerns 
about the impact on hospitals and software vendors of moving to a 
proprietary system. Several commenters suggested that CMS refine the 
existing DRG classification system to preserve the many policy 
decisions that were made over the last 20 years and were already 
incorporated into the DRG system, such as complexity of services and 
new device technologies. Consistent with the concerns expressed in the 
public comments, this option had the advantage of using the existing 
DRGs as a starting point (which was already familiar to the public) and 
retained the benefit of many DRG decisions that were made in recent 
years. We stated our belief that the suggested approach of 
incorporating severity measures into the existing DRG system was a 
viable option that would be evaluated.
    Therefore, we decided to make interim changes to the existing DRGs 
for FY 2007 by creating 20 new DRGs involving 13 different clinical 
areas that would significantly improve the CMS DRG system's recognition 
of severity of illness. We also modified 32 DRGs to better capture 
differences in severity. The new and revised DRGs were selected from 40 
existing CMS DRGs that contained 1,666,476 cases and represented a 
number of body systems. In creating these 20 new DRGs, we deleted 8 
existing DRGs and modified 32 existing DRGs. We indicated that these 
interim steps for FY 2007 were being taken as a prelude to more 
comprehensive changes to better account for severity in the DRG system 
by FY 2008.
    In the FY 2007 IPPS final rule (71 FR 47898), we indicated our 
intent to pursue further DRG reform through two initiatives. First, we 
announced that we were in the process of engaging a contractor to 
assist us with evaluating alternative DRG systems that were raised as 
potential alternatives to the CMS DRGs in the public comments. Second, 
we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes 
as part of making further refinements to the current CMS DRGs to better 
recognize severity of illness based

[[Page 25801]]

on the work that CMS (then HCFA) did in the mid-1990's in connection 
with adopting severity DRGs. We describe below the progress we have 
made on these two initiatives and our actions for FYs 2008, 2009, 2010, 
and 2011, and our proposed actions for FY 2012 based on our continued 
analysis of reform of the DRG system. We note that the adoption of the 
MS-DRGs to better recognize severity of illness has implications for 
the outlier threshold, the application of the postacute care transfer 
policy, the measurement of real case-mix versus apparent case-mix, and 
the IME and DSH payment adjustments. We discuss these implications for 
FY 2012 in other sections of this preamble and in the Addendum to this 
proposed rule.
    In the FY 2007 IPPS proposed rule, we discussed MedPAC's 
recommendations to move to a cost-based HSRV weighting methodology 
using HSRVs beginning with the FY 2007 IPPS proposed rule for 
determining the DRG relative weights. Although we proposed to adopt the 
HSRV weighting methodology for FY 2007, we decided not to adopt the 
proposed methodology in the final rule after considering the public 
comments we received on the proposal. Instead, in the FY 2007 IPPS 
final rule, we adopted a cost-based weighting methodology without the 
HSRV portion of the proposed methodology. The cost-based weights were 
adopted over a 3-year transition period in \1/3\ increments between FY 
2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we 
indicated our intent to further study the HSRV-based methodology as 
well as other issues brought to our attention related to the cost-based 
weighting methodology adopted in the FY 2007 final rule. There was 
significant concern in the public comments that our cost-based 
weighting methodology does not adequately account for charge 
compression--the practice of applying a higher percentage charge markup 
over costs to lower cost items and services and a lower percentage 
charge markup over costs to higher cost items and services. Further, 
public commenters expressed concern about potential inconsistencies 
between how costs and charges are reported on the Medicare cost reports 
and charges on the Medicare claims. In the FY 2007 IPPS final rule, we 
used costs and charges from the cost reports to determine departmental 
level cost-to-charge ratios (CCRs) which we then applied to charges on 
the Medicare claims to determine the cost-based weights. The commenters 
were concerned about potential distortions to the cost-based weights 
that would result from inconsistent reporting between the cost reports 
and the Medicare claims. After publication of the FY 2007 IPPS final 
rule, we entered into a contract with RTI International (RTI) to study 
both charge compression and the extent, if any, to which our 
methodology for calculating DRG relative weights is affected by 
inconsistencies between how hospitals report costs and charges on the 
cost reports and how hospitals report charges on individual claims. 
Further, as part of its study of alternative DRG systems, the RAND 
Corporation analyzed the HSRV cost-weighting methodology. We refer 
readers to section II.E. of the preamble of this proposed rule for a 
discussion of the issue of charge compression and the cost-weighting 
methodology for FY 2012.
    We believe that revisions to the DRG system to better recognize 
severity of illness and changes to the relative weights based on costs 
rather than charges are improving the accuracy of the payment rates in 
the IPPS. We agree with MedPAC that these refinements should be 
pursued. Although we continue to caution that any prospective payment 
system based on grouping cases will always present some opportunities 
for providers to specialize in cases they believe have higher margins, 
we believe that the changes we have adopted and the continuing reforms 
we are proposing to make in this proposed rule for FY 2012 will improve 
payment accuracy and reduce financial incentives to create specialty 
hospitals.
    We refer readers to section II.D. of the FY 2008 IPPS final rule 
with comment period for a full discussion of how the MS-DRG system was 
established based on severity levels of illness (72 FR 47141).

D. Proposed FY 2012 MS-DRG Documentation and Coding Adjustment, 
Including the Applicability to the Hospital-Specific Rates and the 
Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    As we discussed earlier in this preamble, we adopted the MS-DRG 
patient classification system for the IPPS, effective October 1, 2007, 
to better recognize severity of illness in Medicare payment rates for 
acute care hospitals. The adoption of the MS-DRG system resulted in the 
expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008. 
(Currently, there are 747 MS-DRGs, and we are proposing 4 additional 
MS-DRGs for FY 2012.) By increasing the number of MS-DRGs and more 
fully taking into account patient severity of illness in Medicare 
payment rates for acute care hospitals, MS-DRGs encourage hospitals to 
improve their documentation and coding of patient diagnoses.
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we indicated that the adoption of the MS-DRGs had the 
potential to lead to increases in aggregate payments without a 
corresponding increase in actual patient severity of illness due to the 
incentives for additional documentation and coding. In that final rule 
with comment period, we exercised our authority under section 
1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget 
neutrality by adjusting the national standardized amount, to eliminate 
the estimated effect of changes in coding or classification that do not 
reflect real changes in case-mix. Our actuaries estimated that 
maintaining budget neutrality required an adjustment of -4.8 percent to 
the national standardized amount. We provided for phasing in this -4.8 
percent adjustment over 3 years. Specifically, we established 
prospective documentation and coding adjustments of -1.2 percent for FY 
2008, -1.8 percent for FY 2009, and -1.8 percent for FY 2010.
    On September 29, 2007, Congress enacted the TMA [Transitional 
Medical Assistance], Abstinence Education, and QI [Qualifying 
Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 
7(a) of Public Law 110-90 reduced the documentation and coding 
adjustment made as a result of the MS-DRG system that we adopted in the 
FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 
and -0.9 percent for FY 2009. Section 7(a) of Public Law 110-90 did not 
adjust the FY 2010 -1.8 percent documentation and coding adjustment 
promulgated in the FY 2008 IPPS final rule with comment period. To 
comply with section 7(a) of Public Law 110-90, we promulgated a final 
rule on November 27, 2007 (72 FR 66886) that modified the IPPS 
documentation and coding adjustment for FY 2008 to -0.6 percent, and 
revised the FY 2008 payment rates, factors, and thresholds accordingly. 
These revisions were effective on October 1, 2007.
    For FY 2009, section 7(a) of Pub. L. 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -1.8 
percent adjustment established in the FY 2008 IPPS final

[[Page 25802]]

rule with comment period. As discussed in the FY 2009 IPPS final rule 
(73 FR 48447) and required by statute, we applied a documentation and 
coding adjustment of -0.9 percent to the FY 2009 IPPS national 
standardized amount. The documentation and coding adjustments 
established in the FY 2008 IPPS final rule with comment period, as 
amended by Public Law 110-90, are cumulative. As a result, the -0.9 
percent documentation and coding adjustment for FY 2009 was in addition 
to the -0.6 percent adjustment for FY 2008, yielding a combined effect 
of -1.5 percent.
2. Prospective Adjustment to the Average Standardized Amounts Required 
by Section 7(b)(1)(A) of Public Law 110-90
    Section 7(b)(1)(A) of Public Law 110-90 requires that, if the 
Secretary determines that implementation of the MS-DRG system resulted 
in changes in documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2008 or FY 2009 
that are different than the prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90, the 
Secretary shall make an appropriate adjustment under section 
1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act 
authorizes adjustments to the average standardized amounts for 
subsequent fiscal years in order to eliminate the effect of such coding 
or classification changes. These adjustments are intended to ensure 
that future annual aggregate IPPS payments are the same as the payments 
that otherwise would have been made had the prospective adjustments for 
documentation and coding applied in FY 2008 and FY 2009 reflected the 
change that occurred in those years.
3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Public Law 110-90
    If, based on a retroactive evaluation of claims data, the Secretary 
determines that implementation of the MS-DRG system resulted in changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 or FY 2009 that are 
different from the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of 
Public Law 110-90 requires the Secretary to make an additional 
adjustment to the standardized amounts under section 1886(d) of the 
Act. This adjustment must offset the estimated increase or decrease in 
aggregate payments for FYs 2008 and 2009 (including interest) resulting 
from the difference between the estimated actual documentation and 
coding effect and the documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90. This adjustment is in addition to 
making an appropriate adjustment to the standardized amounts under 
section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) 
of Public Law 110-90. That is, these adjustments are intended to recoup 
(or repay, in the case of underpayments) spending in excess of (or less 
than) spending that would have occurred had the prospective adjustments 
for changes in documentation and coding applied in FY 2008 and FY 2009 
precisely matched the changes that occurred in those years. Public Law 
110-90 requires that the Secretary make these recoupment or repayment 
adjustments for discharges occurring during FYs 2010, 2011, and 2012.
4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data
    In order to implement the requirements of section 7 of Public Law 
110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that 
we planned a thorough retrospective evaluation of our claims data. We 
stated that the results of this evaluation would be used by our 
actuaries to determine any necessary payment adjustments to the 
standardized amounts under section 1886(d) of the Act to ensure the 
budget neutrality of the MS-DRGs implementation for FY 2008 and FY 
2009, as required by law. In the FY 2009 IPPS proposed rule (73 FR 
23541 through 23542), we described our preliminary plan for a 
retrospective analysis of inpatient hospital claims data and invited 
public input on our proposed methodology.
    In that proposed rule, we indicated that we intended to measure and 
corroborate the extent of the overall national average changes in case-
mix for FY 2008 and FY 2009. We expected that the two largest parts of 
this overall national average change would be attributable to 
underlying changes in actual patient severity of illness and to 
documentation and coding improvements under the MS-DRG system. In order 
to separate the two effects, we planned to isolate the effect of shifts 
in cases among base DRGs from the effect of shifts in the types of 
cases within base DRGs.
    The MS-DRGs divide the base DRGs into three severity levels (with 
MCC, with CC, and without CC); the previously used CMS DRGs had only 
two severity levels (with CC and without CC). Under the CMS DRG system, 
the majority of hospital discharges had a secondary diagnosis which was 
on the CC list, which led to the higher severity level. The MS-DRGs 
significantly changed the code lists of what was classified as an MCC 
or a CC. Many codes that were previously classified as a CC are no 
longer included on the MS-DRG CC list because the data and clinical 
review showed these conditions did not lead to a significant increase 
in resource use. The addition of a new level of high severity 
conditions, the MCC list, also provided a new incentive to code more 
precisely in order to increase the severity level. We anticipated that 
hospitals would examine the MS-DRG MCC and CC code lists and then work 
with physicians and coders on documentation and coding practices so 
that coders could appropriately assign codes from the highest possible 
severity level. We note that there have been numerous seminars and 
training sessions on this particular coding issue. The topic of 
improving documentation practices in order to code conditions on the 
MCC list was also discussed extensively by participants at the March 
11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. 
Participants discussed their hospitals' efforts to encourage physicians 
to provide more precise documentation so that coders could 
appropriately assign codes that would lead to a higher severity level. 
Because we expected most of the documentation and coding changes under 
the MS-DRG system would occur in the secondary diagnoses, we believed 
that the shifts among base DRGs were less likely to be the result of 
the MS-DRG system and the shifts within base DRGs were more likely to 
be the result of the MS-DRG system. We also anticipated evaluating data 
to identify the specific MS-DRGs and diagnoses that contributed 
significantly to the documentation and coding payment effect and to 
quantify their impact. This step entailed analysis of the secondary 
diagnoses driving the shifts in severity within specific base DRGs.
    In the FY 2009 IPPS proposed rule, we solicited public comments on 
the analysis plans described above, as well as suggestions on other 
possible approaches for performing a retrospective analysis to identify 
the amount of case-mix changes that occurred in FY 2008 and FY 2009 
that did not reflect real increases in patient severity of illness.
    A few commenters, including MedPAC, expressed support for the 
analytic approach described in the FY

[[Page 25803]]

2009 IPPS proposed rule. A number of other commenters expressed 
concerns about certain aspects of the approach and/or suggested 
alternate analyses or study designs. In addition, one commenter 
recommended that any determination or retrospective evaluation by the 
actuaries of the impact of the MS-DRGs on case-mix be open to public 
scrutiny prior to the implementation of the payment adjustments 
beginning in FY 2010.
    We took these comments into consideration as we developed our 
proposed analysis plan, and in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24092 through 24101), we solicited public comment 
on our methodology and analysis. For the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule, we performed a retrospective evaluation of the FY 2008 
data for claims paid through December 2008. Based on this evaluation, 
our actuaries determined that implementation of the MS-DRG system 
resulted in a 2.5 percent change due to documentation and coding that 
did not reflect real changes in case-mix for discharges occurring 
during FY 2008. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43768 through 43772), we responded to comments on our methodology for 
the retrospective evaluation of FY 2008 claims data. We refer readers 
to that final rule for a detailed description of our analysis and prior 
responses to comments.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 through 
50068), we performed the same analysis for FY 2009 claims data using 
the same methodology as we did for FY 2008 claims. We note that, in the 
FY 2011 IPPS/LTCH PPS proposed rule, we performed this analysis using 
FY 2009 claims paid through December 2009. In the FY 2011 IPPS/LTCH PPS 
final rule, we updated the analysis with FY 2009 claims paid through 
March 2010, as we discussed in the proposed rule. We note that, for all 
IPPS hospitals, other than those in Puerto Rico, the estimates were 
unchanged from those in the proposed rule. We refer readers to the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50057 through 50068) for a 
detailed description of our analysis and prior responses to comments. 
The results of the analysis for the FY 2011 proposed and final rules 
provided additional support for our conclusion that the proposed 5.4 
percent estimate accurately reflected the FY 2009 increases in 
documentation and coding under the MS-DRG system.
    As in prior years, the FY 2008 and FY 2009 MedPAR files are 
available to the public to allow independent analysis of the FY 2008 
and FY 2009 documentation and coding effect. Interested individuals may 
still order these files through the Web site at: http://www.cms.hhs.gov/LimitedDataSets/ by clicking on MedPAR Limited Data Set 
(LDS)-Hospital (National). This Web page describes the file and 
provides directions and further detailed instructions for how to order.
    Persons placing an order must send the following: A Letter of 
Request, the LDS Data Use Agreement and Research Protocol (refer to the 
Web site for further instructions), the LDS Form, and a check for 
$3,655 to:

Mailing address if using the U.S. Postal Service: Centers for Medicare 
& Medicaid Services, RDDC Account, Accounting Division, P.O. Box 7520, 
Baltimore, MD 21207-0520.
Mailing address if using express mail: Centers for Medicare & Medicaid 
Services, OFM/Division of Accounting--RDDC, 7500 Security Boulevard, 
C3-07-11, Baltimore, MD 21244-1850.

5. Prospective Adjustment for FY 2010 and Subsequent Years Authorized 
by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) 
of the Act
    Based on our evaluation of FY 2008 Medicare claims data that were 
most current at the time of the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, the estimated 2.5 percent change in FY 2008 case-mix due to 
changes in documentation and coding that did not reflect real changes 
in case-mix for discharges occurring during FY 2008 exceeded the -0.6 
percent prospective documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90 by 1.9 percentage points. In the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited 
public comment on our proposal to make a -1.9 percent prospective 
adjustment to the standardized amounts under section 1886(d) of the Act 
to address the effects of documentation and coding changes unrelated to 
changes in real case-mix in FY 2008. In the FY 2010 IPPS/RY 2010 LTCH 
PPS final rule, in response to public comments, we indicated that we 
fully understood that our proposed adjustment of -1.9 percent would 
reduce the increase in payments that affected hospitals would have 
received in FY 2009 in the absence of the adjustment, and we determined 
that it would be appropriate to postpone adopting documentation and 
coding adjustments as authorized under section 7(a) of Public Law 110-
90 and section 1886(d)(3)(A)(vi) of the Act until a full analysis of 
case-mix changes could be completed. We refer readers to the FY 2010 
IPPS/LTCH PPS final rule (74 FR 43767 through 43777) for a detailed 
description of our proposal, responses to comments, and finalized 
policy.
    After analysis of the FY 2009 claims data for the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50057 through 50073), we found a total 
prospective documentation and coding effect of 1.054. After accounting 
for the -0.6 percent and the -0.9 percent documentation and coding 
adjustments in FYs 2008 and 2009, we found a remaining documentation 
and coding effect of 3.9 percent. As we have discussed, an additional 
cumulative adjustment of -3.9 percent would be necessary to meet the 
requirements of section 7(b)(1)(A) of Public Law 110-90 to make an 
adjustment to the average standardized amounts in order to eliminate 
the full effect of the documentation and coding changes on future 
payments. Unlike section 7(b)(1)(B) of Public Law 110-90, section 
7(b)(1)(A) does not specify when we must apply the prospective 
adjustment, but merely requires us to make an ``appropriate'' 
adjustment. Therefore, as we stated in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50061), we believe we have some discretion as to the manner 
in which we apply the prospective adjustment of -3.9 percent. We 
indicated that applying the full prospective adjustment of -3.9 percent 
for FY 2011, in combination with the proposed recoupment adjustment of 
-2.9 percent in FY 2011 (discussed below) would require an aggregate 
adjustment of -6.8 percent. As we discuss elsewhere in this section 
II.D., and more extensively in the FY 2011 IPPS/LTCH PPS final rule, it 
has been our practice to moderate payment adjustments when necessary to 
mitigate the effects of significant downward adjustments on hospitals, 
to avoid what could be widespread, disruptive effects of such 
adjustments on hospitals. As we also discuss below in this section 
II.D., we are required to implement the remaining adjustment in section 
7(b)(1)(B) of Public Law 110-90 no later than the FY 2012 rulemaking 
period, and accordingly, in the FY 2011 IPPS/LTCH PPS proposed rule, we 
proposed a recoupment adjustment under section 7(b)(1)(B) of -2.9 
percent for FY 2011 (75 FR 23870 and 23871). Therefore, we stated that 
we believed it was appropriate to not implement any or all of the -3.9 
percent prospective adjustment in FY 2011. Accordingly, we did not 
propose a prospective

[[Page 25804]]

adjustment under section 7(b)(1)(A) of Public Law 110-90 for FY 2011 
(75 FR 23868 through 23870) for FY 2011. We note that, as a result, 
payments in FY 2011 (and in each future year until we implement the 
requisite adjustment) would be 3.9 percent higher than they would have 
been if we had implemented an adjustment under section 7(b)(1)(A) of 
Public Law 110-90. Our actuaries estimate that this 3.9 percentage 
point increase will result in an aggregate payment of approximately $4 
billion. We also noted that payments in FY 2010 were also expected to 
be 3.9 percent higher than they would have been if we had implemented 
an adjustment under section 7(b)(1)(A) of Public Law 110-90, which our 
actuaries estimated increased aggregate payments by approximately $4 
billion in FY 2010.
    Because further delay of this prospective adjustment will result in 
a continued accrual of unrecoverable overpayments, it is imperative 
that we propose a prospective adjustment for FY 2012, while recognizing 
CMS' continued desire to mitigate the effects of any significant 
downward adjustments to hospitals. Therefore, we are proposing a -3.15 
percent prospective adjustment to the standardized amount to partially 
eliminate the full effect of the documentation and coding changes on 
future payments. Due to the offsetting nature of the remaining 
recoupment adjustment under section 7(b)(1)(B) of Public Law 110-90 
(described below in section II.D.6. of this preamble), and after 
considering other payment adjustments to FY 2012 rates proposed 
elsewhere within this proposed rule, we believe that the proposed -3.15 
percent adjustment will allow for a significant reduction in potential 
unrecoverable overpayments, yet will maintain a comparable adjustment 
level between FY 2011 and FY 2012, reflecting the applicable percentage 
increase with a documentation and coding adjustment. We recognize that 
an additional adjustment of -0.75 (3.9 minus 3.15) percent will be 
required in future rule making to complete the necessary -3.9 
adjustment to meet CMS' statutory requirement under section 7(b)(1)(A) 
of Public Law 110-90. We are not at this time proposing a timeline to 
implement the remainder of this prospective adjustment.
6. Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 
7(b)(1)(B) of Public Law 110-90
    As discussed in section II.D.1. of this preamble, section 
7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an 
adjustment to the standardized amounts under section 1886(d) of the Act 
to offset the estimated increase or decrease in aggregate payments for 
FY 2008 and FY 2009 (including interest) resulting from the difference 
between the estimated actual documentation and coding effect and the 
documentation and coding adjustments applied under section 7(a) of 
Public Law 110-90. This determination must be based on a retrospective 
evaluation of claims data.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43773), we 
estimated a 2.5 percent change due to documentation and coding that did 
not reflect real changes in case-mix for discharges occurring during FY 
2008, exceeding the -0.6 percent prospective documentation and coding 
adjustment applied under section 7(a) of Public Law 110-90 by 1.9 
percentage points. We stated that our actuaries had estimated that this 
1.9 percentage point increase resulted in an increase in aggregate 
payments of approximately $2.2 billion in FY 2008. We did not propose 
to make an adjustment to the FY 2010 average standardized amounts to 
offset, in whole or in part, the estimated increase in aggregate 
payments for discharges occurring in FY 2008, but stated in the 
proposed rule that we intended to address this issue in future 
rulemaking. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43774), we stated that because we would not receive all FY 2009 claims 
data prior to publication of the final rule, we would address any 
increase or decrease in FY 2009 payments in future rulemaking for FY 
2011 and 2012 after we performed a retrospective evaluation of the FY 
2009 claims data. In response to public comments in FY 2010, we 
indicated that we recognized that any adjustment to account for the 
documentation and coding effect observed in the FY 2008 and FY 2009 
claims data may result in significant future payment reductions for 
providers. However, we indicated that we are required under section 
7(b)(1)(B) of Pub. L. 110-90 to recover the difference of actual 
documentation and coding effect in FY 2008 and FY 2009 that is greater 
than the prior adjustments. We agreed with the commenters who requested 
that CMS delay any adjustment and, for the reasons stated above, 
indicated that we expected to address this issue in the FY 2011 
rulemaking. We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule (74 FR 43767 through 43777) for a detailed description of our 
proposal, responses to comments, and finalized policy.
    As we indicated in the FY 2011 IPPS/LTCH PPS final rule, the change 
due to documentation and coding that did not reflect real changes in 
case-mix for discharges occurring during FY 2008 and FY 2009 exceeded 
the -0.6 and -0.9 percent prospective documentation and coding 
adjustments applied under section 7(a) of Pub. L. 110-90 for those 2 
years, respectively, by 1.9 percentage points in FY 2008 and 3.9 
percentage points in FY 2009. In total, this change exceeded the 
cumulative prospective adjustments by 5.8 (1.9 plus 3.9) percentage 
points. Our actuaries estimated that this 5.8 percentage point increase 
resulted in an increase in aggregate payments of approximately $6.9 
billion. In the FY 2011 IPPS/LTCH PPS final rule, we noted that there 
may be a need to actuarially adjust the recoupment adjustment to 
accurately reflect accumulated interest. Therefore, we determined that 
an aggregate adjustment of -5.8 percent in FYs 2011 and 2012, subject 
to actuarial adjustment to reflect accumulated interest, would be 
necessary in order to meet the requirements of section 7(b)(1)(B) of 
Public Law 110-90 to adjust the standardized amounts for discharges 
occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount 
of the increase in aggregate payments (including interest) in FYs 2008 
and 2009. In the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23871), we 
stated that we intended to take into account the need to reflect 
accumulated interest in proposing a recoupment adjustment under section 
7(b)(1)(B) of Public Law 110-90 for FY 2012.
    It is often our practice to phase in rate adjustments over more 
than one year in order to moderate the effect on rates in any one year. 
Therefore, consistent with the policies that we have adopted in many 
similar cases, in the FY 2011 IPPS/LTCH PPS proposed rule, we proposed 
to make an adjustment to the standardized amount of -2.9 percent, 
representing approximately half of the aggregate adjustment required 
under section 7(b)(1)(B) of Public Law 110-90, for FY 2011. An 
adjustment of this magnitude would allow us to moderate the effects on 
hospitals in one year while simultaneously making it possible to 
implement the entire adjustment within the timeframe required under 
section 7(b)(1)(B) of Public Law 110-90 (that is, no later than FY 
2012).
    Unlike the permanent prospective adjustment to the standardized 
amounts under section 7(b)(1)(A) of Public Law 110-90 described 
earlier, the recoupment adjustment to the standardized amounts under 
section 7(b)(1)(B) of Public Law 110-90 is not cumulative, and, 
therefore, would be removed for subsequent fiscal years

[[Page 25805]]

once we have completely offset the increase in aggregate payments for 
discharges for FY 2008 and FY 2009 expenditures. In keeping with our 
practice of moderating payment adjustments when necessary, we stated 
that we anticipated that the proposal of phasing in the recoupment 
adjustment will have an additional, and significant, moderating effect 
on implementing the requirements of section 7(b)(1)(B) of Public Law 
110-90 for FY 2012.
    In the FY 2011 IPPS/LTCH PPS proposed rule, we sought public 
comment on our proposal to offset part of the total 5.8 percent 
increase in aggregate payments (including interest) for discharges 
occurring in FY 2008 and FY 2009 resulting from the adoption of the MS-
DRGs in FY 2011, noting that this proposal would result in a -2.9 
percent adjustment to the standardized amount. We received numerous 
comments on our proposal, especially from national and regional 
hospital associations, hospital systems, and individual hospitals. 
MedPAC also commented on our proposal. We refer readers to the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50055 through 50073) for a detailed 
description of our analysis and prior responses to comments, and 
finalized policy.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50062 through 
50068), we finalized the proposed adjustment to the standardized amount 
of -2.9 percent, which represented approximately half of the aggregate 
recoupment adjustment required under section 7(b)(1)(B) of Public Law 
110-90, for FY 2011. We were persuaded by both MedPAC's analysis, and 
our own review of the methodologies recommended by various commenters, 
that the methodology we employed to determine the required recoupment 
adjustment was sound. Since the statute required that we implement the 
entire recoupment adjustment no later than FY 2012, we have sought, as 
we commonly do, to moderate the potential impact on hospitals by 
phasing in the required adjustment over more than one year. As we 
stated in prior rulemaking, a major advantage of making the -2.9 
percent adjustment to the standardized amount in FY 2011 was that, 
because the required recoupment adjustment is not cumulative, we 
anticipated removing the FY 2011 -2.9 percent adjustment from the rates 
(in other words, making a positive 2.9 percent adjustment to the rates) 
in FY 2012, at the same time that the law required us to apply the 
remaining approximately -2.9 percent adjustment required by section 
7(b)(1)(B) of Public Law 110-90. These two steps in FY 2012, restoring 
the FY 2011 -2.9 percent adjustment and then applying the remaining 
adjustment of approximately -2.9 percent, would effectively cancel each 
other out. The result of these two steps would be an aggregate 
adjustment of approximately 0.0 percent. While we stated in the FY 2011 
IPPS/LTCH PPS final rule the need to potentially adjust the remaining -
2.9 percent estimate to account for accumulated interest, our actuaries 
have determined that there has been no significant interest 
accumulation and that no additional adjustment will be required. 
Therefore, for FY 2012, pursuant to the timeframes set forth by section 
7(b)(1)(B) of Public Law 110-90, and consistent with the discussion in 
the FY 2011 IPPS/LTCH PPS final rule, we are proposing to complete the 
recoupment adjustment by implementing the remaining -2.9 percent 
adjustment, in addition to removing the effect of the -2.9 percent 
adjustment to the standardized amount finalized for FY 2011. Because 
these adjustments will, in effect, balance out, there will be no year-
to-year change in the standardized amount due to this recoupment 
adjustment. As this adjustment will complete the required recoupment 
for overpayments due to documentation and coding effects on discharges 
occurring in FYs 2008 and 2009, we anticipate removing the effect of 
this adjustment by adding 2.9 percent to the standardized amount in FY 
2013. We continue to believe that this is a reasonable and fair 
approach that satisfies the requirements of the statute while 
substantially moderating the financial impact on hospitals.
[GRAPHIC] [TIFF OMITTED] TP05MY11.002

    The table above summarizes the proposed adjustments for FY 2012 for 
documentation and coding for IPPS hospitals.
7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on 
whichever of the following rates yields the greatest aggregate payment: 
The Federal rate; the updated hospital-specific rate based on FY 1982 
costs per discharge; the updated hospital-specific rate based on FY 
1987 costs per discharge; the updated hospital-specific rate based on 
FY 1996 costs per discharge; or the updated hospital-specific rate 
based on FY 2006 costs per discharge. Under section 1886(d)(5)(G) of 
the Act, MDHs are paid based on the Federal national rate or, if 
higher, the Federal national rate plus 75 percent of the difference 
between the Federal national rate and the updated hospital-specific 
rate based on the greatest of the FY 1982, FY 1987, or FY 2002 costs 
per discharge. In the FY 2008 IPPS final rule with comment period (72 
FR 47152 through 47188), we established a policy of applying the 
documentation and coding adjustment to the hospital-specific rates. In 
that final rule with comment period, we indicated that because SCHs and 
MDHs use the same DRG system as all other hospitals, we believe they 
should be equally subject to the budget neutrality adjustment that we 
are applying for adoption of the MS-DRGs to all other hospitals. In 
establishing this policy, we relied on section 1886(d)(3)(A)(vi) of the 
Act, which provides us with the authority to adjust ``the standardized 
amount'' to eliminate the effect of changes in coding or classification 
that do not reflect real change in case-mix.
    However, in the final rule that appeared in the Federal Register on 
November 27, 2007 (72 FR 66886), we rescinded the application of the

[[Page 25806]]

documentation and coding adjustment to the hospital-specific rates 
retroactive to October 1, 2007. In that final rule, we indicated that, 
while we still believe it would be appropriate to apply the 
documentation and coding adjustment to the hospital-specific rates, 
upon further review, we decided that the application of the 
documentation and coding adjustment to the hospital-specific rates is 
not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of 
the Act, which only mentions adjusting ``the standardized amount'' 
under section 1886(d) of the Act and does not mention adjusting the 
hospital-specific rates.
    In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that 
we continued to have concerns about this issue. Because hospitals paid 
based on the hospital-specific rate use the same MS-DRG system as other 
hospitals, we believe they have the potential to realize increased 
payments from documentation and coding changes that do not reflect real 
increases in patient severity of illness. In section 1886(d)(3)(A)(vi) 
of the Act, Congress stipulated that hospitals paid based on the 
standardized amount should not receive additional payments based on the 
effect of documentation and coding changes that do not reflect real 
changes in case-mix. Similarly, we believe that hospitals paid based on 
the hospital-specific rates should not have the potential to realize 
increased payments due to documentation and coding changes that do not 
reflect real increases in patient severity of illness. While we 
continue to believe that section 1886(d)(3)(A)(vi) of the Act does not 
provide explicit authority for application of the documentation and 
coding adjustment to the hospital-specific rates, we believe that we 
have the authority to apply the documentation and coding adjustment to 
the hospital-specific rates using our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act. The special 
exceptions and adjustment provision authorizes us to provide ``for such 
other exceptions and adjustments to [IPPS] payment amounts * * * as the 
Secretary deems appropriate.'' In the FY 2009 IPPS final rule (73 FR 
48448 through 48449), we indicated that, for the FY 2010 rulemaking, we 
planned to examine our FY 2008 claims data for hospitals paid based on 
the hospital-specific rate. We further indicated that if we found 
evidence of significant increases in case-mix for patients treated in 
these hospitals that do not reflect real changes in case-mix, we would 
consider proposing application of the documentation and coding 
adjustments to the FY 2010 hospital-specific rates under our authority 
in section 1886(d)(5)(I)(i) of the Act.
    In response to public comments received on the FY 2009 IPPS 
proposed rule, we stated in the FY 2009 IPPS final rule that we would 
consider whether such a proposal was warranted for FY 2010. To gather 
information to evaluate these considerations, we indicated that we 
planned to perform analyses on FY 2008 claims data to examine whether 
there has been a significant increase in case-mix for hospitals paid 
based on the hospital-specific rate. If we found that application of 
the documentation and coding adjustment to the hospital-specific rates 
for FY 2010 was warranted, we indicated that we would propose to make 
such an adjustment in the FY 2010 IPPS proposed rule.
8. Documentation and Coding Adjustment to the Hospital-Specific Rates 
for FY 2011 and Subsequent Fiscal Years
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and final rule 
(74 FR 24098 through 24100 and 74 FR 43775 through 43776, 
respectively), we discussed our retrospective evaluation of the FY 2008 
claims data for SCHs and MDHs using the same methodology described 
earlier for other IPPS hospitals. We found that, independently for both 
SCHs and MDHs, the change due to documentation and coding that did not 
reflect real changes in case-mix for discharges occurring during FY 
2008 slightly exceeded the proposed 2.5 percent result discussed 
earlier for other IPPS hospitals, but did not significantly differ from 
that result. We refer readers to those rules for a more complete 
discussion.
    Therefore, consistent with our statements in prior IPPS rules, we 
proposed to use our authority under section 1886(d)(5)(I)(i) of the Act 
to prospectively adjust the hospital-specific rates by the proposed -
2.5 percent in FY 2010 to account for our estimated documentation and 
coding effect in FY 2008 that does not reflect real changes in case-
mix. We proposed to leave this adjustment in place for subsequent 
fiscal years in order to ensure that changes in documentation and 
coding resulting from the adoption of the MS-DRGs do not lead to an 
increase in aggregate payments for SCHs and MDHs not reflective of an 
increase in real case-mix. The proposed -2.5 percent adjustment to the 
hospital-specific rates exceeded the -1.9 percent adjustment to the 
national standardized amount under section 7(b)(1)(A) of Public Law 
110-90 because, unlike the national standardized rates, the FY 2008 
hospital-specific rates were not previously reduced in order to account 
for anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), 
we solicited public comment on this proposal. Consistent with our 
approach for IPPS hospitals discussed earlier, in the FY 2010 IPPS/RY 
2010 LTCH PPS final rule, we also delayed adoption of a documentation 
and coding adjustment to the hospital-specific rate until FY 2011. We 
refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule for a 
more detailed discussion of our proposal, responses to comments, and 
finalized policy.
    As we have noted previously, because SCHs and MDHs use the same MS-
DRG system as all other IPPS hospitals, we believe they have the 
potential to realize increased payments from documentation and coding 
changes that do not reflect real increases in patient severity of 
illness. Therefore, we believe they should be equally subject to a 
prospective budget neutrality adjustment that we are applying for 
adoption of the MS-DRGs to all other hospitals. We believe the 
documentation and coding estimates for all subsection (d) hospitals 
should be the same. While the findings for the documentation and coding 
effect for all IPPS hospitals are similar to the effect for SCHs and 
slightly different to the effect for MDHs, we continue to believe that 
this is the appropriate policy so as to neither advantage or 
disadvantage different types of providers. As we discuss in section 
II.D.4. of this preamble, our best estimate, based on the most recently 
available data, is that a cumulative adjustment of -5.4 percent is 
required to eliminate the full effect of the documentation and coding 
changes on future payments to SCHs and MDHs. Unlike the case of 
standardized amounts paid to IPPS hospitals, prior to FY 2011, we had 
not made any previous adjustments to the hospital-specific rates paid 
to SCHs and MDHs to account for documentation and coding changes. 
Therefore, the entire -5.4 percent recoupment adjustment needed to be 
made, as opposed to a -3.9 percent remaining adjustment for IPPS 
hospitals.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50068 through 
50071), we made an adjustment to the standardized amount for IPPS 
hospitals of -2.9 percent under section 7(b)(1)(B) of

[[Page 25807]]

Public Law 110-90, for FY 2011. As we noted in the FY 2011 IPPS/LTCH 
PPS final rule, in determining the level and pace of adjustments to 
account for such documentation and coding changes, we believe that it 
is important to maintain, as much as possible, both consistency and 
equity among these classes of hospitals. Therefore, we finalized a 
prospective adjustment of -2.9 percent to the hospital-specific rates 
paid to SCHs and MDHs. We refer readers to the FY 2011 IPPS/LTCH PPS 
final rule for a more detailed discussion of our proposal, responses to 
comments, and finalized policy.
    As discussed earlier in this section II.D., we are proposing a net 
-3.15 percent documentation and coding adjustment for IPPS hospitals in 
FY 2012 (-3.15 percent prospective adjustment plus a -2.9 percent 
recoupment adjustment in FY 2012, offset by the removal of the -2.9 
percent recoupment adjustment for FY 2010). The proposed IPPS 
adjustment exceeds the remaining -2.5 percent documentation and coding 
adjustment for hospitals receiving a hospital-specific rate (that is, 
the entire -5.4 percent adjustment, minus the -2.9 percent adjustment 
finalized for FY 2011). As we indicated in the FY 2011 IPPS/LTCH PPS 
proposed rule and final rule, we are continuing, as much as possible, 
consistent with section 7(b)(1) of Public Law 110-90 and section 
1886(d)(5)(I)(i) of the Act, to take such consistency and equity into 
account in developing future proposals for implementing documentation 
and coding adjustments. We believe that any adjustment to the hospital-
specific rate due to documentation and coding effect should be as 
similar as possible to adjustments to the IPPS rate. Accordingly, we 
are proposing a -2.5 percent payment adjustment to the hospital-
specific rate. We believe that proposing the entire remaining 
prospective adjustment of -2.5 percent allows CMS to maintain, to the 
extent possible, similarity and consistency in payment rates for 
different IPPS hospitals paid using the MS-DRG. As discussed below, we 
took a similar approach in finalizing an adjustment to the Puerto-Rico 
specific rate in FY 2011.
9. Application of the Documentation and Coding Adjustment to the Puerto 
Rico-Specific Standardized Amount
a. Background
    Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amount and 25 percent of the Puerto Rico-specific 
standardized amount. As noted previously, the documentation and coding 
adjustment we adopted in the FY 2008 IPPS final rule with comment 
period relied upon our authority under section 1886(d)(3)(A)(vi) of the 
Act, which provides the Secretary the authority to adjust ``the 
standardized amounts computed under this paragraph'' to eliminate the 
effect of changes in coding or classification that do not reflect real 
changes in case-mix. Section 1886(d)(3)(A)(vi) of the Act applies to 
the national standardized amounts computed under section 1886(d)(3) of 
the Act, but does not apply to the Puerto Rico-specific standardized 
amount computed under section 1886(d)(9)(C) of the Act. In calculating 
the FY 2008 payment rates, we made an inadvertent error and applied the 
FY 2008 -0.6 percent documentation and coding adjustment to the Puerto 
Rico-specific standardized amount, relying on our authority under 
section 1886(d)(3)(A)(vi) of the Act. However, section 
1886(d)(3)(A)(vi) of the Act authorizes application of a documentation 
and coding adjustment to the national standardized amount and does not 
apply to the Puerto Rico specific standardized amount. In the FY 2009 
IPPS final rule (73 FR 48449), we corrected this inadvertent error by 
removing the -0.6 percent documentation and coding adjustment from the 
FY 2008 Puerto Rico-specific rates (that is, we made a positive 0.6 
percent adjustment, increasing the Puerto Rico-specific rates).
    While section 1886(d)(3)(A)(vi) of the Act is not applicable to the 
Puerto Rico-specific standardized amount, we believe that we have the 
authority to apply the documentation and coding adjustment to the 
Puerto Rico-specific standardized amount using our special exceptions 
and adjustment authority under section 1886(d)(5)(I)(i) of the Act. 
Similar to SCHs and MDHs that are paid based on the hospital-specific 
rate, we believe that Puerto Rico hospitals that are paid based on the 
Puerto Rico-specific standardized amount should not have the potential 
to realize increased payments due to documentation and coding changes 
that do not reflect real increases in patient severity of illness. 
Consistent with the approach described for SCHs and MDHs, in the FY 
2009 IPPS final rule (73 FR 48449), we indicated that we planned to 
examine our FY 2008 claims data for hospitals in Puerto Rico. We 
indicated in the FY 2009 IPPS proposed rule (73 FR 23541) that if we 
found evidence of significant increases in case-mix for patients 
treated in these hospitals, we would consider proposing to apply 
documentation and coding adjustments to the FY 2010 Puerto Rico-
specific standardized amount under our authority in section 
1886(d)(5)(I)(i) of the Act.
b. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Standardized Amount
    For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a 
retrospective evaluation of the FY 2008 claims data for Puerto Rico 
hospitals using the same methodology described earlier for IPPS 
hospitals paid under the national standardized amounts under section 
1886(d) of the Act. We found that, for Puerto Rico hospitals, the 
increase in payments for discharges occurring during FY 2008 due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2008 was approximately 1.1 percent. 
However, as we note earlier for IPPS hospitals and hospitals receiving 
hospital-specific rates, if the estimated documentation and coding 
effect determined based on a full analysis of FY 2009 claims data was 
more or less than our then current estimates, it would change, possibly 
lessen, the anticipated cumulative adjustments that we had estimated we 
would have to make for the FY 2008 and FY 2009 combined adjustment. 
Therefore, we believed that it would be more prudent to delay 
implementation of the documentation and coding adjustment to allow for 
a more complete analysis of FY 2009 claims data for Puerto Rico 
hospitals.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43777), we 
indicated that, given these documentation and coding increases, 
consistent with our statements in prior IPPS rules, we would use our 
authority under section 1886(d)(5)(I)(i) of the Act to adjust the 
Puerto Rico-specific rate and solicited public comment on the proposed 
-1.1 percent prospective adjustment. However, in parallel to our 
decision to postpone adjustments to the Federal standardized amount, we 
also indicated that we were adopting a similar policy for the Puerto 
Rico-specific rate for FY 2010 and would consider the phase-in of this 
adjustment over an appropriate time period through future rulemaking. 
We noted that, as with the hospital-specific rates, the Puerto Rico-
specific standardized amount had not previously been adjusted based on 
estimated changes in documentation and coding associated with the 
adoption of the MS-DRGs.
    Consistent with our approach for IPPS hospitals for FY 2010, we 
indicated that

[[Page 25808]]

we would address in the FY 2011 rulemaking cycle any change in FY 2009 
case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2009.
    As we have noted above, similar to SCHs and MDHs, hospitals in 
Puerto Rico use the same MS-DRG system as all other hospitals and we 
believe they have the potential to realize increased payments from 
documentation and coding changes that do not reflect real increases in 
patient severity of illness. Therefore, we believe they should be 
equally subject to the prospective budget neutrality adjustment that we 
intend to apply to prospective payment rates for IPPS hospitals, 
including SCHs and MDHs, in order to eliminate the full effect of the 
documentation and coding changes associated with implementation of the 
MS-DRG system.
    As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 
through 50073), using the same methodology we applied to estimate 
documentation and coding changes under IPPS for non-Puerto Rico 
hospitals, our best estimate, based on the then most recently available 
data (FY 2009 claims paid through March 2010), was that, for 
documentation and coding that occurred over FY 2008 and FY 2009, a 
cumulative adjustment of -2.6 percent was required to eliminate the 
full effect of the documentation and coding changes on future payments 
from the Puerto Rico-specific rate. As we stated above, we believe it 
important to maintain both consistency and equity among all hospitals 
paid on the basis of the same MS-DRG system. At the same time, however, 
we recognize that the estimated cumulative impact on aggregate payment 
rates resulting from implementation of the MS-DRG system was smaller 
for Puerto Rico hospitals as compared to IPPS hospitals and SCHs and 
MDHs. Therefore, in the FY 2011 IPPS LTCH PPS proposed rule (75 FR 
23876), we proposed an adjustment to eliminate the full effect of the 
documentation and coding changes on the portion of future payments to 
Puerto Rico hospitals based on the Puerto Rico-specific rate. We stated 
that we believed that a full prospective adjustment was the most 
appropriate means to take into full account the effect of documentation 
and coding changes on payments, while maintaining equity as much as 
possible between hospitals paid on the basis of different prospective 
rates. We noted that our updated data analysis in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50072 through 50073) final rule showed that this 
adjustment would be -2.6 percent. The previous estimate in the proposed 
rule was a -2.4 percent adjustment.
    One reason we proposed the full prospective adjustment for the 
Puerto Rico-specific rate in FY 2011 was to maintain equity as much as 
possible in the documentation and coding adjustments applied to various 
hospital rates in FY 2011. Because our proposal was to make an 
adjustment that represents the full adjustment that is warranted for 
the Puerto Rico-specific rate, we indicated that we did not anticipate 
proposing any additional adjustments to the this rate for documentation 
and coding effects.
    Therefore, because the Puerto Rico-specific rate received a full 
prospective adjustment of -2.6 percent in FY 2011, we are proposing no 
further adjustment in this proposed rule for FY 2012.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background
    In the FY 2009 IPPS final rule (73 FR 48450), we continued to 
implement significant revisions to Medicare's inpatient hospital rates 
by completing our 3-year transition from charge-based relative weights 
to cost-based relative weights. Beginning in FY 2007, we implemented 
relative weights based on cost report data instead of based on charge 
information. We had initially proposed to develop cost-based relative 
weights using the hospital-specific relative value cost center (HSRVcc) 
methodology as recommended by MedPAC. However, after considering 
concerns expressed in the public comments we received on the proposal, 
we modified MedPAC's methodology to exclude the hospital-specific 
relative weight feature. Instead, we developed national CCRs based on 
distinct hospital departments and engaged a contractor to evaluate the 
HSRVcc methodology for future consideration. To mitigate payment 
instability due to the adoption of cost-based relative weights, we 
decided to transition cost-based weights over 3 years by blending them 
with charge-based weights beginning in FY 2007. (We refer readers to 
the FY 2007 IPPS final rule for details on the HSRVcc methodology and 
the 3-year transition blend from charge-based relative weights to cost-
based relative weights (71 FR 47882 through 47898).)
    In FY 2008, we adopted severity-based MS-DRGs, which increased the 
number of DRGs from 538 to 745. Many commenters raised concerns as to 
how the transition from charge-based weights to cost-based weights 
would continue with the introduction of new MS-DRGs. We decided to 
implement a 2-year transition for the MS-DRGs to coincide with the 
remainder of the transition to cost-based relative weights. In FY 2008, 
50 percent of the relative weight for each DRG was based on the CMS DRG 
relative weight and 50 percent was based on the MS-DRG relative weight.
    In FY 2009, the third and final year of the transition from charge-
based weights to cost-based weights, we calculated the MS-DRG relative 
weights based on 100 percent of hospital costs. We refer readers to the 
FY 2007 IPPS final rule (71 FR 47882) for a more detailed discussion of 
our final policy for calculating the cost-based DRG relative weights 
and to the FY 2008 IPPS final rule with comment period (72 FR 47199) 
for information on how we blended relative weights based on the CMS 
DRGs and MS-DRGs.
2. Summary of the RTI Study of Charge Compression and CCR Refinement
    As we transitioned to cost-based relative weights, some public 
commenters raised concerns about potential bias in the weights due to 
``charge compression,'' which is the practice of applying a higher 
percentage charge markup over costs to lower cost items and services, 
and a lower percentage charge markup over costs to higher cost items 
and services. As a result, the cost-based weights would undervalue 
high-cost items and overvalue low-cost items if a single CCR is applied 
to items of widely varying costs in the same cost center. To address 
this concern, in August 2006, we awarded a contract to RTI to study the 
effects of charge compression in calculating the relative weights and 
to consider methods to reduce the variation in the CCRs across services 
within cost centers. RTI issued an interim draft report in January 2007 
with its findings on charge compression (which was posted on the CMS 
Web site at: http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In 
that report, RTI found that a number of factors contribute to charge 
compression and affect the accuracy of the relative weights. RTI's 
findings demonstrated that charge compression exists in several CCRs, 
most notably in the Medical Supplies and Equipment CCR.
    In its interim draft report, RTI offered a number of 
recommendations to mitigate the effects of charge compression, 
including estimating regression-based CCRs to disaggregate the Medical 
Supplies Charged to Patients, Drugs Charged to Patients, and Radiology 
cost centers, and adding new cost centers to the Medicare cost report, 
such as adding a ``Devices, Implants and Prosthetics'' line under 
``Medical

[[Page 25809]]

Supplies Charged to Patients'' and a ``CT Scanning and MRI'' 
subscripted line under ``Radiology-Diagnostics''. Despite receiving 
public comments in support of the regression-based CCRs as a means to 
immediately resolve the problem of charge compression, particularly 
within the Medical Supplies and Equipment CCR, we did not adopt RTI's 
recommendation to create additional regression-based CCRs. (For more 
details on RTI's findings and recommendations, we refer readers to the 
FY 2009 IPPS final rule (73 FR 48452).) RTI subsequently expanded its 
analysis of charge compression beyond inpatient services to include a 
reassessment of the regression-based CCR models using both outpatient 
and inpatient charge data. This interim report was made available in 
April 2008 during the public comment period on the FY 2009 IPPS 
proposed rule and can be found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200804.pdf . The IPPS-specific chapters, which were 
separately displayed in the April 2008 interim report, as well as the 
more recent OPPS chapters, were included in the July 3, 2008 RTI final 
report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC 
[Ambulatory Payment Classification] and DRG Relative Payment Weights,'' 
that became available at the time of the development of the FY 2009 
IPPS final rule. The RTI final report can be found on RTI's Web site 
at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.
    RTI's final report found that, under the IPPS and the OPPS, 
accounting improvements to the cost reporting data reduce some of the 
sources of aggregation bias without having to use regression-based 
adjustments. In general, with respect to the regression-based 
adjustments, RTI confirmed the findings of its March 2007 report that 
regression models are a valid approach for diagnosing potential 
aggregation bias within selected services for the IPPS and found that 
regression models are equally valid for setting payments under the 
OPPS.
    RTI also noted that cost-based weights are only one component of a 
final prospective payment rate. There are other rate adjustments (wage 
index, IME, and DSH) to payments derived from the revised cost-based 
weights, and the cumulative effect of these components may not improve 
the ability of final payment to reflect resource cost. RTI endorsed 
short-term regression-based adjustments, but also concluded that more 
refined and accurate accounting data are the preferred long-term 
solution to mitigate charge compression and related bias in hospital 
cost-based weights. For a more detailed summary of RTI's findings, 
recommendations, and public comments we received on the report, we 
refer readers to the FY 2009 IPPS final rule (73 FR 48452 through 
48453).
3. Summary of Policy Changes Made in FY 2011
    In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48458 through 
48467), in response to the RTI's recommendations concerning cost report 
refinements, and because of RAND's finding that regression-based 
adjustments to the CCRs do not significantly improve payment accuracy, 
we discussed our decision to pursue changes to the cost report to split 
the cost center for Medical Supplies Charged to Patients into one line 
for ``Medical Supplies Charged to Patients'' and another line for 
``Implantable Devices Charged to Patients.'' (We refer readers to the 
Web site: http://www.rand.org/pubs/working_papers/WR560/, and the FY 
2009 IPPS/LTCH PPS final rule for details on the RAND report (73 FR 
48453 through 48457).) We acknowledged, as RTI had found, that charge 
compression occurs in several cost centers that exist on the Medicare 
cost report. However, as we stated in the FY 2009 IPPS/LTCH PPS final 
rule, we focused on the CCR for Medical Supplies and Equipment because 
RTI found that the largest impact on the MS-DRG relative weights could 
result from correcting charge compression for devices and implants. In 
determining what should be reported in these respective cost centers, 
we adopted the commenters' recommendation that hospitals should use 
revenue codes established by AHA's National Uniform Billing Committee 
to determine what should be reported in the ``Medical Supplies Charged 
to Patients'' and the ``Implantable Devices Charged to Patients'' cost 
centers. Accordingly, a new subscripted line 55.30 for ``Implantable 
Devices Charged to Patients'' was created in July 2009 as part of CMS' 
Transmittal 20 update to the existing cost report Form CMS-2552-96. 
This new subscripted cost center has been available for use for cost 
reporting periods beginning on or after May 1, 2009.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 
50080), we finalized our proposal to create standard cost centers for 
CT scans, MRI, and cardiac catheterization, and to require that 
hospitals report the costs and charges for these services under new 
cost centers on the revised Medicare cost report Form CMS 2552-10. As 
we discussed in the FY 2009 IPPS/LTCH PPS and CY 2009 OPPS/ASC proposed 
and final rules, RTI found that the costs and charges of CT scans, MRI, 
and cardiac catheterization differ significantly from the costs and 
charges of other services included in the standard associated cost 
center. RTI also concluded that both the IPPS and OPPS relative weights 
would better estimate the costs of those services if CMS were to add 
standard costs centers for CT scans, MRI, and cardiac catheterization 
in order for hospitals to report separately the costs and charges for 
those services and in order for CMS to calculate unique CCRs to 
estimate the cost from charges on claims data. (We refer readers to the 
FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 50080) for a more 
detailed discussion on the reasons for the creation of standard cost 
centers for CT scans, MRI, and cardiac catheterization.) The new 
standard cost centers for MRI, CT scans, and cardiac catheterization 
are effective for cost report periods beginning on or after May 1, 
2010, on the revised cost report Form CMS-2552-10. CMS issued the new 
hospital cost report Form CMS-2552-10 on December 30, 2010. The new 
cost report form can be accessed at the CMS Web site at: https://www.cms.gov/Manuals/PBM/itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=1&sortOrder=ascending&itemID=CMS021935&intNumPerPage=10. 
Once at this Web site, users should double click on ``Chapter 40.''
4. Discussion for FY 2012
    In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48468), we stated 
that, due to what is typically a 3-year lag between the reporting of 
cost report data and the availability for use in ratesetting, we 
anticipated that we might be able to use data from the new 
``Implantable Devices Charged to Patients'' cost center to develop a 
CCR for Implantable Devices Charged to Patients in the FY 2012 or FY 
2013 IPPS rulemaking cycle. Specifically, we stated, ``Because there is 
approximately a 3-year lag between the availability of cost report data 
for IPPS and OPPS rate-setting purposes in a given fiscal year, we may 
be able to derive two distinct CCRs, one for medical supplies and one 
for devices, for use in calculating the FY 2012 or FY 2013 IPPS 
relative weights and the CY 2012 or CY 2013 OPPS relative weights'' (73 
FR 48468). However, as noted in the FY 2010 IPPS/LTCH PPS final rule 
(74 FR 43782), due to delays in the issuance of the revised cost report 
CMS 2552-10,

[[Page 25810]]

a new CCR for Implantable Devices Charged to Patients may not be 
available until FY 2013. Similarly, when we finalized the decision in 
the FY 2011 IPPS/LTCH PPS final rule to add new cost centers for MRI, 
CT scans, and cardiac catheterization, we explained that data from any 
new cost centers that may be created will not be available until at 
least 3 years after they are first used (75 FR 50077). That is, in the 
FY 2011 IPPS/LTCH PPS final rule (75 FR 50077), we stated that the data 
from the standard cost centers for MRI, CT scans, and cardiac 
catheterization, respectively, would not even be available for possible 
use in calculating the relative weights earlier than 3 years after Form 
CMS-2552-10 becomes available. We further stated that, at that time, we 
would analyze the data and determine if it is appropriate to use those 
data to create distinct CCRs from these cost centers for use in the 
relative weights for the respective payment systems. We also reassured 
public commenters that there was no need for immediate concern 
regarding possible negative payment impacts on MRI and CT scans under 
the IPPS and the OPPS because the cost report data that would be used 
for the calculation of the relative weights were at least 3 years from 
being available. We stated that we will first thoroughly analyze and 
run impacts on the data and provide the public with the opportunity to 
comment before distinct CCRs for MRI and CT scans would be finalized 
for use in the calculation of the relative weights. We also urged all 
hospitals to properly report their costs and charges for MRI, CT scans, 
and all other services so that, in several years' time, we will have 
reliable data from all hospitals on which to base a decision as to 
whether to incorporate additional CCRs into the relative weight 
calculation (75 FR 50077).
    Accordingly, in preparation for this FY 2012 IPPS/LTCH PPS proposed 
rule, we have assessed the availability of data in the ``Implantable 
Devices Charged to Patients'' cost center. In order to develop a robust 
analysis regarding the use of cost data from the ``Implantable Devices 
Charged to Patients'' cost center, it is necessary to have a critical 
mass of cost reports filed with data in this cost center. The cost 
center for ``Implantable Devices Charged to Patients'' is effective for 
cost reporting periods beginning on or after May 1, 2009. We have 
checked the availability of FY 2009 cost reports in the December 31, 
2010 quarter ending update of HCRIS, which is the latest upload of FY 
2009 cost report data that we could use for this proposed rule. We have 
determined that there are only 437 hospitals (out of approximately 
3,500 IPPS hospitals) that have completed the ``Implantable Devices 
Charged to Patients'' cost center. We do not believe that this is a 
sufficient amount of data from which to generate a meaningful analysis 
in this particular situation. Therefore, we are not proposing to use 
data from the ``Implantable Devices Charged to Patients'' cost center 
to create a distinct CCR for Implantable Devised Charged to Patients 
for use in calculating the MS-DRG relative weights for FY 2012. We will 
reassess the availability of data for the ``Implantable Devices Charged 
to Patients'' cost center, and the ``MRI, CT Scans, and Cardiac 
Catheterization'' cost centers, for the FY 2013 IPPS rulemaking cycle 
and, if appropriate, we will propose to create a distinct CCR at that 
time.

F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections

1. Background
a. Statutory Authority
    Section 1886(d)(4)(D) of the Act addresses certain hospital-
acquired conditions (HACs), including infections. Section 1886(d)(4)(D) 
of the Act specifies that by October 1, 2007, the Secretary was 
required to select, in consultation with the Centers for Disease 
Control and Prevention (CDC), at least two conditions that: (a) Are 
high cost, high volume, or both; (b) are assigned to a higher paying 
MS-DRG when present as a secondary diagnosis (that is, conditions under 
the MS-DRG system that are CCs or MCCs); and (c) could reasonably have 
been prevented through the application of evidence-based guidelines. 
Section 1886(d)(4)(D) of the Act also specifies that the list of 
conditions may be revised, again in consultation with CDC, from time to 
time as long as the list contains at least two conditions.
    Section 1886(d)(4)(D)(iii) of the Act requires that hospitals, 
effective with discharges occurring on or after October 1, 2007, submit 
information on Medicare claims specifying whether diagnoses were 
present on admission (POA). Section 1886(d)(4)(D)(i) of the Act 
specifies that effective for discharges occurring on or after October 
1, 2008, Medicare no longer assigns an inpatient hospital discharge to 
a higher paying MS-DRG if a selected condition is not POA. Thus, if a 
selected condition that was not POA manifests during the hospital stay, 
it is considered a HAC and the case is paid as though the secondary 
diagnosis was not present. However, even if a HAC manifests during the 
hospital stay, if any nonselected CC/MCC appears on the claim, the 
claim will be paid at the higher MS-DRG rate. Under the HAC payment 
policy, all CCs/MCCs on the claim must be HACs in order to generate a 
lower MS-DRG payment. In addition, Medicare continues to assign a 
discharge to a higher paying MS-DRG if a selected condition is POA.
    The POA indicator reporting requirement and the HAC payment 
provision apply to IPPS hospitals only. Non-IPPS hospitals, including 
CAHs, LTCHs, IRFs, IPFs, cancer hospitals, children's hospitals, 
hospitals in Maryland operating under waivers, rural health clinics, 
federally qualified health centers, RNHCIs, and Department of Veterans 
Affairs/Department of Defense hospitals, are exempt from POA reporting 
and the HAC payment provision. Throughout this section, the term 
``hospital'' refers to an IPPS hospital.
    The HAC provision found in section 1886(d)(4)(D) of the Act is part 
of an array of Medicare value-based purchasing (VBP) tools that we are 
using to promote increased quality and efficiency of care. Those tools 
include measuring performance, using payment incentives, publicly 
reporting performance results, applying national and local coverage 
policy decisions, enforcing conditions of participation, and providing 
direct support for providers through Quality Improvement Organization 
(QIO) activities. The application of VBP tools, such as this HAC 
provision, is transforming Medicare from a passive payer to an active 
purchaser of higher value health care services. We are applying these 
strategies for inpatient hospital care and across the continuum of care 
for Medicare beneficiaries.
    These VBP tools are highly compatible with the underlying purposes 
as well as existing structural features of Medicare's IPPS. Under the 
IPPS, hospitals are encouraged to treat patients efficiently because 
they receive the same DRG payment for stays that vary in length and in 
the services provided, which gives hospitals an incentive to avoid 
unnecessary costs in the delivery of care. In some cases, conditions 
acquired in the hospital do not generate higher payments than the 
hospital would otherwise receive for cases without these conditions. To 
this extent, the IPPS encourages hospitals to avoid complications.
    However, the treatment of certain conditions can generate higher 
Medicare payments in two ways. First, if a hospital incurs 
exceptionally high costs treating a patient, the hospital stay may

[[Page 25811]]

generate an outlier payment. Because the outlier payment methodology 
requires that hospitals experience large losses on outlier cases before 
outlier payments are made, hospitals have an incentive to prevent 
outliers. Second, under the MS-DRG system that took effect in FY 2008 
and that has been refined through rulemaking in subsequent years, 
certain conditions can generate higher payments even if the outlier 
payment requirements are not met. Under the MS-DRG system, there are 
currently 259 sets of MS-DRGs that are split into 2 or 3 subgroups 
based on the presence or absence of a CC or an MCC. The presence of a 
CC or an MCC generally results in a higher payment. However, since we 
implemented the HAC provisions, if a secondary diagnosis acquired 
during a hospital stay is a HAC and no other CCs or MCCs are present, 
the hospital receives a payment under the MS-DRGs as if the HACs were 
not present. (We refer readers to section II.D. of the FY 2008 IPPS 
final rule with comment period for a discussion of DRG reforms (72 FR 
47141).)
b. HAC Selection
    Beginning in FY 2007, we have proposed, solicited, and responded to 
public comments and have implemented section 1886(d)(4)(D) of the Act 
through the IPPS annual rulemaking process. For specific policies 
addressed in each rulemaking cycle, we direct readers to the following 
publications: the FY 2007 IPPS proposed rule (71 FR 24100) and final 
rule (71 FR 48051 through 48053); the FY 2008 IPPS proposed rule (72 FR 
24716 through 24726) and final rule with comment period (72 FR 47200 
through 47218); the FY 2009 IPPS proposed rule (73 FR 23547) and final 
rule (73 FR 48471); the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 
FR 24106) and final rule (74 FR 43782); and the FY 2011 IPPS/LTCH PPS 
proposed rule (75 FR 23880) and final rule (75 FR 50080). A complete 
list of the 10 current categories of HACs is included in section 
II.F.2. of this preamble.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 
50101), we did not add any additional HACs or make any changes to 
policies already established under the authority of section 
1886(d)(4)(D) of the Act.
c. Collaborative Process
    In establishing the HAC payment policy under section 1886(d)(4)(D) 
of the Act, our experts have worked closely with public health and 
infectious disease professionals from across the Department of Health 
and Human Services, including CDC, the Agency for Healthcare Research 
and Quality (AHRQ), and the Office of Public Health and Science (OPHS), 
to identify the candidate preventable HACs, review comments, and select 
HACs. CMS and CDC also have collaborated on the process for hospitals 
to submit a POA indicator for each diagnosis listed on IPPS hospital 
Medicare claims and on the payment implications of the various POA 
reporting options. In addition, as discussed below, we have used 
rulemaking and Listening Sessions to obtain public input.
d. Application of HAC Payment Policy to MS-DRG Classifications
    As described above, in certain cases, application of the HAC 
payment policy provisions can result in MS-DRG reassignment to a lower 
paying MS-DRG. The following diagram portrays the logic of the HAC 
payment policy provision as adopted in the FY 2008 IPPS final rule with 
comment period (72 FR 47200) and in the FY 2009 IPPS final rule (73 FR 
48471):
[GRAPHIC] [TIFF OMITTED] TP05MY11.003

e. Public Input Regarding Selected and Potential Candidate HACs
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 
50101), we did not add or remove categories of HACs, nor did we make 
any changes to previously established policies. However, we continue to 
encourage public dialogue about refinement of the HAC list.
    Given the timeliness of the HAC discussion, particularly when 
considered within the context of recent legislative health care reform 
initiatives, we remain eager to engage in an ongoing public dialogue 
about the various aspects of this policy. We plan to continue to 
include updates and findings from the RTI evaluation on CMS' Hospital-
Acquired Conditions and Present on Admission Indicator Web site 
available at: http://www.cms.hhs.gov/HospitalAcqCond/.

[[Page 25812]]

f. POA Indicator Reporting
    Collection of POA indicator data is necessary to identify which 
conditions were acquired during hospitalization for the HAC payment 
provision as well as for broader public health uses of Medicare data. 
In the FY 2011 IPPS/LTCH PPS proposed rule, we listed the instructions 
and change requests that were issued to IPPS hospitals and also to non-
IPPS hospitals regarding the submission of POA indicator data for all 
diagnosis codes on Medicare claims and the processing of non-PPS claims 
(75 FR 23381). We also indicated that specific instructions on how to 
select the correct POA indicator for each diagnosis code were included 
in the ICD-9-CM Official Guidelines for Coding and Reporting, available 
on the CDC Web site at: http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. We reiterate that additional information regarding POA 
indicator reporting and application of the POA reporting options is 
available on the CMS Web site at: http://www.cms.gov/HospitalAcqCond/. 
Historically, we have not provided coding advice. Rather, we 
collaborate with the American Hospital Association (AHA) through the 
Coding Clinic for ICD-9-CM. We will continue to collaborate with the 
AHA to promote the Coding Clinic for ICD-9-CM as the source for coding 
advice about the POA indicator.
    As discussed in previous IPPS proposed and final rules, there are 
five POA indicator reporting options, as defined by the ICD-9-CM 
Official Guidelines for Coding and Reporting:
[GRAPHIC] [TIFF OMITTED] TP05MY11.004

    In the FY 2009 IPPS final rule (73 FR 48486 through 48487), we 
adopted final payment policies to: (1) Pay the CC/MCC MS-DRGs for those 
HACs coded with ``Y'' and ``W'' indicators; and (2) not pay the CC/MCC 
MS-DRGs for those HACs coded with ``N'' and ``U'' indicators.
    Beginning on or after January 1, 2011, hospitals are required to 
begin reporting POA indicators using the 5010 electronic transmittal 
standards format. The 5010 format removes the need to report a POA 
indicator of ``1'' for codes that are exempt from POA reporting. 
However, for claims that continue to be submitted using the 4010 
electronic transmittal standards format, the POA indicator of ``1'' is 
still necessary because of reporting restrictions from the use of the 
4010 electronic transmittal standards format.
    Hospitals that began reporting with the 5010 format on and after 
January 1, 2011, can no longer report a POA indicator of ``1'' for POA 
exempt codes. The POA field should instead be left blank for codes 
exempt from POA reporting. We have issued CMS instructions on this 
reporting change as a One-Time Notification, Pub. No. 100-20, 
Transmittal No. 756, Change Request 7024, effective on August 13, 2010. 
These instructions, entitled 5010 Implementation-Changes to Present on 
Admission (POA) Indicator ``1'' and the K3 Segment, can be located at 
the following link on the CMS Web site: http://www.cms.gov/manuals/downloads/Pub100_20.pdf.
    We are continuing our efforts to clarify instructions regarding use 
of the POA indicator. As discussed in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50088), we received public comments in response to the FY 
2011 IPPS/LTCH PPS proposed rule that expressed concern about the 
accuracy of reporting of POA indicators for HACs related to 
intracranial injury with loss of consciousness. The codes for loss of 
consciousness are listed in the Falls and Trauma HAC category, within 
the ``Intracranial Injury'' subcategory. Because loss of consciousness 
is a component of intracranial injuries rather than a separate 
condition, we agreed that the POA guidelines that instructed coders to 
assign an ``N'' indicator if any part of the combination code was not 
present on admission did not apply to the loss of consciousness codes. 
As a member of the Editorial Advisory Board for the Coding Clinic for 
ICD-9-CM, we worked with the American Hospital Association (AHA), 
American Health Information Management Association (AHIMA), and the 
Centers for Disease Control and Prevention (CDC) to provide additional 
clarification on how these conditions should be reported. Additional 
guidance on how these cases should be reported can be found in AHA's 
Coding Clinic for ICD-9-CM, 2nd Quarter 2010, ``Frequently Asked POA 
Questions'' section. That publication clarified the POA reporting for 
patients in whom a single code captures the fact that the patient was 
admitted as a result of a head injury and then subsequently lost 
consciousness after the admission. For these cases, we clarified that 
the POA indicator assigned should be ``Y,'' indicating that the head 
injury and resulting loss of consciousness occurred prior to (and was 
present on) admission.
    We expect that this clarification will lead to greater consistency 
and accuracy in POA indicator reporting for these conditions. We look 
forward to continuing our efforts as part of the AHA's Editorial 
Advisory Board for Coding Clinic for ICD-9-CM to provide guidance on 
accuracy of coding and the reporting of POA indicators. Hospitals look 
to this publication to provide detailed guidance on ICD-9-CM coding and 
POA reporting. We encourage

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hospitals to send any other questions about ICD-9-CM codes or POA 
indicator selection to the AHA so that the Editorial Advisory Board can 
continue its role of providing instruction on the accurate selection 
and reporting of both ICD-9-CM codes and POA indicators.
2. Proposed Additions and Revisions to the HAC Policy for FY 2012
a. Contrast-Induced Acute Kidney Injury
    We discuss below our analysis for a proposed new condition as a 
possible candidate for selection for FY 2012 under section 
1886(d)(4)(D) of the Act. As described in more detail in section 
II.F.1.a. of this preamble, each HAC must be: (1) High cost, high 
volume, or both; (2) assigned to a higher paying MS-DRG when present as 
a secondary diagnosis (that is, conditions under the MS-DRG system that 
are CCs or MCCs); and (3) could reasonably have been prevented through 
the application of evidence-based guidelines. We also discuss other 
considerations relating to the selection of a HAC, including any 
administrative or operational issues associated with a proposed 
condition. For example, the condition may only be able to be identified 
by multiple codes, thereby requiring the development of special GROUPER 
logic to also exclude similar or related ICD-9-CM codes from being 
classified as a CC or an MCC. Similarly, a condition acquired during a 
hospital stay may arise from another condition that the patient had 
prior to admission, making it difficult to determine whether the 
condition was reasonably preventable. We invite public comment on 
clinical, coding, and prevention issues on our proposal to add 
contrast-induced acute kidney injury as a condition subject to the HAC 
payment provision for FY 2012 (for discharges occurring on or after 
October 1, 2011).
    Contrast-induced acute kidney injury is a significant complication 
of the use of iodinated contrast media and accounts for a large number 
of cases of hospital-acquired acute kidney injury cases. A published 
study has shown that renal failure associated with contrast 
administration is correlated with up to 11 percent of cases of renal 
failure that occur in hospitals (Nash, et al.: American Journal on 
Kidney Disease, 2002, Vol. 39, pp. 930-936). Patients who experience 
acute kidney injury have an increased risk of inhospital mortality even 
after adjustments for disease comorbidities (McCullough, J.: American 
College of Cardiology, 2008, pp. 1419 through 1428). Data suggest that 
the risk for mortality extends beyond the period of hospitalization, 
resulting in 1-year and 5-year mortality rates significantly higher 
than those patients who have not developed acute kidney injury. In 
addition, contrast-induced acute kidney injury is associated with an 
increased incidence of myocardial infarction, bleeding requiring 
transfusion, and prolonged hospital stays (McCullough, J.: American 
Journal of Medicine, 1997, Vol. 103, pp. 368 through 375). We note that 
``acute kidney injury'' is a new terminology endorsed by the National 
Kidney Foundation to replace ``acute renal failure.''
    There is not a unique code that identifies kidney injury. However, 
kidney injury can be identified as a subset of discharges with ICD-9-CM 
diagnosis code 584.9 (Acute kidney failure, unspecified). Our clinical 
advisors believe that diagnosis code 584.9, in combination with the 
associated procedure codes below, can accurately identify contrast-
induced acute kidney injury:
     88.40 (Arteriography using contrast material, unspecified 
site)
     88.41 (Arteriography of cerebral arteries)
     88.42 (Aortography)
     88.43 (Arteriography of pulmonary arteries)
     88.44 (Arteriography of other intrathoracic vessels)
     88.45 (Arteriography of renal arteries)
     88.46 (Arteriography of placenta)
     88.47 (Arteriography of other intra-abdominal arteries)
     88.48 (Arteriography of femoral and other lower extremity 
arteries)
     88.49 (Arteriography of other specified sites)
     88.50 (Angiocardiography, not otherwise specified)
     88.51 (Angiocardiography of venae cavae)
     88.52 (Angiocardiography of right heart structures)
     88.53 (Angiocardiography of left heart structures)
     88.54 (Combined right and left heart angiocardiography)
     88.55 (Coronary arteriography using a single catheter)
     88.56 (Coronary arteriography using two catheters)
     88.57 (Other and unspecified coronary arteriography)
     88.58 (Negative-contrast cardiac roentgenography)
     88.59 (Intra-operative coronary fluorescence vascular 
angiography)
     88.60 (Phlebography using contrast material, unspecified 
site)
     88.61 (Phlebography of veins of head and neck using 
contrast material)
     88.62 (Phlebography of pulmonary veins using contrast 
material)
     88.63 (Phlebography of other intrathoracic veins using 
contrast material)
     88.64 (Phlebography of the portal venous system using 
contrast material)
     88.65 (Phlebography of other intra-abdominal veins using 
contrast material)
     88.66 (Phlebography of femoral and other lower extremity 
veins using contrast material)
     88.67 (Phlebography of other specified sites using 
contrast material)
     87.71 (C.A.T. of kidney)
     87.72 (Other nephrotomogram)
     87.73 (Intravenous pyelogram)
     87.74 (Retrograde pyelogram)
     87.75 (Percutaneous pyelogram)
    We are proposing to identify contrast-induced acute kidney injury 
with diagnosis code 584.9 in combination with one or more of the above 
associated procedure codes.
    We also considered identifying contrast-induced acute kidney injury 
through the use of external injury codes, or E-codes. Code E947.8 
(Other drugs and medicinal substances) has an inclusion term ``Contrast 
media used for diagnostic x-ray procedures'' to identify the use of 
contrast. However, we note that we do not currently require the 
reporting of E-codes for the HAC payment provisions under the IPPS. 
Therefore, we would be unable to rely on the identification of 
contrast-induced acute kidney injury through E-codes on Medicare IPPS 
HAC claims.
    Section 1886(d)(4)(D) of the Act requires that a HAC be a condition 
that is ``high cost, high volume, or both.'' In FY 2009, there were 
38,324 inpatient discharges coded with acute renal failure as specified 
by ICD-9-CM diagnosis code 584.9 reported as not present on admission 
(POA status = N) when reported with one of the above procedure codes 
submitted through Medicare claims. The cases had an average charge of 
$29,122 for the entire hospital stay. Studies suggest the additional 
average cost per day for a patient who has acquired contrast-induced 
acute kidney injury is $2,654. Other data report patients stays 
increases by 3.75 days once they have acquired the diagnosis 
(Subramanian, et al.: Journal of Medical Economics, 2007, Vol. 10, pp. 
119 through 134).
    There are widely recognized guidelines for the prevention of acute 
kidney injury that address the prevention of contrast-induced acute 
kidney injury, and we believe the condition is reasonably preventable. 
One of these guidelines can be found at: http://www.renal.org/Clinical/

[[Page 25814]]

GuidelineSection/AcuteKidneyInjury.aspx.
    The condition of contrast-induced acute kidney injury as specified 
in our proposal is a CC under the MS DRGs.
    We have not identified any additional administrative or operational 
difficulties with proposing this condition as a HAC. We invite public 
comment on whether contrast-induced acute kidney injury meets the 
requirements set forth under section 1886(d)(4)(D) of the Act, as well 
as other coding and prevention issues associated with our proposal to 
add this injury as a condition subject to the HAC payment provision for 
FY 2012 (for discharges occurring on or after October 1, 2011). We are 
particularly interested in receiving comments on the degree to which 
contrast-induced acute kidney injury is reasonably preventable through 
the application of evidence-based guidelines.
b. New Diagnosis Codes Proposed to be Added to Existing HACs
    As changes to diagnosis codes and new diagnosis codes are proposed 
and finalized for the list of CCs and MCCs, we modify the list of 
selected HACs to reflect these changes. Included in Table 6A, which is 
listed in section VI. of the Addendum to this proposed rule and 
available via the Internet, are five new ICD-9-CM diagnosis codes that 
we are proposing to add to three of the current HAC categories. We are 
proposing to add two new codes for the Falls and Trauma HAC category, 
two new codes for the Surgical Site Infection (SSI) Following Certain 
Bariatric Procedures HAC category, and one new code for the Deep Vein 
Thrombosis and Pulmonary Embolism (DVT/PE) Following Certain Orthopedic 
Procedures HAC category. The two new diagnosis codes that we are 
proposing to add to the Falls and Trauma HAC category are code 808.44 
(Multiple closed pelvic fractures without disruption of pelvic circle) 
and code 808.54 (Multiple open pelvic fractures without disruption of 
pelvic circle). These codes fall within the range of the fracture code 
subcategory (800 through 829). The two new diagnosis codes that we are 
proposing to add to the Surgical Site Infection (SSI) Following Certain 
Bariatric Procedures HAC category are code 539.01 (Infection due to 
gastric band procedure) and code 539.81 (Infection due to other 
bariatric procedure). We believe these diagnosis codes are appropriate 
for inclusion in the existing category when reported as a secondary 
diagnosis with the specified principal diagnosis code of morbid obesity 
(code 278.01) and one of the designated bariatric procedure codes (code 
44.38, 44.39, or 44.95). Lastly, the one new diagnosis code that we are 
proposing to add to the Deep Vein Thrombosis and Pulmonary Embolism 
(DVT/PE) Following Certain Orthopedic Procedures HAC category is code 
415.13 (Saddle embolus of pulmonary artery). Diagnosis code 415.13 
would be applicable when reported along with one of the following 
procedures codes describing certain orthopedic procedures: 00.85 
through 00.87, 81.51, 81.52, or 81.54. Shown in the table below are 
these five new diagnosis codes with their corresponding descriptions 
and their proposed CC/MCC designations.
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    We are inviting public comments on the proposed adoption of theses 
five new ICD-9-CM diagnosis codes as CC/MCCs that are listed above, 
which, if finalized, would be added to the current Falls and Trauma HAC 
category, Surgical Site Infection (SSI) Following Certain Bariatric 
Procedures HAC category and Deep Vein Thrombosis and Pulmonary Embolism 
(DVT/PE) Following Certain Orthopedic Procedures HAC category and would 
be subject to the HAC payment provision for FY 2012.
c. Revision to HAC Subcategory Title
    After publication of the FY 2011 IPPS/LTCH PPS final rule, we 
received a comment stating that the subcategory title ``Electric 
Shock'' that is included in the Falls and Trauma HAC category was 
misleading. The commenter stated that this subcategory title did not 
accurately describe the CC/MCC ICD-9-CM diagnoses codes (991 through 
994) contained within this subcategory. The commenter requested that 
CMS develop a new title that would more accurately describe this group 
of codes.
    We agree with the commenter that the HAC subcategory title 
``Electric Shock'' is potentially misleading because the codes included 
within these ranges contain a variety of injuries, including the 
following:
     Category 991 (Effects of Reduced Temperature)
     Category 992 (Effects of Heat and Light)
     Category 993 (Effects of Air Pressure)
     Category 994 (Effects of Other External Causes)
    We are proposing to change the title of this HAC subcategory from 
``Electric Shock'' to ``Other Injuries'' because it includes a variety 
of injury codes. The subcategory will continue to include the codes 
within the 991-994 code ranges appearing on the CC/MCC list. We are 
proposing no changes to the list of codes in this subcategory; we are 
simply proposing to rename the subcategory title. We invite public 
comments on this proposed title change to the HAC subcategory from 
``Electric Shock'' to ``Other Injuries'' for FY 2012.
d. Conclusion
    The following table lists the current HAC categories and the ICD-9-
CM codes that identify the conditions and have been finalized through 
FY 2011. For FY 2012, we are proposing that these conditions continue 
to be subject to the HAC payment provision, along with the creation of 
a new HAC category for Contrast-Induced Acute Kidney Injury as 
discussed in section II.F.2.a. of this preamble. In addition, we are 
proposing to add five new ICD-9-CM diagnosis codes and to revise the 
title of the ``Electric Shock'' subcategory in the Falls and Trauma HAC 
category.
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    We refer readers to section II.F.6. of the FY 2008 IPPS final rule 
with comment period (72 FR 47202 through 47218) and to section II.F.7. 
of the FY 2009 IPPS final rule (73 FR 48474 through 48486) for detailed 
analyses supporting the selection of each of the HACs selected through 
FY 2011.
3. RTI Program Evaluation Summary
a. Background
    On September 30, 2009, a contract was awarded to Research Triangle 
Incorporated (RTI) to evaluate the impact of the Hospital-Acquired 
Condition-Present on Admission (HAC-POA) provisions on the changes in 
the incidence of selected conditions, effects on Medicare payments, 
impacts on coding accuracy, unintended consequences, and infection and 
event rates. This is an intra-agency project with funding and technical 
support coming from CMS, OPHS, AHRQ, and CDC. The evaluation will also 
examine the implementation of the program and evaluate additional 
conditions for future selection.
    RTI's evaluation of the HAC-POA provisions is divided into several 
parts. In the FY 2011 IPPS/LTCH PPS final rule (50085 through 50101), 
we summarized the analyses by RTI that had been completed at that time. 
These RTI analyses of POA indicator reporting, frequencies and net 
savings associated with current HACs, and frequencies of previously 
considered candidate HACs reflected MedPAR claims from October 2008 
through September 2009.
b. FY 2009 Data Analysis
    As we describe above, we have provided instructions to IPPS 
hospitals and non-IPPS hospitals regarding the submission of POA 
indicator data for all diagnosis codes on Medicare claims and the 
processing of non-PPS claims (75 FR 23381) and note that specific 
instructions on how to select the correct POA indicator for each 
diagnosis code were included in the ICD-9-CM Official Guidelines for 
Coding and Reporting, available on the CDC Web site at: http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. After publication of the FY 
2011 IPPS/LTCH PPS final rule, we identified a discrepancy between the 
claims data that hospitals submitted and the CMS data file used to 
calculate the HAC measures. Specifically, this error led to incorrect 
HAC assignments in cases where a hospital reported an external cause of 
injury (E-code). Since then, we have corrected this error in the data 
file.
    As a result, the RTI analysis of the HAC-POA program that was 
conducted using FY 2009 claims data will be updated using the corrected 
data file. We do not expect the corrected data to have a material 
impact on our previous findings for FY 2009. Revised data tables will 
be made publicly available on the CMS Web site at http://www.cms.gov/HospitalAcqCond/01_Overview.asp and the RTI Web site at http://www.rti.org/reports/cms/ soon after publication of this proposed rule.
c. FY 2010 Data Analysis
    RTIs analysis of the FY 2010 MedPAR data file for the HAC-POA 
program evaluation was not fully complete in time for publication in 
this proposed rule. We will provide the results from the study on the 
CMS Web site at http://www.cms.gov/HospitalAcqCond/01_Overview.asp and 
on the RTI Web site at http://www.rti.org/reports/cms/ when available. 
We anticipate that the examination of FY 2010 MedPAR data will be 
completed soon after publication of this proposed rule. We invite 
public comment on RTI's analysis of the FY 2010 MedPAR data for the 
HAC-POA program.

G. Proposed Changes to Specific MS-DRG Classifications

    In this proposed rule, we are inviting public comment on each of 
the MS-DRG classification proposed changes described below, as well as 
our proposals to maintain certain existing MS-DRG classifications, 
which are also discussed below. In some cases, we are proposing changes 
to the MS-DRG classifications based on our analysis of claims data. In 
other cases, we are proposing to maintain the existing MS-DRG 
classification based on our analysis of claims data.
1. Pre-Major Diagnostic Categories (Pre-MDCs)
a. Noninvasive Mechanical Ventilation
    We received a request from the National Association for Medical 
Direction of Respiratory Care (NAMDRC) which suggested that we

[[Page 25817]]

create a new MS-DRG for patients with certain respiratory conditions 
who receive noninvasive mechanical ventilation (NIV). The requestor 
stated that patients who receive NIV are almost always placed within an 
intensive care unit (ICU) or an emergency department and use the 
resources available in those areas. The requestor recommended that this 
new MS-DRG recognize current practice and allow for appropriate 
reimbursement for the technical complexity and monitoring required for 
NIV as a form of acute life support. According to the requestor, NIV 
has evolved to become first-line supportive therapy for several forms 
of acute respiratory failure. Lastly, the requestor recommended that 
the new MS-DRG identify NIV usage of approximately 6 to 12 hours to 
account for the ``legitimate but very short term use of this therapy.''
    Historically, the concept of mechanical ventilation for critically 
ill patients included establishment of an artificial airway, 
invasively, through endotracheal intubation or a tracheostomy. 
According to the requestor, a significant portion of these patients can 
now be treated through noninvasive mechanical ventilation with the use 
of a face or nasal mask. In the ICD-9-CM classification system, NIV is 
described by procedure code 93.90 (Noninvasive mechanical ventilation), 
while invasive mechanical ventilation is described by procedure codes 
96.70 (Continuous invasive mechanical ventilation of unspecified 
duration), 96.71 (Continuous invasive mechanical ventilation for less 
than 96 consecutive hours), and 96.72 (Continuous invasive mechanical 
ventilation for 96 consecutive hours or more). The requestor submitted 
external data to illustrate trends in NIV use over the past decade. 
These data were derived from a survey conducted during 2002-2003 of 
several hospitals located in Massachusetts and Rhode Island. The 
requestor believed that these data indicate patients with exacerbation 
of chronic obstructive pulmonary disease (COPD), acute pulmonary edema, 
or worsening congestive heart failure are successfully managed with 
NIV.
    We analyzed FY 2010 MedPAR claims data that are representative of 
the respiratory conditions the requestor identified when reported with 
NIV. We found 14 MS-DRGs reporting procedure code 93.90 using the above 
specifications. The MS-DRGs are as follows:
    Pre-MDC MS-DRGs:
     MS-DRG 003 (ECMO or Tracheostomy with Mechanical 
Ventilation 96+ Hrs or PDX Except Face, Mouth & Neck with Major O.R.)
     MS-DRG 004 (Tracheostomy with Mechanical Ventilation 96+ 
Hrs or PDX Except Face, Mouth & Neck without Major O.R.) MS-DRGs:
     MS-DRG 189 (Pulmonary Edema & Respiratory Failure)
     MS-DRG 190 (Chronic Obstructive Pulmonary Disease with 
MCC)
     MS-DRG 191 (Chronic Obstructive Pulmonary Disease with CC)
     MS-DRG 192 (Chronic Obstructive Pulmonary Disease without 
CC/MCC)
     MS-DRG 204 (Respiratory Signs & Symptoms)
     MS-DRG 207 (Respiratory System Diagnosis with Ventilator 
Support 96+ Hours)
     MS-DRG 208 (Respiratory System Diagnosis with Ventilator 
Support  MS-DRG 222 (Cardiac Defibrillator Implant with Cardiac 
Catheterization with AMI/HF/Shock with MCC)
     MS-DRG 223 (Cardiac Defibrillator Implant with Cardiac 
Catheterization with AMI/HF/Shock without MCC)
     MS-DRG 291 (Heart Failure & Shock with MCC)
     MS-DRG 292 (Heart Failure & Shock with CC)
     MS-DRG 293 (Heart Failure & Shock without CC/MCC)
    As shown in the list above and in the chart below, the MS-DRGs 
identified also include those that describe invasive mechanical 
ventilation. The ICD-9-CM coding convention instructs the reporting of 
both types of mechanical ventilation when patients are admitted on 
noninvasive mechanical ventilation that subsequently requires invasive 
mechanical ventilation therapy.
    The data demonstrate that, in certain MS-DRGs, for example, MS-DRGs 
003, 004, and 222 that the cases with NIV primarily have shorter 
lengths of stay and lower average costs compared to all the cases in 
those MS-DRGs. Alternatively, the data for MS-DRGs 189, 190, 191, and 
192 demonstrate that the cases with NIV have an increased length of 
stay and higher average costs, but a relatively low volume compared to 
all the cases in those MS-DRGs. Combining the current surgical and 
medical MS-DRGs into a single, new MS-DRG would include noninvasive 
mechanical ventilation cases with a wide range of costs for several 
indications with varying levels of severity. The average costs for 
these cases range from a low of $5,794 in MS-DRG 293 to a high of 
$95,940 in MS-DRG 003. We believe the cases are more appropriately 
assigned and reimbursed in the MS-DRGs to which they are currently 
assigned.
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    As mentioned in the requestor's comments, and our clinical advisors 
agree, NIV encompasses a broad range of interventions and utilizes 
periods of time that range from a few hours to a few days of continuous 
chronic use. Resource requirements are vastly different for the various 
intended indications. For example, as also noted by the requestor, 
respiratory failure can have many forms. Our clinical advisors provided 
three subsets of patients as an example: Those that are given oxygen 
support, those that are given pressure (rate) support, and those that 
are intubated. There is overlap between the three subsets in that a 
patient may require one, two, or all three types of therapy and there 
are multiple options for any given patient. Our clinical advisors 
stated that these various subsets of patients can require significantly 
different resources. Lastly, respiratory failure reflects the severity 
of the diagnosis (it is a complication) while NIV is a therapeutic 
option. Unlike a major surgical intervention where the intervention 
creates morbidity, NIV merely reflects the severity of the underlying 
respiratory failure.
    The requestor further noted in its comments that a significant 
number of patients who receive NIV fail this therapy and must be 
intubated and subsequently placed on a ventilator. However, those 
patients who require both noninvasive and invasive mechanical 
ventilation are already accounted for in the invasive mechanical 
ventilation MS-DRGs. Similar to patients with respiratory failure, 
patients with heart failure and shock have a comparable severity of 
illness where each condition reflects the severity of the diagnosis (it 
is a complication). Therefore, the cost is already reflected in the 
high resource expenditure estimates for MS-DRGs 222, 223, 291, 292, and 
293, as are all other severity-correlated resource costs.
    In conclusion, we believe that the data do not support the creation 
of a single MS-DRG to identify NIV cases. As stated previously, the 
average costs for the NIV cases range from a low of $5,794 in MS-DRG 
293 to a high of $95,940 in MS-DRG 003. If created, this single MS-DRG 
would include patients with a wide range in average costs. We believe 
the cases are more appropriately captured in their current MS-DRGs. In 
addition to the clinical points raised by our clinical advisors and 
outlined above, the volume and length of stay data for cases where NIV 
was reported with the specified respiratory conditions further support 
their present MS-DRG assignments. Therefore, we are not proposing to 
create a new MS-DRG for patients receiving NIV. We invite public 
comment on our proposal not to create a new MS-DRG for patients 
receiving NIV for FY 2012.
b. Debridement With Mechanical Ventilation Greater Than 96 Hours With 
Major Operating Room (O.R.) Procedure
    We received a comment concerning the use of excisional debridement 
in cases with complications that lead to the need for extended 
mechanical ventilation. The commenter stated that patients undergoing 
procedures such as excisional debridement may also develop extensive 
complications such as respiratory failure and sepsis. The commenter 
indicated that these patients tend to use significant resources. The 
commenter stated that these cases are currently assigned to MS-DRG 207 
(Respiratory System Diagnosis with Ventilator Support 96+ Hours) or MS-
DRG 870 (Septicemia with or Severe Sepsis with Mechanical Ventilation 
96+ Hours). The commenter expressed a concern that the operating room 
(OR) procedure of the excisional debridement was not fully recognized 
through either of these two medical MS-DRGs. The commenter requested 
that a new MS-DRG be created that would include mechanical ventilation 
of greater than 96 hours with the presence of an additional major OR 
procedure.
    We agree that patients with long-term mechanical ventilation 
greater than 96 hours and a major OR procedure utilize extensive 
resources. However, we point out that these patient cases are not 
currently assigned to MS-DRG 207 or MS-DRG 870 as the commenter stated. 
Many of these long-term mechanical ventilation patient cases are 
instead assigned to MS-DRG 003 (ECMO or Tracheostomy with Mechanical 
Ventilation 96+ Hours or PDX, Excluding Face, Mouth & Neck with Major 
Operating Room Procedure). Cases that require mechanical ventilation 
for greater than 96 hours, that have a tracheostomy performed, and that 
have a procedure on the major O.R. list (including excisional 
debridement) are assigned to MS-DRG 003. We specifically created MS-DRG 
003 to capture these complicated patients on long-term mechanical 
ventilation who also have a major O.R. procedure. Therefore, we are not 
proposing to create a second MS-DRG to capture these patients at this 
time. We welcome public comments on our proposal not to create a new 
MS-DRG for these patients for FY 2012.
c. Autologous Bone Marrow Transplant
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50101), effective 
October 1, 2011, we deleted MS-DRG 009 (Bone Marrow Transplant) and 
created two new MS-DRGs: MS-DRG 014 (Allogeneic Bone Marrow Transplant) 
and MS-DRG 015 (Autologous Bone Marrow Transplant). We created new MS-
DRGs 014 and 015 because of differences in costs associated with these 
procedures. During the comment period for the FY 2011 IPPS/LTCH PPS 
proposed rule, two commenters who supported the proposed 
reclassification of the bone marrow transplant MS-DRGs requested 
further refinement to account for severity of illness. At that time, we 
did not subdivide MS-DRG 014 and MS-DRG 015 based on severity of 
illness because they did not meet our criteria for subdivision (75 FR 
50102).
    As we outlined in our FY 2008 IPPS/LTCH PPS final rule with comment 
period (72 FR 47169), in designating an MS-DRG as one that would be 
subdivided into subgroups based on the presence of a CC or an MCC, we 
developed a set of criteria to facilitate our decision-making process. 
The original criteria were based on average charges; we now use average 
costs (FY 2007 IPPS final rule, 71 FR 47882). In order to warrant 
creation of a CC or an MCC subgroup within a base MS-DRG, the subgroup 
must meet all of the following five criteria:
     A reduction in variance of cost of at least 3 percent.
     At least 5 percent of the patients in the MS-DRG fall 
within the CC or MCC subgroup.
     At least 500 cases are in the CC or MCC subgroup.
     There is at least a 20-percent difference in average cost 
between subgroups.
     There is a $2,000 difference in average cost between 
subgroups.
    We examined FY 2010 MedPAR claims data for these newly created MS-
DRGs, and based on these criteria, we identified MS-DRG 015 as a 
possible MS-DRG that would require further subdivision. MS-DRG 014 was 
not identified, as this MS-DRG did not meet the criteria stated above 
for possible subdivision. Autologous bone marrow transplantation 
utilizes the patient's own bone marrow or stem cells in the treatment 
of certain cancers and bone marrow diseases. These procedures restore 
stem cells that have been destroyed either by chemotherapy and/or 
radiation treatment.
    In our analysis, we found 1,338 total cases assigned to MS-DRG 015 
with average costs of approximately $38,608

[[Page 25820]]

and an average length of stay of approximately 18.8 days. There were 
1,092 cases that had a secondary diagnosis code reported on the claim 
that was designated as a CC or an MCC with average costs of 
approximately $40,974 and an average length of stay of approximately 
19.7 days. There were 246 cases without a secondary diagnosis code 
reported on the claim that had a CC or an MCC designation with average 
cost of approximately $28,105 and an average length of stay of 
approximately 14.6 days. The following table illustrates our findings:
[GRAPHIC] [TIFF OMITTED] TP05MY11.009

    We found that the cases reported with a secondary diagnosis code of 
a CC or an MCC were more costly and had a longer average length of stay 
than both the overall cases assigned to MS-DRG 015 and the cases 
without a CC or an MCC. The cases without a CC or an MCC were less 
costly and had a shorter average length of stay than both the cases 
with a CC or an MCC and the overall cases assigned to that MS-DRG. 
Based on our analysis, all five criteria for a subgroup division were 
met, thereby supporting a 2-level severity split for MS-DRG 015. 
Therefore, we are proposing to delete MS-DRG 015 and create two new MS-
DRGs:
     Proposed MS-DRG 016 (Autologous Bone Marrow Transplant 
with MCC/CC); and
     Proposed MS-DRG 017 (Autologous Bone Marrow Transplant 
without MCC/CC).
    We invite public comment on our proposal to delete MS-DRG 015 and 
create two new MS-DRGs 016 and 017 for autologous bone marrow 
transplant for FY 2012.
2. MDC 1 (Diseases and Disorders of the Nervous System): Rechargeable 
Dual Array Deep Brain Stimulation System
    We received a public comment in response to the FY 2011 IPPS/LTCH 
PPS proposed rule regarding the MS-DRG assignment for rechargeable dual 
array deep brain neurostimulators. In the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50128), we indicated that we considered this comment 
outside of the scope of the proposed rule as we did not propose any 
changes for these procedures for FY 2011. However, we are addressing 
this issue in this FY 2012 proposed rule.
    Deep brain stimulation is a surgical treatment that involves the 
implantation of a neurostimulator, used in the treatment of essential 
tremor, Parkinson's disease, dystonia, and chronic pain. The commenter 
recommended that CMS assign the combination of procedure codes 
representing rechargeable systems for deep brain stimulation therapy, 
procedure code 02.93 (Implantation or replacement of intracranial 
neurostimulator lead(s)) and procedure code 86.98 (Insertion or 
replacement of dual array rechargeable neurostimulator pulse generator) 
to MS-DRG 023 (Craniotomy with Major Device Implant/Acute Complex CNS 
PDX with MCC or Chemo Implant) and MS-DRG 024 (Craniotomy with Major 
Device Implant/Acute Complex CNS PDX without MCC).
    The commenter stated that this recommendation would allow all full 
system dual array deep brain stimulation cases to be appropriately 
grouped to the same MS-DRGs. Currently, procedure codes 02.93 and 86.98 
are assigned to MS-DRG 025 (Craniotomy and Endovascular Intracranial 
Procedures with MCC), MS-DRG 026 (Craniotomy and Endovascular 
Intracranial Procedures with CC), and MS-DRG 027 (Craniotomy and 
Endovascular Intracranial Procedures without CC/MCC), while the 
procedure codes for the nonrechargeable dual array systems, procedure 
codes 02.93 and 86.95 (Insertion or replacement of dual array 
neurostimulator pulse generator, not specified as rechargeable), are 
already assigned to MS-DRGs 023 and 024. The commenter stated that the 
procedures to implant the rechargeable and nonrechargeable dual array 
systems are similar clinically as well as comparable in resource 
utilization.
    We analyzed FY 2010 MedPAR data and found a total of 16 full system 
rechargeable dual array deep brain stimulation systems reported with 
procedure codes 02.93 and 86.98 assigned to MS-DRGs 025 through 027. We 
found one case assigned to MS-DRG 025 and one case assigned to MS-DRG 
026. The majority of the cases, 14, were assigned to MS-DRG 027, with 
average costs of approximately $23,870 and an average length of stay of 
approximately 2.2 days. We found that the deep brain stimulation cases 
assigned to MS-DRG 027 had higher average costs than the overall cases 
assigned to MS-DRG 027 of approximately $14,200. However, the average 
length of stay was shorter for these cases than the overall length of 
stay for MS-DRG 027 cases of approximately 3.7 days.
    We also examined the data for the nonrechargeable dual array 
systems to assess the commenter's assumption that both the rechargeable 
and nonrechargeable dual array systems are similar in resource use. We 
found 155 total nonrechargeable dual array systems (procedure codes 
02.93 and 86.95) assigned to MS-DRGs 023 and 024. There were 5 cases 
assigned to MS-DRG 023, with average costs of approximately $36,159 and 
an average length of stay of approximately 10 days. We found that the 
majority of the cases, 150, were assigned to MS-DRG 024, with average 
costs of approximately $25,855 and an average length of stay of 
approximately 2.2 days. We believe that these data support the 
commenter's statement that, for the majority of these cases, the 
resource use is similar for both systems.
    For comparison purposes, if we propose the changes that the 
commenter suggested, those deep brain stimulation cases currently 
assigned to MS-DRG 027 and the one case assigned to MS-DRG 026 (with 
average costs of approximately $27,836) would be reassigned to MS-DRG 
024. The average costs of approximately $23,870 of these deep brain 
stimulation cases assigned to MS-DRG 027 are similar to the overall 
average costs of approximately $23,249 for MS-DRG 024. The one case 
assigned to MS-DRG 025 (with average costs of approximately $29,361) 
would be reassigned to MS-DRG 023 (with average costs of approximately 
$34,168). The following table illustrates our findings:

[[Page 25821]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.010

    Based on our findings, we believe that the data support reassigning 
the combination of procedure codes representing rechargeable systems 
for deep brain stimulation therapy, code 02.93 and code 86.98, to MS-
DRGs 023 and 024. Our clinical advisors support this reassignment. 
Therefore, we are proposing to assign rechargeable dual array systems 
for deep brain stimulation cases identified by reporting both procedure 
codes 02.93 and 86.98 to MS-DRGs 023 and 024 for FY 2012. We invite 
public comment on our proposal to assign these cases to MS-DRG 023 and 
024 for FY 2012.
3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat): 
Skull Based Surgeries
    We received a request from a commenter recommending that CMS 
reclassify skull-based surgical procedures that are currently assigned 
to MS-DRGs 135 and 136 (Sinus and Mastoid Procedures with CC/MCC and 
without CC/MCC, respectively) and reassign them to MS-DRGs 025, 026, 
and 027 (Craniotomy and Endovascular Intracranial Procedures with MCC, 
with CC, and without CC/MCC, respectively). The commenter stated that 
the current MS-DRG assignment does not reflect the resource utilization 
and technical complexity of these difficult procedures when performed 
for anterior skull base tumors.
    Skull (or cranial) based surgery is performed for a variety of 
serious medical conditions including esthesioneuroblastomas, which are 
rare, malignant tumors that arise from the epithelium overlying the 
olfactory bulb; sinonasal melanomas, which are malignant melanomas that 
may develop in the mucosa of the nose and sinuses; and sinonasal 
undifferentiated carcinomas, which are rapidly growing malignant tumors 
arising in the nasal cavity and/or sinuses. These types of conditions 
are generally identified by the following ICD-9-CM diagnosis codes:
     160.0 (Malignant neoplasm of nasal cavities)
     160.1 (Malignant neoplasm of auditory tube, middle ear, 
and mastoid air cells)
     160.2 (Malignant neoplasm of maxillary sinus)
     160.3 (Malignant neoplasm of ethmoidal sinus)
     160.4 (Malignant neoplasm of frontal sinus)
     160.5 (Malignant neoplasm of sphenoidal sinus)
     160.8 (Malignant neoplasm of other accessory sinuses)
     160.9 (Malignant neoplasm of accessory sinus, unspecified)
     210.7 (Benign neoplasm of nasopharynx)
     212.0 (Benign neoplasm of nasal cavities, middle ear, and 
accessory sinuses)
    According to the commenter, procedure code 22.63 (Ethmoidectomy) 
describes the type of surgery being performed for these patients and is 
currently assigned to MS-DRGs 135 and 136.
    Using the FY 2010 MedPAR file, we examined data on cases identified 
by procedure code 22.63 when reported with one of the above listed 
diagnosis codes in MS-DRGs 135 and 136. We found a total of 402 cases 
in MS-DRG 135 with an average length of stay of 6.30 days and average 
costs of $12,869. We found only 23 cases in MS-DRG 135 identified by 
procedure code 22.63 with one of the diagnosis codes listed above with 
an average length of stay of 3.96 days and average costs of $10,510. In 
MS-DRG 136, there were a total of 320 cases with an average length of 
stay of 2.36 days and average costs of $6,683. We found only 27 cases 
in MS-DRG 136 identified by procedure code 22.63 with one of the 
diagnosis codes listed above with an average length of stay of 2.04 
days and average costs of $6,844. As shown in the table below, the 
cases reporting procedure code 22.63 in MS-DRGs 135 and 136 have a 
lower volume, a shorter length of stay, and primarily lower average 
costs compared to all cases in MS-DRGs 135 and 136. The data 
demonstrate that these cases are appropriately assigned to their 
current MS-DRG classifications.

[[Page 25822]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.011

    We also analyzed claims data for MS-DRGs 25 through 27. We 
determined that if the cases identified by procedure code 22.63 were to 
be reassigned to MS-DRGs 25-27, they would be significantly overpaid. 
As shown in the table below, we found that the average costs for these 
MS-DRGs range from $14,200 to $29,524.
[GRAPHIC] [TIFF OMITTED] TP05MY11.012

    In summary, the data do not support moving cases with procedure 
code 22.63 when reported with one of the previously listed diagnosis 
codes from MS-DRGs 135 and 136 to MS-DRGs 25, 26 and 27. We invite 
public comment on our proposal not to make any MS-DRG modifications for 
these codes for FY 2012.
4. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Percutaneous Mitral Valve Repair With Implant
    Procedure code 35.97 (Percutaneous mitral valve repair with 
implant) was created for use beginning October 1, 2010 (FY 2011) after 
the concept of a percutaneous valve repair was presented and approved 
at the February 2010 ICD-9-CM Coordination and Maintenance Committee 
Meeting. Procedure code 35.97 was created at that time to describe the 
MitraClip TM device and any other percutaneous mitral valve 
repair devices currently on the market. This procedure code is assigned 
to the following MS-DRGs: 231 and 232 (Coronary Bypass with PTCA with 
MCC and without MCC, respectively); 246 (Percutaneous Cardiovascular 
Procedure with Drug-Eluting Stent with MCC or 4+ Vessels/Stents); 247 
(Percutaneous Cardiovascular Procedure with Drug-Eluting Stent without 
MCC); 248 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting 
Stent with MCC or 4+ Vessels/Stents); 249 (Percutaneous Cardiovascular 
Procedure with Non-Drug-Eluting Stent without MCC); 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent or AMI with 
MCC); and 251 (Percutaneous Cardiovascular Procedure without Coronary 
Artery Stent or AMI without MCC).
    According to the Food and Drug Administration's (FDA's) terms of 
the clinical trial for MitraClipTM, the device is to be 
implanted in patients without any additional surgeries performed. 
Therefore, based on these terms, we believe that the most likely MS-DRG 
assignments would be MS-DRGs 250 and 251, as described above. However, 
because procedure code 35.97 has only been in use since October 1, 
2010, there are no claims data in the most recent MedPAR update file 
with which to evaluate any alternative MS-DRG assignments. Therefore, 
we are not proposing to make any MS-DRG changes for procedure code 
35.97 for FY 2012. We are proposing to keep procedure code 35.97 in its 
current MS-DRG assignments. We invite public comment on this proposal.
b. Aneurysm Repair Procedure Codes
    Thoracic aorta defects, such as aneurysm, dissection, or injury, 
are uncommon but serious conditions that may arise from a disease or an 
accident. Some patients can be medically managed but most patients are 
treated with surgery. Often these defects result in death if they are 
not diagnosed and treated promptly. Currently, there are two techniques 
used for repair of aortic defects; both are O.R. procedures performed 
in an inpatient hospital setting. These two procedures are described by 
ICD-9-CM procedure codes 38.45 (Resection of vessel with replacement, 
thoracic vessel) and 39.73 (Endovascular implantation of graft in 
thoracic aorta). Both procedure codes 38.45 and 39.73 are currently 
assigned to MS-DRGs 237 (Major Cardiovascular Procedures with MCC or 
Thoracic Aortic Aneurysm Repair) and 238 (Major Cardiovascular 
Procedures without MCC).
    We received a request that we consider the reassignment of 
procedure codes 38.45 and 39.73 within the MS-DRG structure by removing 
the procedure codes from MS-DRGs 237 and 238 and adding them to a more 
clinically coherent set of MS-DRGs reflecting higher resource 
consumption. The requestors believed that, based on their analysis of 
MedPAR claims data of

[[Page 25823]]

MS-DRGs 237 and 238, the resource utilization of both the endovascular 
and open repairs of the abdominal and thoracic aortas are higher than 
the overall average resource utilization for the MS-DRGs to which these 
procedures are currently assigned. The requestors also believed that an 
unusually high number of cases probably fall into cost outlier status.
    We reviewed the MedPAR claims data for these two procedure codes. 
Our findings are shown in the following two tables.
[GRAPHIC] [TIFF OMITTED] TP05MY11.013

    Our findings of the analysis of the cases with procedure code 39.73 
showed that the average costs are substantially higher than those costs 
for the cases overall in both MS-DRGs 237 and 238. We found that the 
average length of stay for the 1,851 cases identified in MS-DRG 237 is 
somewhat lower at 7.73 days than the average length of stay of 10.26 
days in cases not containing procedure code 39.73.
    Our findings of the analysis of the cases with procedure code 38.45 
showed that both the average costs and the average length of stay are 
considerably higher than the average costs and the average length of 
stay for those cases without procedure code 38.45.
    In addition, we reviewed the cases in which both procedure codes 
38.45 and 39.73 were documented during the same admission. As can be 
seen in the charts below, we found 22 cases in which both procedure 
codes 38.45 and 39.73 were reported. Therefore, the sum of the values 
in the next two charts below will differ from the charts above because 
of the cases containing both procedure codes that have been removed and 
the data have been reworked.

[[Page 25824]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.015

[GRAPHIC] [TIFF OMITTED] TP05MY11.016

    We found in our analysis of the claims data for cases with both 
procedure codes 38.45 and 39.73 that the average costs are 
substantially higher than those costs for the cases overall in MS-DRG 
237. In addition, we found that the average length of stay for the 22 
cases with both procedure codes 38.45 and 39.73 is higher at 11.86 days 
than the average length of stay of 10.03 days for all cases in MS-DRG 
237.
    Our analysis of the claims data for the procedure codes in MDC 5 
showed that procedure code 34.85 is also assigned to MS-DRGs 228 (Other 
Cardiothoracic Procedures with MCC), 229 (Other Cardiothoracic 
Procedures with CC), and 230 (Other Cardiothoracic Procedures without 
CC/MCC) when it occurs in combination with procedure code 38.44 
(Resection of vessel with replacement, aorta, abdominal). We found that 
when procedure code 39.73 is not assigned to MS-DRGs 228 through 230, 
there are no cases reported.
    The table below shows our findings of the average costs and the 
average length of stay for procedure code 38.45 in combination with 
procedure code 38.44 in MS-DRGs 228 through 230 and the average costs 
and the average length of stay in all cases in MS-DRGs 228 through 230 
when both procedure codes 38.45 and 38.44 are not assigned.

[[Page 25825]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.017

    Our findings show that both the average length of stay and average 
costs are higher in those cases containing procedure code 34.85 than 
those cases without this procedure code in MS-DRGs 228 through 230.
    We then analyzed the 1,851 cases containing procedure code 39.73 in 
MS-DRGs 237 and 238 and the 912 cases containing procedure code 38.45 
in MS-DRGs 237 and 238 to determine if they would meet the established 
criteria for a 3-way severity of illness split. This criterion is 
described in section III.G.1.c. of this preamble. The chart below shows 
our findings, with MS-DRG 237 acting as a severity of illness proxy for 
all cases, as there were no cases in MS-DRG 238. In the chart, the 
extensions ``-1,'' ``-2,'' and ``-3'' correspond to severity levels, 
with ``-1'' representing cases with MCC, ``-2'' representing cases with 
CC, and ``-3'' representing cases without CC/MCC.
[GRAPHIC] [TIFF OMITTED] TP05MY11.018

[[Page 25826]]

    Our next step was to analyze the claims data for the cases in the 
clinically coherent MS-DRGs to which we are proposing to move these 
cases. These six MS-DRGs are: 216 (Cardiac Valve & Other Major 
Cardiothoracic Procedures with Cardiac Catheterization with MCC); 217 
(Cardiac Valve & Other Major Cardiothoracic Procedures with Cardiac 
Catheterization with CC); 218 (Cardiac Valve & Other Major 
Cardiothoracic Procedures with Cardiac Catheterization without CC/MCC); 
219 (Cardiac Valve & Other Major Cardiothoracic Procedures without 
Cardiac Catheterization with MCC), 220 (Cardiac Valve & Other Major 
Cardiothoracic Procedures without Cardiac Catheterization with CC); and 
221 (Cardiac Valve & Other Major Cardiothoracic Procedures without 
Cardiac Catheterization without CC/MCC). For the sake of the grouping 
algorithm, procedure codes 39.73 and 38.45 must also be added to MS-
DRGs 216 through 219. However, if these codes are documented in cases 
in which a cardiac catheterization occurs, they will be ``trumped'' by 
those catheterizations. Therefore, when we reviewed the data in order 
to make length of stay and cost comparisons, we only used the three MS-
DRGs to which procedure codes 39.73 and 38.45 would appear without 
cardiac catheterization; that is MS-DRGs 219, 220, and 221. Our 
findings describing these three MS-DRGs are displayed in the following 
chart:
[GRAPHIC] [TIFF OMITTED] TP05MY11.019

    Our evaluation of the severity levels in the cases containing 
procedure codes 39.73 and 38.45 using the proxy MS-DRGs 237-1, 237-2, 
and 237-3 compared to the claims data in the table above with MS-DRGs 
219 through 221 demonstrates that the cases are similar in resource 
consumption. In addition, the cases are clinically coherent.
    By proposing to move procedure code 38.45 to MS-DRGs 216 through 
221, we do not believe that there is a need for combination codes 38.45 
plus 38.44 to be specifically assigned to MS-DRGs 228, 229, and 230. 
Because MS-DRGs 216 through 221 are higher in the surgical hierarchy 
for MDC 5 than MS-DRGs 228 through 230, the result of the proposal 
would be that either procedure code 38.45 by itself or in combination 
with procedure code 38.44 will always be assigned to MS-DRGs 216 
through 221. When reported alone, under our proposal, procedure code 
38.44 would continue to be assigned to MS-DRGs 237 and 238, as it has 
been in the past.
    Therefore, for FY 2012, we are proposing to move procedure codes 
38.45 and 39.73 from MS-DRGs 237 and 238 and to add these codes to MS-
DRGs 216, 217, 218, 219, 220, and 221 based on our findings of similar 
resource consumption and clinical coherence. To conform to this 
proposed change, we also are proposing to change the title of MS-DRG 
237 (Major Cardiovascular Procedures with MCC or Thoracic Aortic 
Aneurysm Repair) by removing the terms ``or Thoracic Aortic Aneurysm 
Repair.'' Therefore, the new proposed title of MS-DRG 237 would be 
``Major Cardiovascular Procedures with MCC.'' We invite public comment 
on these proposals.
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue)
a. Artificial Discs
    In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received 
a public comment that was outside of the scope of any proposal in that 
proposed rule. The commenter urged CMS to reassign procedure code 84.62 
(Insertion of total spinal disc prosthesis, cervical) from MS-DRG 490 
(Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc 
Device/Neurostimulator) into MS-DRGs 471 through 473 (Cervical Spinal 
Fusion with MCC, with CC, and without CC/MCC, respectively). In 
addition, the commenter requested that CMS reassign procedure code 
84.65 (Insertion of total spinal disc prosthesis, lumbosacral) from MS-
DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or 
Disc Device/Neurostimulator) to MS-DRGs 459 and 460 (Spinal Fusion 
Except Cervical with MCC and without MCC, respectively). However, the 
commenter also provided an alternative option to reassigning the 
procedure codes to different MS-DRGs. The commenter suggested the 
creation of a new, separate MS-DRG for the two artificial disc 
procedures if reassignment to the fusion MS-DRGs was not feasible.
    We refer the reader to the FY 2008 IPPS proposed rule and final 
rule with comment period (72 FR 24731 through 24735 and 47226 through 
47232) for discussion on the comprehensive evaluation of all the spinal 
DRGs in the development of the MS-DRG classification system. The 
modifications made to the spinal DRGs for FY 2008 recognized the 
similar utilization of resources, differences in levels of severity, 
and the complexity of the services being performed on patients 
undergoing the various types of spinal procedures.
    We analyzed FY 2010 MedPAR claims data for procedure codes 84.62 
and 84.65 in MS-DRG 490 and compared those results to the claims data 
for MS-DRGs 459, 460, 471, 472, and 473. We found a total of 19,840 
cases in MS-DRG 490 with an average length of stay of 4.24 days and 
average costs of $11,940. As displayed in the chart below, we found 97 
cases reporting procedure code 84.62, with an average length of stay of 
1.80 days and average costs of $13,194 in MS-DRG 490. We also found 35 
cases reporting procedure code 84.65, with an average length of stay of 
2.91 days and average costs of $20,753. While average costs for the 
artificial disc cases were slightly higher ($1,254 for procedure code 
84.62 and $8,813 for procedure code 84.65) compared to the average cost 
for all cases in MS-DRG 490, the artificial disc cases were of 
extremely low volume and reflected shorter lengths of stay compared to 
all the cases in MS-DRG 490.

[[Page 25827]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.020

    We recognize the disparity in average costs for cases reporting the 
insertion of a cervical or lumbar artificial disc in MS-DRG 490 
compared to all the cases in that MS-DRG. However, we do not believe 
this supports reassignment of procedure codes 84.62 and 84.65 to the 
MS-DRGs for spinal fusion as the commenter requested. Even with the 
disparity in costs, clinically, the insertion of an artificial disc is 
not a spinal fusion. Therefore, reassignment of the artificial disc 
cases to the fusion MS-DRGs would be clinically inappropriate. In 
addition, for certain Medicare populations, the insertion of an 
artificial disc is considered a noncovered procedure.
    As stated earlier, the commenter also provided an alternative 
option to reassigning procedure codes 84.62 and 84.65. The commenter 
suggested the creation of a new, separate MS-DRG for the two artificial 
disc procedures if reassignment to the fusion MS-DRGs was not feasible. 
In our evaluation of the claims data and as shown above in the data 
chart, the artificial disc cases are of extremely low volume; 
therefore, we do not believe the findings warrant the creation of a 
separate MS-DRG.
    We invite public comment on our proposal not to reassign procedure 
code 84.62 from MS-DRG 490 to MS-DRGs 471 through 473 and procedure 
code 84.65 from MS-DRG 490 to MS-DRGs 459 and 460. We also invite 
public comment on our proposal not to create a new, separate MS-DRG for 
artificial disc procedures (codes 84.62 and 84.65) for FY 2012.
b. Major Joint Replacement or Reattachment of Lower Extremities
    We received a request to add an additional severity level for MS-
DRG 469 (Major Joint Replacement or Reattachment of Lower Extremity 
with MCC) and MS-DRG 470 Major Joint Replacement or Reattachment of 
Lower Extremity without MCC). We examined FY 2010 MedPAR claims data to 
determine if we could subdivide the base MS-DRG into three severity 
levels: With MCC, with CC, and without CC/MCC. We applied the criteria 
used in the development of the MS-DRGs included in the FY 2008 IPPS 
final rule with comment period (72 FR 47169). We refer readers to this 
final rule with comment period for a complete description of these 
criteria. As discussed earlier, the original criteria were based on 
average charges. However, subsequent to the FY 2007 IPPS final rule (71 
FR 47882), we now use average costs. The five criteria using costs are 
listed below. In order to warrant creation of a CC or an MCC subgroup 
within a base MS-DRG, the subgroup must meet all of the following five 
criteria:
     A reduction in variance of costs of at least 3 percent.
     At least 5 percent of the patients in the MS-DRG fall 
within the CC or MCC subgroup.
     At least 500 cases are in the CC or MCC subgroup.
     There is at least a 20-percent difference in average costs 
between subgroups.
     There is a $2,000 difference in average costs between 
subgroups
    The following table shows our determination of the number of cases 
and average costs by MCC, CC, and non-CC levels.
[GRAPHIC] [TIFF OMITTED] TP05MY11.021

    We determined that these cases do not meet our five criteria for 
adding a new severity level. The cases failed to meet criterion four 
(requiring at least a 20-percent difference in average costs between 
subgroups) and criterion five (requiring a $2,000 difference in average 
costs between subgroups). Therefore, we are not proposing the addition 
of a new severity level for the base MS-DRG. Instead, we are proposing 
to maintain the two existing severity levels for MS-DRGs 469 and 470. 
We welcome public comments on our proposal not to add an additional 
severity level to MS-DRGs 469 and 470.
c. Combined Anterior/Posterior Spinal Fusion
    A manufacturer requested that CMS reassign spinal fusion cases 
utilizing the AxiaLIF technology from MS-DRGs 459 and 460 (Spinal 
Fusion Except Cervical with MCC and without MCC, respectively) to MS-
DRGs 453, 454, and

[[Page 25828]]

455 (Combined Anterior/Posterior Spinal Fusion with MCC, with CC, and 
without CC/MCC, respectively). The commenter stated that an anterior 
lumbar interbody spinal fusion performed with a lateral approach, the 
extreme lateral interbody fusion (XLIF[supreg]), with posterior spinal 
fixation, can report two codes resulting in assignment to the combined 
fusion MS-DRGs. The commenter also stated that the AxiaLIF technology, 
which is also utilized in an anterior lumbar interbody spinal fusion 
and uses a pre-sacral approach, can only report one code, resulting in 
assignment to the single fusion MS-DRGs. The commenter expressed 
concern that the payment incentives are not properly aligned for the 
recently available minimally invasive spinal fusion technologies. The 
commenter compared the XLIF[supreg] to the AxiaLIF and urged CMS to 
consider the AxiaLIF technology similar to the XLIF[supreg] for 
purposes of MS-DRG assignment.
    Spinal fusion is a surgical procedure that joins two or more 
vertebrae by the use of bone graft (or bone graft substitute), with the 
goal of maintaining alignment, providing stability, decreasing pain, 
and restoring the function of the spinal nerves. Routinely, a spinal 
fusion also utilizes internal fixation devices (instrumentation) to 
assist in stabilizing the spine. These fixation devices may include 
pedicle screws, cages, rods, or plates. Effective October 1, 2010, ICD-
9-CM procedure code 81.06 (Lumbar and lumbosacral fusion of the 
anterior column, anterior technique) describes the XLIF[supreg] 
procedure, and code 81.08 (Lumbar and lumbosacral fusion of the 
anterior column, posterior technique) describes the AxiaLIF technology.
    The spinal fusion codes and their corresponding MS-DRG assignment 
include the use of bone graft and internal fixation. The requestor's 
comment regarding the assignment of one procedure code for one 
technology versus assigning two procedure codes for another technology 
indicates that the commenter may not fully understand the MS-DRG 
GROUPER logic for spinal fusions. For example, if an anterior lumbar 
interbody fusion is performed and posterior spinal fixation (or 
instrumentation) is also utilized, this requires one code and results 
in a single fusion MS-DRG assignment. However, if a posterior spinal 
fusion (procedure code 81.07 (Lumbar and lumbosacral fusion of the 
posterior column, posterior technique) was performed in addition to an 
anterior fusion, for example, the XLIF[supreg] procedure (procedure 
code 81.06), that scenario would necessitate the assignment of both 
codes, resulting in assignment to the combined spinal fusion MS-DRGs 
(453, 454, or 455). MS-DRGs 453, 454, and 455 were created to capture 
patients who have both an anterior and posterior fusion. We believe the 
requestor may have confused the terms ``fixation'' and ``fusion'' for 
MS-DRG assignment in its request.
    We analyzed the FY 2010 MedPAR data to evaluate claims reporting 
procedure codes 81.06, 81.07, and 81.08 in MS-DRGs 456 through 458 
(Spinal Fusion Except Cervical with Spinal Curvature/Malignancy/
Infection or 9+ Fusions with MCC, with CC and without CC/MCC, 
respectively) and MS-DRGs 459 and 460. We found a total of 1,115 cases 
in MS-DRG 456, with an average length of stay of 13.14 days and average 
costs of $63,856. We found 278 cases reporting procedure code 81.08, 
with an average length of stay of 12.04 days and average costs of 
$56,585. Similar results can be seen for procedure code 81.08 in the 
remaining MS-DRGs as shown in the chart below in terms of volume, 
length of stay, and average cost. Clearly, the data demonstrate that 
the AxiaLIF technology (procedure code 81.08) is appropriately assigned 
to its current MS-DRG assignments, as is the XLIF[supreg] procedure 
(procedure code 81.06).

[[Page 25829]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.022

    We also analyzed data for combinations of the spinal fusion codes 
that result in assignment to MS-DRGs 453, 454, and 455. We evaluated 
the following combinations:
     81.06 (Lumbar and lumbosacral fusion of the anterior 
column, anterior technique) and 81.07 (Lumbar and lumbosacral fusion of 
the posterior column, posterior technique).
     81.06 (Lumbar and lumbosacral fusion of the anterior 
column, anterior technique) and 81.08 (Lumbar and lumbosacral fusion of 
the anterior column, posterior technique).
    We further analyzed data with the following combination of spinal 
fusion codes in MS-DRGs 456, 457, and 458 and MS-DRGs 459 and 460:
     81.07 (Lumbar and lumbosacral fusion of the posterior 
column, posterior technique) and 81.08 (Lumbar and lumbosacral fusion 
of the anterior column, posterior technique).
    The chart below shows the results of the data analysis for the 
combination of procedure codes listed above where an anterior and 
posterior spinal fusion was performed in the same episode of care. 
There were a total of 1,190 cases in MS-DRG 453, with an average length 
of stay of 13.08 days and average costs of $71,693. The cases reporting 
the combination of procedure codes 81.06 and 81.08 in this same MS-DRG 
totaled 431, with an average length of stay of 11.59 days and average 
costs of $69,859. Results for the procedure code combination (81.06 and 
81.08) in MS-DRGs 454 and 455 with regard to volume of cases, length of 
stay, and average costs data also support that these spinal fusion 
procedure code combinations are appropriately placed in their current 
MS-DRG assignments. Likewise, for MS-DRGs 456, 457, and 458, the data 
support that the spinal fusion procedure code combinations of 81.07 and 
81.08 are appropriately placed in their current MS-DRG assignments. 
There were a total of 1,115 cases in MS-DRG 456 with an average length 
of stay of 13.14 days and average costs of $68,856. The cases reporting 
the combination of procedure codes 81.07 and 81.08 in this same MS-DRG 
totaled 54, with an average length of stay of 14.37 days and average 
costs of $52,392. Results for the procedure code combination (81.07 and 
81.08) in MS-DRGs 457 and 458 with regard to volume of cases and 
average length of stay were lower compared to all the cases in those 
two MS-DRGs. While the data show higher average costs for the procedure 
code combination of 81.07 and 81.08 in MS-DRGs 457 and 458, as stated 
previously, the volume was extremely low.

[[Page 25830]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.023

    As the focus of the analysis was to evaluate procedure code 81.08 
in comparison to procedure code 81.06, we believe the AxiaLIF 
technology (procedure code 81.08) is grouped appropriately in its 
current MS-DRG assignments, as is the XLIF[supreg] procedure (procedure 
code 81.06). The volume, length of stay, and cost data analyzed 
demonstrate that the complexity of services and resources utilized for 
each of these technologies are properly accounted for in their 
respective MS-DRG assignments. Therefore, the data does not support 
making changes for procedure code 81.08. As a result, we are not 
proposing to reassign cases reporting this procedure code to the 
combined fusion MS-DRGs. We invite public comment on our proposal to 
not reassign procedure code 81.08 from MS-DRGs 456 through 460 to MS-
DRGs 453 through 455 for FY 2012.
6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, and 
Breast): Excisional Debridement of Wound, Infection, or Burn
    We received a request that we remove procedure code 86.22 
(Excisional debridement of wound, infection, or burn) from the list of 
codes considered to be O.R. procedures. The commenter stated that many 
inpatient excisional debridements are performed in a patient's room 
instead of in an operating room. The commenter believed that the 
original assignment of procedure code 86.22 to the O.R. list served to 
help reflect the resource intensity required by a patient with wounds 
and ulcers that required an excisional debridement. The commenter 
stated that, by doing so, the code served as a proxy for severity of 
illness in the original CMS DRGs prior to the implementation of MS-DRGs 
in FY 2008. The commenter stated that the creation of the most serious 
pressure ulcer codes for stage 3 and stage 4 pressure ulcers (codes 
707.23 and 707.24) allows these conditions to be classified as MCCs. 
Therefore, the commenter stated that the need to use procedure code 
86.22 to capture severity of illness was no longer needed. The 
commenter also stated that procedure code 86.22 is a non-O.R. code 
under the APR-DRGs and does not affect the DRG assignment. The 
commenter requested that procedure code 86.22 be changed from an O.R. 
procedure code to a non-O.R. procedure code.
    As the commenter stated, excisional debridements are currently 
captured in procedure code 86.22. Procedure code 88.22 is classified as 
an O.R. procedure in the current MS-DRGs and, therefore, leads to a 
surgical MS-DRG assignment. We examined MedPAR claims data on all 
excisional debridement cases and found that these debridement cases use 
appreciably fewer resources than other cases in their current surgical 
DRGs. However, we determined that if we were to classify debridement 
cases as non-O.R. cases and assign them to medical DRGs, we would 
significantly underpay these cases. The following chart shows 
differences in average costs for all excisional debridement cases 
compared to other cases within their current MS-DRG and compared to 
medical DRGs to which the patients would be assigned if the procedure 
were reclassified as a non-O.R. procedure.

[[Page 25831]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.024

    The chart illustrates that when debridement is the only O.R. 
procedure, it is assigned to MS-DRGs that have an average cost that is 
approximately $5,000 more than the actual cost of the debridement 
($12,427 versus $17,332). Conversely, if the debridement is made a non-
O.R. code, it would, on average, be assigned to MS-DRGs that have an 
average cost that is approximately $4,000 less than the actual cost of 
the debridement ($8,070 versus $12,427). Therefore, we believe it would 
be inappropriate to propose to classify these procedures as a non-O.R. 
procedure.
    We explored alternative approaches to classifying procedure code 
86.22 as a non-O.R. procedure. We evaluated the possibility of removing 
excisional debridements from their current MS-DRG assignments within 
the following skin-related MS-DRGs, where they are combined with skin 
grafts, and creating a new set of debridement MS-DRGs. The current MS-
DRGs that combine skin grafts and debridements into the same MS-DRGs 
are as follows:
     MS-DRGs 573 through 575 (Skin Graft &/or Debridement for 
Skin Ulcer or Cellulitis with MCC, with CC, and without CC/MCC, 
respectively).
     MS-DRGs 576 through 578 (Skin Graft &/or Debridement 
Except for Skin Ulcer or Cellulitis with MCC, with CC, and without CC/
MCC, respectively).
    We analyzed MedPAR claims data on the severity level of graft cases 
without any debridements in these six MS-DRGs. Our findings are shown 
in the chart below.
[GRAPHIC] [TIFF OMITTED] TP05MY11.025

    We compared these data to a proposed new set of skin-related MS-
DRGs that would include only debridements. The results of the findings 
of the severity levels of debridements without skin grafts in these six 
MS-DRGs are shown in the chart below.

[[Page 25832]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.026

    Our findings indicate that the graft procedure cases have higher 
average costs than the excisional debridement cases. The average costs 
for the excisional debridement cases in MS-DRGs 573 through 575 
compared to the debridement cases in MS-DRGs 576 through 578 are very 
similar. We believe that the data support creating a single set of 
skin-related excisional debridement MS-DRGs composed of cases 
previously captured in MS-DRGs 573 through 575 as well as MS-DRGs 576 
through 578. The following chart illustrates those combined average 
costs.
[GRAPHIC] [TIFF OMITTED] TP05MY11.027

    We believe that the data support separating skin graft procedures 
from excisional debridements by creating a new set of MS-DRGs. This 
would result in more accurate payment for both skin grafts and 
debridement. Therefore, we are proposing to remove excisional 
debridements (procedure code 86.22) from their current MS-DRG 
assignments within MS-DRGs 573 through 578 for skin grafts and assign 
them to new excisional debridement MS-DRGs. We are proposing to 
maintain MS-DRGs 573 through 578 for skin grafts. The following list 
describes the proposed new and revised MS-DRG titles:
    Proposed new MS-DRGs based on procedure code 86.22:
     Proposed MS-DRG 570 (Skin Debridement with MCC)
     Proposed MS-DRG 571 (Skin debridement with CC)
     Proposed MS-DRG 572 (Skin Debridement without CC/MCC)
    Proposed Revised MS-DRGs based on codes currently assigned to MS-
DRGs 573 through 578, excluding procedure code 86.22:
     Proposed revised MS-DRG 573 (Skin Graft for Skin Ulcer or 
Cellulitis with MCC)
     Proposed revised MS-DRG 574 (Skin Graft for Skin Ulcer or 
Cellulitis with CC)
     Proposed revised MS-DRG 575 (Skin Graft for Skin Ulcer or 
Cellulitis without CC/MCC)
     Proposed revised MS-DRG 576 (Skin Graft Except for Skin 
Ulcer or Cellulitis with MCC)
     Proposed revised MS-DRG 577 (Skin Graft except for Skin 
Ulcer or Cellulitis with CC)
     Proposed revised MS-DRG 578 (Skin Graft Except for Skin 
Ulcer or Cellulitis without CC/MCC)

[[Page 25833]]

    We welcome public comments on our proposal for FY 2012 to create 
three new debridement MS-DRGs 570, 571, and 572 for skin debridement 
and to revise MS-DRGs 573 through 578 to include skin grafts only, as 
indicated above.
7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and 
Disorders)
a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles
    We received a request to revise the MS-DRG titles for MS-DRGs 640 
through 642 to more clearly capture the cases that are currently 
assigned to these MS-DRGs. The current titles for these MS-DRGs are: 
MS-DRGs 640 (Nutritional & Miscellaneous Metabolic Disorders with MCC); 
MS-DRG 641 (Nutritional & Miscellaneous Metabolic Disorders without 
MCC); and MS-DRG 642 (Inborn Errors of Metabolism). The requestor 
suggested that we change the titles to: MS-DRG 640 (Miscellaneous 
Disorders of Nutrition, Metabolism, and Fluids and Electrolytes with 
MCC); MS-DRG 641 (Miscellaneous Disorders of Nutrition, Metabolism, and 
Fluids and Electrolytes without MCC); and MS-DRG 642 (Inborn and Other 
Disorders of Metabolism).
    Our clinical advisors support these suggested changes to the 
titles, as the suggested changes would provide a better description of 
the diagnoses assigned to MS-DRGs 640, 641, and 642. Therefore, we are 
proposing to revise the MS-DRG titles for MS-DRGs 640, 641, and 642 as 
the requested suggested. We invite public comment on our proposal to 
change the MS-DRG titles for MS-DRGs 640, 641, and 642 for FY 2012.
b. Sleeve Gastrectomy Procedure for Morbid Obesity
    Sleeve gastrectomy is a 70 percent to 80 percent greater curvature 
gastrectomy (sleeve resection of the stomach) with continuity of the 
gastric lesser curve being maintained while simultaneously reducing 
stomach volume. It may be the first step in a two-stage procedure when 
performing Roux-en-Y Gastric Bypass (RYGBP). Sleeve gastrectomy can be 
performed either as an open or a laparoscopic procedure. Sleeve 
gastrectomy is currently coded using ICD-9-CM procedure code 43.89 
(Other total gastrectomy). Procedure code 43.89 is currently assigned 
to several MS-DRGs. However, the code is not assigned to MS-DRG 619, 
620, or 621 (O.R. Procedures for Obesity with MCC, with CC, and without 
CC/MCC, respectively).
    We received a request for CMS to review MDC 10 (Endocrine, 
Nutritional, and Metabolic Diseases and Disorders) for consistency. 
Specifically, the requestor questioned why diagnosis code 278.01 
(Morbid obesity), when paired on a claim with procedure code 43.89, 
would be assigned to MS-DRG 981, 982, or 983 (Extensive O.R. Procedure 
Unrelated to Principal Diagnosis with MCC, with CC, or without CC/MCC, 
respectively) instead of MS-DRG 619, 620, or 621.
    Upon review, we determined that diagnosis code 278.01 is assigned 
to MDC 10. However, procedure code 43.89 is not assigned to any MS-DRG 
set in this MDC. Therefore, the cases are assigned to MS-DRGs 981 
through 983, reflecting procedures not related to the principal 
diagnosis. This was an inadvertent oversight on CMS' part when the MS-
DRGs were created. Therefore, we are proposing to add a procedure code 
or codes identifying sleeve gastrectomy to MS-DRGs 619 through 621 for 
FY 2012.
    Currently, sleeve gastrectomy is identified in the ICD-9-CM 
procedure code Index as follows: Gastrectomy (partial) (subtotal) NEC 
43.89. At procedure code 43.89 in the ICD-9-CM procedure code Tabular, 
an inclusion note identifies this code as including sleeve resection of 
the stomach.
    In light of our proposal to add a procedure code or codes to MS-
DRGs 619 through 621, we point out that there is an NCD that has 
precluded coverage of sleeve gastrectomy when performed either open or 
laparoscopically. This decision may be found in the Medicare National 
Coverage Determination Manual, Section 100.1, Nationally Non-Covered 
Indications for Bariatric Surgery for Treatment of Morbid Obesity, 
effective on February 12, 2009. This manual is available through the 
CMS Web site through a link at: http://www.cms.gov/manuals/downloads/mcd103c1_Part2.pdf. This manual entry affirms that treatment for 
obesity via use of the open or laparoscopic sleeve gastrectomy is 
determined to be noncovered for Medicare beneficiaries.
    Noncoverage of these cases is determined by the fiscal intermediary 
or MAC because of the nature of procedure code 43.89, which is a code 
that identifies several gastrectomy procedures. Therefore, to identify 
a code describing many procedures in the MCE would be inappropriately 
restricting other procedures which are covered. However, we have 
received a request to create specific codes identifying both 
laparoscopic sleeve gastrectomy and the open procedure, vertical sleeve 
gastrectomy. We addressed this request at the ICD-9-CM Coordination and 
Maintenance Committee meeting held on March 9, 2011. Should a code or 
codes be created as a result of this request, we will then be able to 
add these codes to the MCE as a conforming noncoverage edit when 
combined with diagnosis code 278.01. The background information 
discussing sleeve gastrectomy coding can be accessed on the CMS Web 
site at: http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. A summary of the meeting will be available soon 
after the meeting is held. This summary can be found on CMS' Web site 
for the ICD-9-CM Coordination and Maintenance Committee at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage by 
scrolling down to the .pdf zip files containing the meeting agenda and 
handouts.
    Therefore, for FY 2012, we are proposing to add a procedure code or 
codes identifying sleeve gastrectomy to MS-DRGs 619 through 621. 
However, we also intend to add any code or codes created at the ICD-9-
CM Coordination and Maintenance Committee on March 9, 2011, to the MCE 
as sleeve gastrectomy, whether open or laparoscopic, is not covered for 
Medicare beneficiaries. The code or codes would appear in the 
``Noncovered Procedures'' edit of the MCE. As the timing of the 
development of this proposed rule and the date of the March 2011 
meeting of the ICD-9-CM Coordination and Maintenance Committee overlap, 
it is not possible to determine what those codes might be, or even if 
they will be created. However, should a code or codes be created, we 
propose that they will simultaneously be placed in both MS-DRGs 619 
through 621 and the MCE. This decision may seem to be counterintuitive, 
but CMS realizes that our MS-DRGs and the Medicare GROUPER program are 
used for other beneficiaries and insurance plans rather than strictly 
for Medicare beneficiaries. A complete description of this issue will 
be addressed in the final rule. Any new code or codes created as a 
result of the ICD-9-CM Coordination and Maintenance Committee meeting 
will only be included in Table 6B, which will be listed in section VI. 
of the Addendum to the final rule and available via the Internet; we do 
not have a mechanism to make the codes available prior to the final 
rule's publication. We invite public comment on this proposal.

[[Page 25834]]

8. MDC 15 (Newborns and Other Neonates With Conditions Originating in 
the Perinatal Period): Discharge Status Code 66 (Discharged/Transferred 
to Critical Assess Hospital (CAH))
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50236), we finalized 
our transfer policy regarding transfer of patients from an acute care 
hospital to a CAH. In that final rule, we stated that hospitals are 
required to use patient discharge status code 66 on the IPPS claims to 
identify transfers to CAHs.
    With this new requirement, a discharge from an IPPS hospital to a 
CAH equates to a transfer status. However, discharge status code 66 is 
currently not included in the MS-DRG GROUPER logic for MS-DRG 789 
(Neonate, Died or Transferred to Another Acute Care Facility). 
Therefore, in this proposed rule, we are proposing to add discharge 
status code 66 to the MS-DRG GROUPER logic for MS-DRG 789. We invite 
public comment on our proposal to add discharge status code 66 to the 
MS-DRG GROUPER logic for MS-DRG 789 for FY 2012.
9. Proposed Medicare Code Editor (MCE) Changes
    As explained under section II.B.1. of the preamble of this proposed 
rule, the Medicare Code Editor (MCE) is a software program that detects 
and reports errors in the coding of Medicare claims data. Patient 
diagnoses, procedure(s), and demographic information are entered into 
the Medicare claims processing systems and are subjected to a series of 
automated screens. The MCE screens are designed to identify cases that 
require further review before classification into a MS-DRG. In this 
proposed rule, we discuss our intention to make the following change to 
the MCE edits.
    In section II.G.7.a. of this preamble, we discuss that the current 
ICD-9-CM procedure code for sleeve gastrectomy (43.89 (Other partial 
gastrectomy, other)) is a noncovered code when performed for resection 
of the stomach in patients with morbid obesity. We also discussed that 
noncoverage for Medicare beneficiaries of cases containing procedure 
code 43.89 is determined by the fiscal intermediaries or MACs because 
of the nature of procedure code 43.89. This code is imprecise and 
identifies several other gastrectomy procedures in addition to sleeve 
resection. Therefore, to limit coverage by identifying a code that 
describes many procedures through the use of the MCE would 
inappropriately restrict other procedures that are covered by Medicare. 
In this same section, we also stated that we received a request to 
create specific codes identifying both laparoscopic sleeve gastrectomy 
and the open procedure, vertical sleeve gastrectomy. As we stated 
above, we addressed this request at the ICD-9-CM Coordination and 
Maintenance Committee meeting held on March 9, 2011. If a code or codes 
should be created as a result of this request, we will then be able to 
add these codes to the MCE as a conforming noncoverage edit when 
combined with diagnosis code 278.01 (Morbid obesity).
    As the timing of development of this proposed rule and the holding 
of the ICD-9-CM Coordination and Maintenance Committee meeting on March 
9, 2011 overlap, it is not possible to determine what those codes might 
be, or even if they will be created. However, should a code or codes be 
created, we propose that any code or codes for laparoscopic or open 
sleeve resection of the stomach be added to the MCE as a noncovered 
procedure or procedures, in combination with ICD-9-CM diagnosis code 
278.01 (Morbid obesity). The background information discussing sleeve 
gastrectomy coding can be accessed on the CMS Web site at: http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. A 
complete description of this issue will be addressed in the final rule. 
Any new code or codes describing sleeve gastrectomy will only be 
included in Table 6B, which will be listed in section VI. of the 
Addendum to the final rule and available via the Internet; we do not 
have a mechanism to make the codes available prior to the final rule's 
publication. We invite public comments on this proposal.
10. 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 MS-DRG within the MDC to which the principal diagnosis 
is assigned. Therefore, it is necessary to have a decision rule within 
the GROUPER by which these cases are assigned to a single MS-DRG. The 
surgical hierarchy, an ordering of surgical classes from most resource-
intensive to least resource-intensive, performs that function. 
Application of this hierarchy ensures that cases involving multiple 
surgical procedures are assigned to the MS-DRG associated with the most 
resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of MS-DRG reclassification and recalibrations, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications and recalibrations, to determine if the ordering of 
classes coincides with the intensity of resource utilization.
    A surgical class can be composed of one or more MS-DRGs. For 
example, in MDC 11, the surgical class ``kidney transplant'' consists 
of a single MS-DRG (MS-DRG 652) and the class ``major bladder 
procedures'' consists of three MS-DRGs (MS-DRGs 653, 654, and 655). 
Consequently, in many cases, the surgical hierarchy has an impact on 
more than one MS-DRG. The methodology for determining the most 
resource-intensive surgical class involves weighting the average 
resources for each MS-DRG by frequency to determine the weighted 
average resources for each surgical class. For example, assume surgical 
class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 
3, 4, and 5. Assume also that the average costs of MS-DRG 1 is higher 
than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are 
higher than the average costs of MS-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 costs of each MS-DRG in 
the class by frequency (that is, by the number of cases in the MS-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 O.R. procedures'' as discussed below.
    This methodology may occasionally result in assignment of a case 
involving multiple procedures to the lower-weighted MS-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 search for the procedure in the 
most resource-intensive surgical class, in cases involving multiple 
procedures, this result is sometimes unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average cost is 
ordered above a surgical class with a higher average cost. For example, 
the ``other O.R. procedures'' surgical class is uniformly ordered last 
in the surgical hierarchy of each MDC in which it occurs, regardless of 
the fact that the average costs for the MS-DRG or MS-DRGs in that 
surgical class may be higher than those for other surgical classes in 
the MDC. The ``other O.R. procedures'' class is a group of procedures 
that are only infrequently related to the diagnoses in the MDC, but

[[Page 25835]]

are still occasionally performed on patients in the MDC with these 
diagnoses. Therefore, assignment to these surgical classes should only 
occur if no other surgical class more closely related to the diagnoses 
in the MDC is appropriate.
    A second example occurs when the difference between the average 
costs for two surgical classes is very small. We have found that small 
differences generally do not warrant reordering of the hierarchy 
because, as a result of reassigning cases on the basis of the hierarchy 
change, the average costs are likely to shift such that the higher-
ordered surgical class has a lower average costs than the class ordered 
below it.
    Based on the changes that we are proposing to make for FY 2012, as 
discussed in sections II.G.1. and 6. of this preamble, we are proposing 
to revise the surgical hierarchy for Pre-MDCs and MDC 9 (Diseases and 
Disorders of the Skin, Subcutaneous Tissue, and Breast) as follows:
    In Pre-MDCs, we are proposing to reorder proposed new MS-DRG 016 
(Autologous Bone Marrow Transplant with CC/MCC) and proposed new MS-DRG 
017 (Autologous Bone Marrow Transplant without CC/MCC) above MS-DRG 010 
(Pancreas Transplant).
    In MDC 9, we are proposing to reorder--
     MS-DRG 578 (Skin Graft Except for Skin Ulcer or Cellulitis 
without CC/MCC) above proposed new MS-DRG 570 (Skin Debridement with 
MCC);
     Proposed new MS-DRG 570 above proposed new MS-DRG 571 
(Skin Debridement with CC);
     Proposed new MS-DRG 571 above proposed new MS-DRG 572 
(Skin Debridement without CC/MCC; and
     Proposed new MS-DRG 572 above MS-DRG 579 (Other Skin, 
Subcutaneous Tissue, and Breast Procedures with MCC).
11. Complications or Comorbidity (CC) Exclusions List
a. Background
    As indicated earlier in the preamble of this proposed rule, under 
the IPPS MS-DRG classification system, we have developed a standard 
list of diagnoses that are considered CCs. Historically, we developed 
this list using physician panels that classified each diagnosis code 
based on whether the diagnosis, when present as a secondary condition, 
would be considered a substantial complication or comorbidity. A 
substantial complication or comorbidity was defined as a condition 
that, because of its presence with a specific principal diagnosis, 
would cause an increase in the length of stay by at least 1 day in at 
least 75 percent of the patients. We refer readers to section II.D.2. 
and 3. of the preamble of the FY 2008 IPPS final rule with comment 
period for a discussion of the refinement of CCs in relation to the MS-
DRGs we adopted for FY 2008 (72 FR 47121 through 47152).
b. Proposed CC Exclusions List for FY 2012
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) To preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. As we indicated above, we 
developed a list of diagnoses, using physician panels, to include those 
diagnoses that, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. In previous 
years, we have made changes to the list of CCs, either by adding new 
CCs or deleting CCs already on the list.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
     Chronic and acute manifestations of the same condition 
should not be considered CCs for one another.
     Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another.
     Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another.
     Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another.
     Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. 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.\2\
---------------------------------------------------------------------------

    \2\ See the FY 1989 final rule (53 FR 38485, September 30, 
1988), for the revision made for the discharges occurring in FY 
1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for 
the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September 
4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 
43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final 
rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the 
FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994 
revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), 
for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782, 
September 1, 1995), for the FY 1996 revisions; the FY 1997 final 
rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the 
FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 
revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for 
the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 
1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR 
39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final 
rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the 
FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004 
revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), 
for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640, 
August 12, 2005), for the FY 2006 revisions; the FY 2007 final rule 
(71 FR 47870) for the FY 2007 revisions; the FY 2008 final rule (72 
FR 47130) for the FY 2008 revisions, the FY 2009 final rule (73 FR 
48510), the FY 2010 final rule (74 FR 43799); and the FY 2011 final 
rule (75 FR 50114). In the FY 2000 final rule (64 FR 41490, July 30, 
1999, we did not modify the CC Exclusions List because we did not 
make any changes to the ICD-9-CM codes for FY 2000.
---------------------------------------------------------------------------

(1) Proposed Limited Revisions Based on Changes to the ICD-9-CM 
Diagnosis Codes
    For FY 2012, we are proposing to make limited revisions to the CC 
Exclusions List to take into account the changes made in the ICD-9-CM 
diagnosis coding system effective October 1, 2011. (We refer readers to 
section II.G.13. of the preamble of this proposed rule for a discussion 
of ICD-9-CM changes.) We are proposing to make these changes in 
accordance with the principles established when we created the CC 
Exclusions List in 1987. In addition, we are indicating on the CC 
Exclusions List some changes as a result of updates to the ICD-9-CM 
codes to reflect the exclusion of codes from being MCCs under the MS-
DRG system that we adopted in FY 2008.
    CMS encourages input from our stakeholders concerning the annual 
IPPS updates when that input is made available to us by December of the 
year prior to the next annual proposed rule update. For example, to be 
considered for any updates or changes in FY 2012, comments and 
suggestions should have been submitted by early December 2010. The 
following comments were submitted in a timely manner, and are therefore 
being discussed in this section.

[[Page 25836]]

a. Pressure Ulcer Diagnosis Codes
    We received a comment recommending that CMS remove diagnosis codes 
707.23 (Pressure ulcer, stage III) and 707.24 (Pressure ulcer, stage 
IV) from the CC Exclusion List when reported as a secondary diagnosis 
code with a principal diagnosis code for the pressure ulcer site: 
Diagnosis code 707.00 (Pressure ulcer, unspecified); diagnosis code 
707.01 (Pressure ulcer, elbow); diagnosis code 707.02 (Pressure ulcer, 
upper back); diagnosis code 707.03 (Pressure ulcer, lower back); 
diagnosis code 707.04 (Pressure ulcer, hip); diagnosis code 707.05 
(Pressure ulcer, buttock); diagnosis code 707.06 (Pressure ulcer, 
ankle); diagnosis code 707.07 (Pressure ulcer, heel); or diagnosis code 
707.09 (Pressure ulcer, other site). Currently, when a patient is 
admitted with a pressure ulcer, the CC Exclusion List prevents a 
pressure ulcer stage diagnosis code from being designated as an MCC 
when reported as a secondary diagnosis. The commenter disagreed with 
this approach and contended that a patient admitted for treatment of a 
stage III or stage IV pressure ulcer likely requires resources that 
would qualify the case as a diagnosis with an MCC or, at a minimum, as 
a CC.
    Our clinical advisors agree with the commenter. Therefore, we are 
proposing to remove diagnosis codes 707.23 and 707.24 from the CC 
Exclusion List when a principal diagnosis code of one of codes 707.00 
through 707.09 is reported. Under this proposal, diagnosis code 707.23 
or diagnosis code 707.24 would be an MCC when reported as a secondary 
diagnosis code with a principal diagnosis code of one of codes 707.00 
through 707.09.
b. End-Stage Renal Disease Diagnosis Code
    We received a suggestion from a commenter that diagnosis code 585.6 
(End-stage renal disease) be added to the CC Exclusion List when 
reported with a principal diagnosis code of 403.90 (Hypertensive 
chronic kidney disease, unspecified, with chronic kidney disease stage 
I through stage IV, or unspecified) or diagnosis code 403.91 
(Hypertensive chronic kidney disease, unspecified, with chronic kidney 
disease stage V or end-stage renal disease). Currently, diagnosis code 
585.6 is designated as an MCC.
    According to the commenter, diagnosis codes 585.6 and 403.91 are 
essentially the same diagnosis but coding guidelines require the 
reporting of two codes to identify the stage of chronic kidney disease 
when associated with hypertensive chronic kidney disease. The commenter 
suggested that there is no need for diagnosis code 585.6 to be 
designated as an MCC when reported with a principal diagnosis of 
hypertensive chronic kidney disease, stage V or end-stage renal 
disease. The commenter also pointed out that, while coding guidelines 
would preclude diagnosis codes 403.90 and 585.6 from being reported 
together, the MS-DRG GROUPER allows diagnosis code 585.6 to act as an 
MCC when reported as a secondary diagnosis with principal diagnosis 
code 403.90.
    In response to the first issue, our clinical advisors disagree with 
the commenter. Diagnosis code 403.91 includes chronic kidney disease 
stage V or end-stage renal disease. These are two separate conditions 
(or stages) that are identified by two unique codes. Diagnosis code 
585.5 identifies stage V chronic kidney disease and is classified as a 
CC. Diagnosis code 585.6 identifies end-stage renal disease, is 
classified as an MCC, and describes patients who require chronic 
dialysis. The patients diagnosed with stage V chronic kidney disease 
are a different population who require different resources than those 
patients who are diagnosed with end-stage renal disease. Therefore, we 
are not proposing to add diagnosis code 585.6 to the CC Exclusion List 
when reported with a principal diagnosis of code 403.91.
    On the second issue raised by the commenter, our clinical advisors 
agree. Diagnosis code 403.90 identifies patients with chronic kidney 
disease, stages I through IV or unspecified, and diagnosis code 585.6 
identifies end-stage renal disease. Our clinical advisors indicate that 
the reporting of diagnosis code 585.6 should not be designated as an 
MCC in this case. We agree with the commenter that diagnosis codes 
403.90 and 585.6 should not be reported together as instructed by the 
Coding Guidelines. Only a code from the 585.1 through 585.4 range 
(stages I through IV, or unspecified) should be reported with diagnosis 
code 403.90. Diagnosis code 585.6 is the exclusive code that uniquely 
identifies end-stage renal disease and should only be reported with 
diagnosis code 403.91. Therefore, we are proposing to add diagnosis 
code 585.6 to the CC Exclusion List when reported with a principal 
diagnosis code of 403.90.
c. Hypertensive Chronic Kidney Disease With Chronic Kidney Disease 
Stage V or End-Stage Renal Disease Code
    We received a comment recommending the addition of diagnosis code 
403.91 (Hypertensive chronic kidney disease, unspecified, with chronic 
kidney disease stage V or end-stage renal disease) to the CC Exclusion 
List when reported as a secondary diagnosis code with principal 
diagnosis code 585.6 (End stage renal disease). The commenter stated 
that it would be unlikely that diagnosis code 403.91 would be reported 
as a secondary diagnosis code with diagnosis code 585.6 as the 
principal diagnosis code due to sequencing rules for end-stage renal 
disease with hypertension. Currently, diagnosis code 403.91 is 
designated as a CC.
    Our clinical advisors agree with the commenter. Therefore, we are 
proposing to add diagnosis code 403.91 to the CC Exclusion List when 
reported as a secondary diagnosis code with principal diagnosis code 
585.6.
    We invite public comment on the above three proposals regarding the 
CC Exclusion List for FY 2012.
(2) Suggested Changes to Severity Levels for Encephalopathy
    We received a request that we consider changing the following 
diagnosis codes from an MCC to a CC:
     348.30 (Encephalopathy NOS)
     348.32 (Metabolic encephalopathy)
     348.39 (Encephalopathy NEC)
     349.82 (Toxic encephalopathy)
     572.2 (Hepatic encephalopathy)
    For this FY 2012 IPPS/LTCH PPS proposed rule, we analyzed the 
claims data for the diagnosis codes mentioned above related to 
encephalopathy. We used the same approach we used in initially creating 
the MS-DRGs and classifying secondary diagnosis codes as non-CCs, CCs, 
or MCCs. A detailed discussion of the process and criteria we used in 
this process is described in the FY 2008 IPPS final rule (72 FR 47158 
through 47161). We refer the readers to this discussion for complete 
information on our approach to developing the non-CC, CC, and MCC 
lists. Each diagnosis for which Medicare data were available was 
evaluated to determine its impact on resource use and to determine the 
most appropriate CC subclass (non-CC, CC, or MCC) assignment. In order 
to make this determination, the average cost for each subset of cases 
was compared to the expected cost for cases in that subset. The 
following format was used to evaluate each diagnosis:

[[Page 25837]]

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
            Code  Diagnosis              Cnt1          C1            Cnt2          C2            Cnt3          C3
----------------------------------------------------------------------------------------------------------------

    Count (Cnt) is the number of patients in each subset. C1, C2, and 
C3 are a measure of the impact on resource use of patients in each of 
the subsets. The C1, C2, and C3 values are a measure of the ratio of 
average costs for patients with these conditions to the expected 
average cost across all cases. The C1 value reflects a patient with no 
other secondary diagnosis or with all other secondary diagnoses that 
are non-CCs. The C2 value reflects a patient with at least one other 
secondary diagnosis that is a CC but none that is a MCC. The C3 value 
reflects a patient with at least one other secondary diagnosis that is 
a MCC. A value close to 1.0 in the C1 field would suggest that the 
diagnosis code produces the same expected value as a non-CC. A value 
close to 2.0 suggests the condition is more like a CC than a non-CC but 
not as significant in resource usage as an MCC. A value close to 3.0 
suggests the condition is expected to consume resources more similar to 
an MCC than a CC or non-CC. For additional details on this analysis, we 
refer readers to the FY 2008 IPPS final rule (72 FR 47158 through 
47161).
    The following chart shows the analysis for each of the 
encephalopathy diagnosis codes that are currently classified as MCCs.
[GRAPHIC] [TIFF OMITTED] TP05MY11.028

    We ran the following data as described in FY 2008 IPPS final rule 
(72 FR 47158 through 47161). The C1 value reflects a patient with no 
other secondary diagnosis or with all other secondary diagnoses that 
are non-CCs. The C2 value reflects a patient with at least one other 
secondary diagnosis that is a CC but none that is a MCC. The C3 value 
reflects a patient with at least one other secondary diagnosis that is 
a MCC.
    The chart above shows that the C1 findings ranged from a low of 
1.5448 to a high of 2.3158. As stated earlier, a C1 value close to 2.0 
suggests the condition is more like a CC than a non-CC but not as 
significant in resource usage as an MCC. The C1 findings suggest that 
these codes are more like a CC than a MCC. However, the C2 findings 
ranged from a low of 2.5054 to a high of 3.0023. Values close to 3.0 
suggests the condition is more similar to an MCC than a CC or non-CC. 
The C2 findings support maintaining the encephalopathy codes as an MCC 
level. The data are clearly mixed between the C1 and C2 findings, and 
does not consistently support a change in the severity level. Our 
clinical advisers recommended that these encephalopathy codes remain at 
an MCC level because these patients with encephalopathy typically 
utilize significant resources and are at a higher severity level. Based 
on the clinical analysis and the lack of consistent claims data support 
for the severity level change, we believe that the encephalopathy codes 
should remain on the MCC list. Therefore, we are proposing to retain 
the following encephalopathy codes on the MCC list:
     348.30 (Encephalopathy NOS)
     348.32 (Metabolic encephalopathy)
     348.39 (Encephalopathy NEC)
     349.82 (Toxic encephalopathy)
     572.2 (Hepatic encephalopathy)
    We invite public comment on our proposal not to change the severity 
level classification for these codes.
(3) Suggested Changes to Severity Levels for Mechanical Complication 
and Infection Due to Device Related Codes
    We received a request to change the severity classification from 
CCs to MCCs for the following diagnosis codes:
     996.01 (Mechanical of cardiac device, implant and graft 
due to cardiac pacemaker (electrode)).
     996.04 (Mechanical complication of cardiac device, 
implant, and graft due to automatic implantable cardiac defibrillator).
     996.61 (Infection and inflammatory reaction due to 
internal prosthetic device, implant, and graft due to cardiac device, 
implant, and graft).
    Currently, all three diagnosis codes are classified as a CC. For 
this proposed rule, we analyzed claims data using the methodology 
described previously in this section for these diagnosis codes. The 
following chart shows our findings:
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP05MY11.029

    We reviewed the findings from these data. The C1 findings ranged 
from a low of 1.6723 to a high of 1.9922. As stated earlier, a value 
close to 2.0 in the C1 field suggests that the condition is more like a 
CC than a non-CC but not as

[[Page 25838]]

significant in resource usage as an MCC. The C1 findings clearly 
support the current classification of these three codes on the CC list 
and the C2 findings supports this classification. Our clinical advisors 
agree that the data findings and their own clinical evaluation of the 
severity level of these conditions support the classification of these 
three codes on the CC list. Therefore, we are proposing that these 
codes remain on the CC list. We invite public comment on this proposal.
    Tables 6G and 6H, Additions to and Deletions from the CC Exclusion 
List, respectively, which are proposed to be effective for discharges 
occurring on or after October 1, 2011, are not being published in the 
Addendum to this proposed rule because of the length of the two tables. 
Instead, we are making them available through the Internet on the CMS 
Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Each of these 
principal diagnoses for which there is a CC exclusion is shown in 
Tables 6G and 6H, which are listed in section VI. of the Addendum to 
this proposed rule (and available via the Internet) with an asterisk, 
and the conditions that will not count as a CC, are provided in an 
indented column immediately following the affected principal diagnosis.
    A complete updated MCC, CC, and Non-CC Exclusions List is also 
available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. If finalized in this rulemaking 
cycle, beginning with discharges on or after October 1, 2011, the 
indented diagnoses will not be recognized by the GROUPER as valid CCs 
for the asterisked principal diagnosis.
    To assist readers in identifying the changes to the MCC and CC 
lists that occurred as a result of updates to the ICD-9-CM codes, as 
described in Tables 6A, 6C, and 6E, which are listed in section VI. of 
the Addendum to this proposed rule and available via the Internet, we 
are providing the following summaries of those MCC and CC changes for 
FY 2012.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP05MY11.030

[[Page 25839]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.031

[[Page 25840]]

BILLING CODE 4120-01-C
    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with CMS, is 
responsible for updating and maintaining the GROUPER program. The 
current MS-DRG Definitions Manual, Version 28.0, is available on a CD 
for $225.00. Version 29.0 of this manual, which will include the final 
FY 2012 MS-DRG changes, will be available on a CD for $225.00. These 
manuals may be obtained by writing 3M/HIS at the following address: 100 
Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303, or by 
obtaining an order form at the Web site: http://www.3MHIS.com. Please 
specify the revision or revisions requested.
12. Review of Procedure Codes in MS DRGs 981 Through 983; 984 Through 
986; and 987 Through 989
    Each year, we review cases assigned to former CMS DRG 468 
(Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 
476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and 
CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal 
Diagnosis) to determine whether it would be appropriate to change the 
procedures assigned among these CMS DRGs. Under the MS-DRGs that we 
adopted for FY 2008, CMS DRG 468 was split three ways and became MS-
DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal 
Diagnosis with MCC, with CC, and without CC/MCC, respectively). CMS DRG 
476 became MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure 
Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC, 
respectively). CMS DRG 477 became MS-DRGs 987, 988, and 989 
(Nonextensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, 
with CC, and without CC/MCC, respectively).
    MS-DRGs 981 through 983, 984 through 986, and 987 through 989 
(formerly CMS DRGs 468, 476, and 477, respectively) are reserved for 
those cases in which none of the O.R. procedures performed are related 
to the principal diagnosis. These MS-DRGs are intended to capture 
atypical cases, that is, those cases not occurring with sufficient 
frequency to represent a distinct, recognizable clinical group. MS-DRGs 
984 through 986 (previously CMS DRG 476) are 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, not elsewhere classified
     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
     60.96, Transurethral destruction of prostate tissue by 
microwave thermotherapy
     60.97, Other transurethral destruction of prostate tissue 
by other thermotherapy
     60.99, Other operations on prostate
    All remaining O.R. procedures are assigned to MS-DRGs 981 through 
983 and 987 through 989, with MS-DRGs 987 through 989 assigned to those 
discharges in which the only procedures performed are nonextensive 
procedures that are unrelated to the principal diagnosis.\3\
---------------------------------------------------------------------------

    \3\ 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 FY 1989 final rule (53 FR 38591). As part 
of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56 
FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final 
rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY 
1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), 
and the FY 1998 final rule (62 FR 45981), we moved several other 
procedures from DRG 468 to DRG 477, and some procedures from DRG 477 
to DRG 468. No procedures were moved in FY 1999, as noted in the 
final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65 
FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule 
(67 FR 49999) we did not move any procedures from DRG 477. However, 
we did move procedure codes from DRG 468 and placed them in more 
clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), 
we moved several procedures from DRG 468 to DRGs 476 and 477 because 
the procedures are nonextensive. In the FY 2005 final rule (69 FR 
48950), we moved one procedure from DRG 468 to 477. In addition, we 
added several existing procedures to DRGs 476 and 477. In the FY 
2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned 
it to DRG 477. In FY 2007, we moved one procedure from DRG 468 and 
assigned it to DRGs 479, 553, and 554. In FYs 2008, 2009, FY 2010, 
and FY 2011, no procedures were moved, as noted in the FY 2008 final 
rule with comment period (72 FR 46241), the FY 2009 final rule (73 
FR 48513), the FY 2010 final rule (74 FR 43796); and the FY 2011 
final rule (75 FR 50122).
---------------------------------------------------------------------------

    Our review of MedPAR claims data showed that there were no cases 
that merited movement or should logically be assigned to any of the 
other MDCs. Therefore, for FY 2012, we are not proposing to change the 
procedures assigned among these MS-DRGs.
a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 
Through 989 Into MDCs
    We annually conduct a review of procedures producing assignment to 
MS-DRGs 981 through 983 (Extensive O.R. procedure unrelated to 
principal diagnosis with MCC, with CC, and without CC/MCC, 
respectively) or MS-DRGs 987 through 989 (Nonextensive O.R. procedure 
unrelated to principal diagnosis with MCC, with CC, and without CC/MCC, 
respectively) on the basis of volume, by procedure, to see if it would 
be appropriate to move procedure codes out of these MS-DRGs into one of 
the surgical MS-DRGs for the MDC into which the principal diagnosis 
falls. The data are arrayed in two ways for comparison purposes. We 
look at a frequency count of each major operative procedure code. We 
also compare procedures across MDCs by volume of procedure codes within 
each MDC.
    We identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical MS-DRGs for the MDC in which the diagnosis falls. 
As noted above, there were no cases that merited movement or that 
should logically be assigned to any of the other MDCs. Therefore, for 
FY 2012, we are not proposing to remove any procedures from MS-DRGs 981 
through 983 or MS-DRGs 987 through 989 into one of the surgical MS-DRGs 
for the MDC into which the principal diagnosis is assigned.
b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    We also annually review the list of ICD-9-CM procedures that, when 
in combination with their principal diagnosis code, result in 
assignment to MS-DRGs 981 through 983, 984 through 986 (Prostatic O.R. 
procedure unrelated to principal diagnosis with MCC, with CC, or 
without CC/MCC, respectively), and 987 through 989, to ascertain 
whether any of those procedures should be reassigned from one of these 
three MS-DRGs to another of the three MS-DRGs based on average charges 
and the length of stay. We look at the data for trends such as shifts 
in treatment practice or reporting practice that would make the 
resulting MS-DRG assignment illogical. If we find these shifts, we 
would propose to move cases to keep

[[Page 25841]]

the MS-DRGs clinically similar or to provide payment for the cases in a 
similar manner. Generally, we move only those procedures for which we 
have an adequate number of discharges to analyze the data.
    There were no cases representing shifts in treatment practice or 
reporting practice that would make the resulting MS-DRG assignment 
illogical, or that merited movement so that cases should logically be 
assigned to any of the other MDCs. Therefore, for FY 2012, we are not 
proposing to move any procedure codes among these MS-DRGs.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on the review of cases in the MDCs as described above in 
sections III.G.12.a. and b., we are not proposing to add any diagnosis 
or procedure codes to MDCs for FY 2012.
13. Changes to the ICD-9-CM Coding System, Including Discussion of the 
Replacement of the ICD-9-CM Coding System With the ICD-10-CM and ICD-
10-PCS Systems in FY 2014
a. ICD-9-CM Coding System
    As described in section II.B.1. of the preamble of this proposed 
rule, the ICD-9-CM is a coding system currently used for the reporting 
of diagnoses and procedures performed on a patient. In September 1985, 
the ICD-9-CM Coordination and Maintenance Committee was formed. This is 
a Federal interdepartmental committee, co-chaired by the National 
Center for Health Statistics (NCHS), the Centers for Disease Control 
and Prevention, and CMS, charged with maintaining and updating the ICD-
9-CM system. The Committee is jointly responsible for approving coding 
changes, and developing errata, addenda, and other modifications to the 
ICD-9-CM to reflect newly developed procedures and technologies and 
newly identified diseases. The Committee is also responsible for 
promoting the use of Federal and non-Federal educational programs and 
other communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The Official Version of the ICD-9-CM contains the list of valid 
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is 
available from the Government Printing Office on CD-ROM for $19.00 by 
calling (202) 512-1800.) Complete information on ordering the CD-ROM is 
also available at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. The Official Version of the ICD-9-CM is no 
longer available in printed manual form from the Federal Government; it 
is only available on CD-ROM. Users who need a paper version are 
referred to one of the many products available from publishing houses.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA), the 
American Hospital Association (AHA), and various physician specialty 
groups, as well as individual physicians, health information management 
professionals, and other members of the public, to contribute ideas on 
coding matters. After considering the opinions expressed at the public 
meetings and in writing, the Committee formulates recommendations, 
which then must be approved by the agencies.
    The Committee presented proposals for coding changes for 
implementation in FY 2012 at a public meeting held on September 15-16, 
2010 and finalized the coding changes after consideration of comments 
received at the meetings and in writing by November 19, 2010. Those 
coding changes are announced in Tables 6A through 6F, which are listed 
in section VI. of the Addendum to this proposed rule and available via 
the Internet.
    The Committee held its 2011 meeting on March 9-10, 2011. New codes 
for which there was a consensus of public support and for which 
complete tabular and indexing changes are made by May 2011 will be 
included in the October 1, 2011 update to ICD-9-CM. Code revisions that 
were discussed at the March 9-10, 2011 Committee meeting but that could 
not be finalized in time to include them in the tables listed in 
section VI. of the Addendum to this proposed rule will be included in 
Tables 6A through 6F, which will be listed in section VI. of the 
Addendum to the final rule and available via the Internet, and will be 
marked with an asterisk (*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 15-16, 2010 meeting and March 9-10, 2011 meeting 
can be obtained from the CMS Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the 
diagnosis codes discussions at the September 15-16, 2010 meeting and 
March 9-10, 2011 meeting are found at: http://www.cdc.gov/nchs/icd.htm. 
These Web sites also provide detailed information about the Committee, 
including information on requesting a new code, attending a Committee 
meeting, and timeline requirements and meeting dates.
    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 2402, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 
[email protected].
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination 
and Maintenance Committee, CMS, Center for Medicare Management, 
Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by E-mail to: [email protected].
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 2011. The new ICD-9-CM codes are listed, along 
with their MS-DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively), which are listed in 
section VI. of the Addendum to this proposed rule and available via the 
Internet. As we stated above, the code numbers and their titles were 
presented for public comment at the ICD-9-CM Coordination and 
Maintenance Committee meetings. Both oral and written comments were 
considered before the codes were approved.
    In this proposed rule, we are soliciting comments on the proposed 
classification of these new codes, which are shown in Tables 6A and 6B 
listed in section VI. of the Addendum to this proposed rule and 
available via the Internet.
    For codes that have been replaced by new or expanded codes, the 
corresponding new or expanded diagnosis codes are included in Table 6A, 
which is listed in section VI. of the Addendum to this proposed rule 
and available via the Internet. New

[[Page 25842]]

procedure codes are shown in Table 6B, which is listed in section VI. 
of the Addendum to this proposed rule and available via the Internet. 
Diagnosis codes that have been replaced by expanded codes or other 
codes or have been deleted are in Table 6C (Invalid Diagnosis Codes), 
which is listed in section VI. of the Addendum to this proposed rule 
and available via the Internet. These invalid diagnosis codes will not 
be recognized by the GROUPER beginning with discharges occurring on or 
after October 1, 2011. Table 6D, which is listed in section VI. of the 
Addendum to this proposed rule and available via the Internet contains 
invalid procedure codes. These invalid procedure codes will not be 
recognized by the GROUPER beginning with discharges occurring on or 
after October 1, 2011. Revisions to diagnosis code titles are in Table 
6E (Revised Diagnosis Code Titles), which is listed in section VI. of 
the Addendum to this proposed rule and available via the Internet, and 
also includes the MS-DRG assignments for these revised codes. Table 6F, 
which is listed in section VI. of the Addendum to this proposed rule 
and available via the Internet includes revised procedure code titles 
for FY 2012.
    In the September 7, 2001 final rule implementing the IPPS new 
technology add-on payments (66 FR 46906), we indicated we would attempt 
to include proposals for procedure codes that would describe new 
technology discussed and approved at the Spring meeting as part of the 
code revisions effective the following October. As stated previously, 
ICD-9-CM codes discussed at the March 9-10, 2011 Committee meeting that 
received consensus and that are finalized by May 2011 will be included 
in Tables 6A through 6F, which will be listed in section VI. of the 
Addendum to the final rule and available via the Internet.
    Section 503(a) of Public Law 108-173 included a requirement for 
updating ICD-9-CM codes twice a year instead of a single update on 
October 1 of each year. This requirement was included as part of the 
amendments to the Act relating to recognition of new technology under 
the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by 
adding a clause (vii) which states that the ``Secretary shall provide 
for the addition of new diagnosis and procedure codes on April 1 of 
each year, but the addition of such codes shall not require the 
Secretary to adjust the payment (or diagnosis-related group 
classification) * * * until the fiscal year that begins after such 
date.'' This requirement improves the recognition of new technologies 
under the IPPS system by providing information on these new 
technologies at an earlier date. Data will be available 6 months 
earlier than would be possible with updates occurring only once a year 
on October 1.
    While section 1886(d)(5)(K)(vii) of the Act states that the 
addition of new diagnosis and procedure codes on April 1 of each year 
shall not require the Secretary to adjust the payment, or DRG 
classification, under section 1886(d) of the Act until the fiscal year 
that begins after such date, we have to update the DRG software and 
other systems in order to recognize and accept the new codes. We also 
publicize the code changes and the need for a mid-year systems update 
by providers to identify the new codes. Hospitals also have to obtain 
the new code books and encoder updates, and make other system changes 
in order to identify and report the new codes.
    The ICD-9-CM Coordination and Maintenance Committee holds its 
meetings in the spring and fall in order to update the codes and the 
applicable payment and reporting systems by October 1 of each year. 
Items are placed on the agenda for the ICD-9-CM Coordination and 
Maintenance Committee meeting if the request is received at least 2 
months prior to the meeting. This requirement allows time for staff to 
review and research the coding issues and prepare material for 
discussion at the meeting. It also allows time for the topic to be 
publicized in meeting announcements in the Federal Register as well as 
on the CMS Web site. The public decides whether or not to attend the 
meeting based on the topics listed on the agenda. Final decisions on 
code title revisions are currently made by March 1 so that these titles 
can be included in the IPPS proposed rule. A complete addendum 
describing details of all changes to ICD-9-CM, both tabular and index, 
is published on the CMS and NCHS Web sites in May of each year. 
Publishers of coding books and software use this information to modify 
their products that are used by health care providers. This 5-month 
time period has proved to be necessary for hospitals and other 
providers to update their systems.
    A discussion of this timeline and the need for changes are included 
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance 
Committee minutes. The public agreed that there was a need to hold the 
fall meetings earlier, in September or October, in order to meet the 
new implementation dates. The public provided comment that additional 
time would be needed to update hospital systems and obtain new code 
books and coding software. There was considerable concern expressed 
about the impact this new April update would have on providers.
    In the FY 2005 IPPS final rule, we implemented section 
1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Public Law 
108-173, by developing a mechanism for approving, in time for the April 
update, diagnosis and procedure code revisions needed to describe new 
technologies and medical services for purposes of the new technology 
add-on payment process. We also established the following process for 
making these determinations. Topics considered during the Fall ICD-9-CM 
Coordination and Maintenance Committee meeting are considered for an 
April 1 update if a strong and convincing case is made by the requester 
at the Committee's public meeting. The request must identify the reason 
why a new code is needed in April for purposes of the new technology 
process. The participants at the meeting and those reviewing the 
Committee meeting summary report are provided the opportunity to 
comment on this expedited request. All other topics are considered for 
the October 1 update. Participants at the Committee meeting are 
encouraged to comment on all such requests. There were no requests 
approved for an expedited April l, 2011 implementation of an ICD-9-CM 
code at the September 15-16, 2010 Committee meeting. Therefore, there 
were no new ICD-9-CM codes implemented on April 1, 2011.
    Current addendum and code title information is published on the CMS 
Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along 
with the Official ICD-9-CM Coding Guidelines, can be found on the Web 
site at: http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, 
and deleted ICD-9-CM codes is also provided to the AHA for publication 
in the Coding Clinic for ICD-9-CM. AHA also distributes information to 
publishers and software vendors.
    CMS also sends copies of all ICD-9-CM coding changes to its 
Medicare contractors for use in updating their systems and providing 
education to providers.
    These same means of disseminating information on new, revised, and 
deleted ICD-9-CM codes will be used to notify providers, publishers, 
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles

[[Page 25843]]

are adopted as part of the ICD-9-CM Coordination and Maintenance 
Committee process. Thus, although we publish the code titles in the 
IPPS proposed and final rules, they are not subject to comment in the 
proposed or final rules. We will continue to publish the October code 
updates in this manner within the IPPS proposed and final rules. For 
codes that are implemented in April, we will assign the new procedure 
code to the same MS-DRG in which its predecessor code was assigned so 
there will be no MS-DRG impact as far as MS-DRG assignment. Any midyear 
coding updates will be available through the Web sites indicated above 
and through the Coding Clinic for ICD-9-CM. Publishers and software 
vendors currently obtain code changes through these sources in order to 
update their code books and software systems. We will strive to have 
the April 1 updates available through these Web sites 5 months prior to 
implementation (that is, early November of the previous year), as is 
the case for the October 1 updates.
b. Code Freeze
    The International Classification of Diseases, 10th Revision (ICD-
10) coding system applicable to hospital inpatient services will be 
implemented on October 1, 2013, as described in the Health Insurance 
Portability and Accountability Act (HIPAA) Administrative 
Simplification: Modifications to Medical Data Code Set Standards to 
Adopt ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362, 
January 16, 2009). The ICD-10 coding system includes the International 
Classification of Diseases, 10th Revision, Clinical Modification (ICD-
10-CM) for diagnosis coding and the International Classification of 
Diseases, 10th Revision, Procedure Coding System (ICD-10-PCS) for 
inpatient hospital procedure coding, as well as the Official ICD-10-CM 
and ICD-10-PCS Guidelines for Coding and Reporting. In the January 16, 
2009 ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362), 
there was a discussion of the need for a partial or total freeze in the 
annual updates to both ICD-9-CM and ICD-10-CM and ICD-10-PCS codes. The 
public comment addressed in that final rule stated that the annual code 
set updates should cease l year prior to the implementation of ICD-10. 
The commenters stated that this freeze of code updates would allow for 
instructional and/or coding software programs to be designed and 
purchased early, without concern that an upgrade would take place 
immediately before the compliance date, necessitating additional 
updates and purchases.
    We responded to comments in the ICD-10 final rule that the ICD-9-CM 
Coordination and Maintenance Committee has jurisdiction over any action 
impacting the ICD-9-CM and ICD-10 code sets. Therefore, we indicated 
that the issue of consideration of a moratorium on updates to the ICD-
9-CM, ICD-10-CM, and ICD-10-PCS code sets in anticipation of the 
adoption of ICD-10-CM and ICD-10-PCS would be addressed through the 
Committee at a future public meeting.
    The code freeze was discussed at multiple meetings of the ICD-9-CM 
Coordination and Maintenance Committee and public comment was actively 
solicited. The Committee evaluated all comments from participants 
attending the Committee meetings as well as written comments that were 
received. There was an announcement at the September 15-16, 2010 ICD-9-
CM Coordination and Maintenance Committee meeting that a partial freeze 
of both ICD-9-CM and ICD-10 codes would be implemented as follows:
     The last regular annual update to both ICD-9-CM and ICD-10 
code sets will be made on October 1, 2011.
     On October 1, 2012, there will be only limited code 
updates to both ICD-9-CM and ICD-10 code sets to capture new technology 
and new diseases.
     There will be no updates to ICD-9-CM on October 1, 2013, 
as the system will no longer be a HIPAA standard. There will be only 
limited code updates to ICD-10 code sets on October 1, 2013, to capture 
new technology and new diseases.
     On October 1, 2014, regular updates to ICD-10 will begin.
    The ICD-9-CM Coordination and Maintenance Committee announced that 
it would continue to meet twice a year during the freeze. At these 
meetings, the public will be encouraged to comment on whether or not 
requests for new diagnosis and procedure codes should be created based 
on the need to capture new technology and new diseases. Any code 
requests that do not meet the criteria will be evaluated for 
implementation within ICD-10 on or after October 1, 2014, once the 
partial freeze is ended.
    Complete information on the partial code freeze and discussions of 
the issues at the Committee meetings can be found on the ICD-9-CM 
Coordination and Maintenance Committee Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03. A summary of the September 15-16, 2010 
Committee meeting, along with both written and audio transcripts of 
this meeting, are posted on the ``Download'' section of this Web page.
c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on Hospital 
Inpatient Claims
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50127), we discussed 
that we had received repeated requests from the hospital community to 
process all 25 diagnosis codes and 25 procedure codes submitted on 
electronic hospital inpatient claims. Prior to January 1, 2011, 
hospitals could submit up to 25 diagnoses and 25 procedures; however, 
CMS' system limitations allowed for the processing of only the first 9 
diagnoses and 6 procedures. We indicated in that final rule that, as 
part of our efforts to update Medicare systems prior to the 
implementation of ICD-10 on October 1, 2013, we were undergoing 
extensive system updates as part of the move to 5010, which includes 
the ability to accept ICD-10 codes. This complicated transition 
involved converting many internal systems prior to October 1, 2013, 
when ICD-10 will be implemented. We stated that, as one important step 
in this planned conversion process, we were planning to complete the 
expansion of our internal system capability so that we are able to 
process up to 25 diagnoses and 25 procedures on hospital inpatient 
claims as part of the HIPAA ASC X12 Technical Reports Type 3, Version 
005010 (Version 5010) standards system update. We have not completed 
this expansion, and, as a result, we were able to process up to 25 
diagnosis codes and 25 procedure codes when received on the 5010 format 
starting on January 1, 2011. We continue to recognize the value of the 
additional information provided by this coded data for multiple uses 
such as for payment, quality measures, outcome analysis, and other 
important uses.
d. ICD-10 MS-DRGs
    In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received 
comments on the creation of the ICD-10 version of the MS-DRGs, which 
will be implemented on October 1, 2013 (FY 2014) when we implement the 
reporting of ICD-10 codes (75 FR 50127 and 50128). While we did not 
propose an ICD-10 version of the MS-DRGs in the FY 2011 IPPS/LTCH PPS 
proposed rule, we noted that we have been actively involved in 
converting our current MS-DRGs from ICD-9-CM codes to ICD-10 codes and 
sharing this information through the ICD-9-CM Coordination and 
Maintenance Committee. We undertook this early conversion project

[[Page 25844]]

to assist other payers and providers in understanding how to go about 
their own conversion projects. We posted ICD-10 MS-DRGs based on V26.0 
(FY 2009) of the MS-DRGs. We also posted a paper that describes how CMS 
went about completing this project and suggestions for others to 
follow. All of this information can be found on the CMS Web site at: 
http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. 
We have continued to keep the public updated on our maintenance efforts 
for ICD-10-CM and ICD-10-PCS coding systems as well as the General 
Equivalence Mappings that assist in conversion through the ICD-9-CM 
Coordination and Maintenance Committee. Information on these committee 
meetings can be found at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp.
    During FY 2011, we developed and posted Version 28.0 of the ICD-10 
MS-DRGs based on the FY 2011 MS-DRGs (Version 28.0) that we finalized 
in the FY 2011 IPPS/LTCH PPS final rule on the CMS Web site. This ICD-
10 MS-DRG Version 28.0 also includes the CC Exclusion List and the ICD-
10 version of the hospital acquired conditions (HACs), which was not 
posted with Version 26.0. We also discussed this update at the 
September 15-16, 2010 and the March 9-10, 2011 meetings of the ICD-9-CM 
Coordination and Maintenance Committee. The minutes of these two 
meetings are posted on the CMS Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. We will continue to work 
with the public to explain how we are approaching the conversion of MS-
DRGs to ICD-10 and will post drafts of updates as they are developed 
for public review. The final version of the ICD-10 MS-DRGs to be 
implemented in FY 2014 will be subject to notice and comment 
rulemaking. In the meantime, we will provide extensive and detailed 
information on this activity through the ICD-9-CM Coordination and 
Maintenance Committee.
14. Other Issues
a. O.R./Non-O.R. Status of Procedures
(1) Brachytherapy Code
    We received a request that we add ICD-9-CM procedure code 92.27 
(Implantation or Insertion of Radioactive Elements) [Brachytherapy] 
into 41 MS-DRGs that are listed below:
     129 (Major Head and Neck Procedures with CC/MCC or Major 
Device)
     130 (Major Head and Neck Procedures without CC/MCC)
     163 (Major Chest Procedures with MCC)
     164 (Major Chest Procedures with CC)
     165 (Major Chest Procedures without CC/MCC)
     180 (Respiratory Neoplasms with MCC)
     181 (Respiratory Neoplasms with CC)
     182 (Respiratory Neoplasms without CC/MCC)
     326 (Stomach, Esophageal and Duodenal Procedures with MCC)
     327 (Stomach, Esophageal and Duodenal Procedures with CC)
     328 (Stomach, Esophageal and Duodenal Procedures without 
CC/MCC)
     329 (Major Small and Large Bowel Procedures with MCC)
     330 (Major Small and Large Bowel Procedures with CC)
     331 (Major Small and Large Bowel Procedures without CC/
MCC)
     332 (Rectal Resection with MCC)
     333 (Rectal Resection with CC)
     334 (Rectal Resection without CC/MCC)
     344 (Minor Small and Large Bowel Procedures with MCC)
     345 (Minor Small and Large Bowel Procedures with CC)
     346 (Minor Small and Large Bowel Procedures without CC/
MCC)
     347 (Anal and Stomal Procedures with MCC)
     348 (Anal and Stomal Procedures with CC)
     349 (Anal and Stomal Procedures without CC/MCC)
     405 (Pancreas, Liver and Shunt Procedures with MCC)
     406 (Pancreas, Liver and Shunt Procedures with CC)
     407 (Pancreas, Liver and Shunt Procedures without CC/MCC)
     490 (Back and Neck Procedures Except Spinal Fusion with 
CC/MCC or Disc Device/Neurostimulator)
     491 (Back and Neck Procedures Except Spinal Fusion without 
CC/MCC)
     500 (Soft Tissue procedures with MCC)
     501 (Soft Tissue procedures with CC)
     502 (Soft Tissue procedures without CC/MCC)
     584 (Breast Biopsy, Local Excision and Other Breast 
Procedures with CC/MCC)
     585 (Breast Biopsy, Local Excision and Other Breast 
Procedures without CC/MCC)
     597 (Malignant Breast Disorders with MCC)
     598 (Malignant Breast Disorders with CC)
     599 (Malignant Breast Disorders without CC/MCC)
     653 (Major Bladder Procedures with MCC)
     654 (Major Bladder Procedures with CC)
     655 (Major Bladder Procedures without CC/MCC)
     656 (Kidney and Ureter Procedures for Neoplasm with MCC)
     657 (Kidney and Ureter Procedures for Neoplasm with CC)
     658 (Kidney and Ureter Procedures for Neoplasm without CC/
MCC)
     662 (Minor Bladder Procedures with MCC)
     663 (Minor Bladder Procedures with CC)
     664 (Minor Bladder Procedures without CC/MCC)
     668 (Transurethral Procedures with MCC)
     669 (Transurethral Procedures with CC)
     670 (Transurethral Procedures without CC/MCC)
     671 (Urethral Procedures with CC/MCC)
     672 (Urethral Procedures without CC/MCC)
     707 (Major Male Pelvic Procedures with CC/MCC)
     708 (Major Male Pelvic Procedures without CC/MCC)
     736 (Uterine and Adnexa Procedures for Ovarian or Adnexal 
Malignancy with MCC)
     737 (Uterine and Adnexa Procedures for Ovarian or Adnexal 
Malignancy with CC)
     738 (Uterine and Adnexa Procedures for Ovarian or Adnexal 
Malignancy without CC/MCC)
     739 (Uterine and Adnexa Procedures for Nonovarian or 
Adnexal Malignancy with MCC)
     740 (Uterine and Adnexa Procedures for Nonovarian or 
Adnexal Malignancy with CC)
     741 (Uterine and Adnexa Procedures for Nonovarian or 
Adnexal Malignancy without CC/MCC)
     746 (Vagina, Cervix and Vulva Procedures with CC/MCC)
     747 (Vagina, Cervix and Vulva Procedures without CC/MCC)
     748 (Female Reproductive System Reconstructive Procedures)
     749 (Other Female Reproductive System O.R. Procedures with 
CC/MCC)
     750 (Other Female Reproductive System O.R. Procedures 
without CC/MCC)
    We examined MedPAR claims data on this request and only found 150 
cases throughout these MS-DRGs. Our findings are presented in the table 
below.
BILLING CODE 4120-01-P

[[Page 25845]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.032

BILLING CODE 4120-01-C

[[Page 25846]]

    The numbers of cases in any of the MS-DRGs listed were minimal. 
Many of the MS-DRGs listed had no occurrences of procedure code 92.27. 
The highest number of cases found was 52, in MS-DRG 164 (Major Chest 
Procedures with CC). Based on these findings, we do not believe that 
making a MS-DRG change based on such a minimal number of cases can be 
justified. Therefore, we are proposing not to add procedure code 92.27 
to any of the 41 MS-DRGs listed above. Further, we are not proposing 
any MS-DRG changes for procedure code 92.27. We welcome public comment 
on our proposal not to make changes to procedure code 92.27.
    (2) Intraoperative Electron Radiation Therapy (IOERT)
    [GRAPHIC] [TIFF OMITTED] TP05MY11.033
    
    We received a public comment that was outside of the scope of the 
FY 2011 IPPS/LTCH PPS proposed rule regarding the MS-DRG assignment for 
intraoperative electron radiation therapy (IOERT). This issue was 
discussed briefly in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50128). However, we are addressing this issue in this FY 2012 proposed 
rule. IOERT is the direct application of radiation to a tumor and/or 
tumor bed while the patient is undergoing surgery for cancer. This 
technology may be used for cancers of the rectum, head/neck, pancreas, 
lung, genitourinary, soft tissue, and breast. IOERT is a secondary 
procedure performed during the primary tumor removal surgery.
    The commenter requested that CMS update the MS-DRG assignments for 
procedure code 92.41 (Intraoperative electron radiation therapy) to 
ensure that the cost of this technology is captured in each MS-DRG 
involving tumor removal in the rectum, head/neck, pancreas, lung, 
genitourinary, soft tissue, and breast. Currently, this code is not 
assigned to a specific MS-DRG as the primary procedure performed, the 
tumor removal, would determine the appropriate MS-DRG assignment.
    The commenter provided a recommended list of MS-DRGs to which IOERT 
should be assigned:

[[Page 25847]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.034

[[Page 25848]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.035

BILLING CODE 4120-01-C

[[Page 25849]]

    Based on our review of the FY 2010 MedPAR claims data, we found a 
total of 12 cases with procedure code 92.41 reported. There were three 
cases assigned to MS-DRG 502; two cases each assigned to two different 
MS-DRGs: MS-DRG 333 and MS-DRG 501; and one case assigned each to five 
MS-DRGs: MS-DRGs 130, 168, 327, 329, and 330.
    The IOERT cases were assigned to an MS-DRG that included the tumor 
removal of that particular site, which was listed on the table above. 
Therefore, the cost of this technology is appropriately identified in 
the MS-DRG assignment for the removal of the tumor by specific site, 
and no change is warranted at this time. Therefore, we are not 
proposing any changes to the assignment for IOERT cases. We invite 
public comment on our proposal to not change the assignment for IOERT 
cases for FY 2012.
b. IPPS Recalled Device Policy Clarification
    In the FY 2008 IPPS final rule with comment period (72 FR 47246 
through 47251), we discussed the topic of Medicare payment for devices 
that are replaced without cost or where credit for a replaced device is 
furnished to the hospital. We implemented a policy to reduce a 
hospital's IPPS payment for certain MS-DRGs where the implantation of a 
device that has been recalled determined the base MS-DRG assignment. At 
that time, we specified that we would reduce a hospital's IPPS payment 
for those MS-DRGs where the hospital received a credit equal to 50 
percent or more of the cost of the device when a manufacturer provided 
a credit for a recalled device.
    A similar policy was adopted under the Outpatient Prospective 
Payment System (OPPS) in CY 2008 (the ``partial credit'' policy). This 
policy can be viewed in its entirety at 72 FR 66743 though 66748. In 
general terms, under the partial credit policy, CMS reduces the amount 
of payment for an implanted device made under the OPPS for which CMS 
determines that a significant portion of the payment is attributable to 
the cost of an implanted device when the provider receives partial 
credit for the cost of a replaced device, but only where the amount of 
the device credit is greater than or equal to 50 percent of the cost of 
the new replacement device being implanted.
    It has come to our attention that there is a discrepancy between 
the IPPS policy and the OPPS partial credit policy for replacement 
devices. In particular, the OPPS partial credit policy specifies that 
the credit must be 50 percent or greater of the cost of the replacement 
device. However, the IPPS policy does not specify whether the credit 
should be 50 percent or greater of the replacement device or the 
original device. We believe that the OPPS partial credit policy and the 
IPPS policy should be consistent with each other on the issue of 
whether the 50 percent or more credit is with respect to the 
replacement device or the original device. Therefore, we are proposing 
to clarify the IPPS policy to state that the policy applies where ``the 
hospital received a credit equal to 50 percent or more of the cost of 
the replacement device.'' We invite public comment on this proposal.

H. Recalibration of MS-DRG Weights

    In developing the proposed FY 2012 system of weights, we used two 
data sources: Claims data and cost report data. As in previous years, 
the claims data source is the MedPAR file. This file is based on fully 
coded diagnostic and procedure data for all Medicare inpatient hospital 
bills. The FY 2010 MedPAR data used in this proposed rule include 
discharges occurring on October 1, 2009, through September 30, 2010, 
based on bills received by CMS through December 31, 2010, from all 
hospitals subject to the IPPS and short-term, acute care hospitals in 
Maryland (which are under a waiver from the IPPS under section 
1814(b)(3) of the Act). The FY 2010 MedPAR file used in calculating the 
proposed relative weights includes data for approximately 10,814,950 
Medicare discharges from IPPS providers. Discharges for Medicare 
beneficiaries enrolled in a Medicare Advantage managed care plan are 
excluded from this analysis. These discharges are excluded when the 
MedPAR ``GHO Paid'' indicator field on the claim record is equal to 
``1'' or when the MedPAR DRG payment field, which represents the total 
payment for the claim, is equal to the MedPAR ``Indirect Medical 
Education (IME)'' payment field, indicating that the claim was an ``IME 
only'' claim submitted by a teaching hospital on behalf of a 
beneficiary enrolled in a Medicare Advantage managed care plan. The 
data exclude CAHs, including hospitals that subsequently became CAHs 
after the period from which the data were taken. The second data source 
used in the cost-based relative weighting methodology is the FY 2009 
Medicare cost report data files from HCRIS (that is, cost reports 
beginning on or after October 1, 2008, and before October 1, 2009), 
which represents the most recent full set of cost report data 
available. We used the December 31, 2010 update of the HCRIS cost 
report files for FY 2009 in setting the relative cost-based weights.
    The methodology we used to calculate the DRG cost-based relative 
weights from the FY 2010 MedPAR claims data and FY 2009 Medicare cost 
report data is as follows:
     To the extent possible, all the claims were regrouped 
using the proposed FY 2012 MS-DRG classifications discussed in sections 
II.B. and G. of the preamble of this proposed rule.
     The transplant cases that were used to establish the 
relative weights for heart and heart-lung, liver and/or intestinal, and 
lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) 
were limited to those Medicare-approved transplant centers that have 
cases in the FY 2010 MedPAR file. (Medicare coverage for heart, heart-
lung, liver and/or intestinal, and lung transplants is limited to those 
facilities that have received approval from CMS as transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average cost for each MS-DRG and before 
eliminating statistical outliers.
     Claims with total charges or total lengths of stay less 
than or equal to zero were deleted. Claims that had an amount in the 
total charge field that differed by more than $10.00 from the sum of 
the routine day charges, intensive care charges, pharmacy charges, 
special equipment charges, therapy services charges, operating room 
charges, cardiology charges, laboratory charges, radiology charges, 
other service charges, labor and delivery charges, inhalation therapy 
charges, emergency room charges, blood charges, and anesthesia charges 
were also deleted.
     At least 96.2 percent of the providers in the MedPAR file 
had charges for 10 of the 15 cost centers. Claims for providers that 
did not have charges greater than zero for at least 10 of the 15 cost 
centers were deleted.
     Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the total charges per case and the total charges 
per day for each MS-DRG.
     Effective October 1, 2008, because hospital inpatient 
claims include a POA

[[Page 25850]]

indicator field for each diagnosis present on the claim, only for 
purposes of relative weight-setting, the POA indicator field was reset 
to ``Y'' for ``Yes'' for all claims that otherwise have an ``N'' (No) 
or a ``U'' (documentation insufficient to determine if the condition 
was present at the time of inpatient admission) in the POA field.
    Under current payment policy, the presence of specific HAC codes, 
as indicated by the POA field values, can generate a lower payment for 
the claim. Specifically, if the particular condition is present on 
admission (that is, a ``Y'' indicator is associated with the diagnosis 
on the claim), then it is not a HAC, and the hospital is paid for the 
higher severity (and, therefore, the higher weighted MS-DRG). If the 
particular condition is not present on admission (that is, an ``N'' 
indicator is associated with the diagnosis on the claim) and there are 
no other complicating conditions, the DRG GROUPER assigns the claim to 
a lower severity (and, therefore, the lower weighted MS-DRG) as a 
penalty for allowing a Medicare inpatient to contract a HAC. While the 
POA reporting meets policy goals of encouraging quality care and 
generates program savings, it presents an issue for the relative 
weight-setting process. Because cases identified as HACs are likely to 
be more complex than similar cases that are not identified as HACs, the 
charges associated with HACs are likely to be higher as well. Thus, if 
the higher charges of these HAC claims are grouped into lower severity 
MS-DRGs prior to the relative weight-setting process, the relative 
weights of these particular MS-DRGs would become artificially inflated, 
potentially skewing the relative weights. In addition, we want to 
protect the integrity of the budget neutrality process by ensuring 
that, in estimating payments, no increase to the standardized amount 
occurs as a result of lower overall payments in a previous year that 
stem from using weights and case-mix that are based on lower severity 
MS-DRG assignments. If this would occur, the anticipated cost savings 
from the HAC policy would be lost.
    To avoid these problems, we reset the POA indicator field to ``Y'' 
only for relative weight-setting purposes for all claims that otherwise 
have a ``N'' or an ``U'' in the POA field. This resetting ``forced'' 
the more costly HAC claims into the higher severity MS-DRGs as 
appropriate, and the relative weights calculated for each MS-DRG more 
closely reflect the true costs of those cases.
    Once the MedPAR data were trimmed and the statistical outliers were 
removed, the charges for each of the 15 cost groups for each claim were 
standardized to remove the effects of differences in area wage levels, 
IME and DSH payments, and for hospitals in Alaska and Hawaii, the 
applicable cost-of-living adjustment. Because hospital charges include 
charges for both operating and capital costs, we standardized total 
charges to remove the effects of differences in geographic adjustment 
factors, cost-of-living adjustments, and DSH payments under the capital 
IPPS as well. Charges were then summed by MS-DRG for each of the 15 
cost groups so that each MS-DRG had 15 standardized charge totals. 
These charges were then adjusted to cost by applying the national 
average CCRs developed from the FY 2009 cost report data.
    The 15 cost centers that we used in the relative weight calculation 
are shown in the following table. The table shows the lines on the cost 
report and the corresponding revenue codes that we used to create the 
15 national cost center CCRs.
BILLING CODE 4120-01-P

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    We developed the national average CCRs as follows:
    Taking the FY 2009 cost report data, we removed CAHs, Indian Health 
Service hospitals, all-inclusive rate hospitals, and cost reports that 
represented time periods of less than 1 year (365 days). We included 
hospitals located in Maryland as we are including their charges in our 
claims database. We then created CCRs for each provider for each cost 
center (see prior table for line items used in the calculations) and 
removed any CCRs that were greater than 10 or less than 0.01. We 
normalized the departmental CCRs by dividing the CCR for each 
department by the total CCR for the hospital for the purpose of 
trimming the data. We then took the logs of the normalized cost center 
CCRs and removed any cost center CCRs where the log of the cost center 
CCR was greater or less than the mean log plus/minus 3 times the 
standard deviation for the log of that cost center CCR. Once the cost 
report data were trimmed, we calculated a Medicare-specific CCR. The 
Medicare-specific CCR was determined by taking the Medicare charges for 
each line item from Worksheet D-4 and deriving the Medicare-specific 
costs by applying the hospital-specific departmental CCRs to the 
Medicare-specific charges for each line item from Worksheet D-4. Once 
each hospital's Medicare-specific costs were established, we summed the 
total Medicare-specific costs and divided by the sum of the total 
Medicare-specific charges to produce national average, charge-weighted 
CCRs.
    After we multiplied the total charges for each MS-DRG in each of 
the 15 cost centers by the corresponding national average CCR, we 
summed the 15 ``costs'' across each MS-DRG to produce a total 
standardized cost for the MS-DRG. The average standardized cost for 
each MS-DRG was then computed as the total standardized cost for the 
MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The 
average cost for each MS-DRG was then divided by the national average 
standardized cost per case to determine the relative weight.
    The new cost-based relative weights were then normalized by an 
adjustment factor of 1.5798292955 so that the average case weight after 
recalibration was equal to the average case weight before 
recalibration. The normalization adjustment is intended to ensure that 
recalibration by itself neither increases nor decreases total payments 
under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.
    The 15 proposed national average CCRs for FY 2012 are as follows:
    [GRAPHIC] [TIFF OMITTED] TP05MY11.042
    
    Since FY 2009, the relative weights have been based on 100 percent 
cost weights based on our MS-DRG grouping system.
    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. In this FY 2012 IPPS/LTCH PPS proposed 
rule, we are proposing to use that same case threshold in recalibrating 
the MS-DRG weights for FY 2012. Using the FY 2010 MedPAR data set, 
there are 8 MS-DRGs that contain fewer than 10 cases. Under the MS-
DRGs, we have fewer low-volume DRGs than under the CMS DRGs because we 
no longer have separate DRGs for patients age 0 to 17 years. With the 
exception of newborns, we previously separated some DRGs based on 
whether the patient was age 0 to 17 years or age 17 years and older. 
Other than the age split, cases grouping to these DRGs are identical. 
The DRGs for patients age 0 to 17 years generally have very low volumes 
because children are typically ineligible for Medicare. In the past, we 
have found that the low volume of cases for the pediatric DRGs could 
lead to significant year-to-year instability in their relative weights. 
Although we have always encouraged non-Medicare payers to develop 
weights applicable to their own patient populations, we have heard 
frequent complaints from providers about the use of the Medicare 
relative weights in the pediatric population. We believe that 
eliminating this age split in the MS-DRGs will provide more stable 
payment for pediatric cases by determining their payment using adult 
cases that are much higher in total volume. Newborns are unique and 
require separate MS-DRGs that are not mirrored in the adult population. 
Therefore, it remains necessary to retain separate MS-DRGs for 
newborns. All of the low-volume MS-DRGs listed below are for newborns. 
In FY 2012, because we do not have sufficient MedPAR data to set 
accurate and stable cost weights for these low-volume MS-DRGs, we are

[[Page 25858]]

proposing to compute weights for the low-volume MS-DRGs by adjusting 
their FY 2011 weights by the percentage change in the average weight of 
the cases in other MS-DRGs. The crosswalk table is shown below:
[GRAPHIC] [TIFF OMITTED] TP05MY11.043

I. Proposed Add-On Payments for New Services and Technologies

1. Background
    Sections 1886(d)(5)(K) and (L) of the Act establish a process of 
identifying and ensuring adequate payment for new medical services and 
technologies (sometimes collectively referred to in this section as 
``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the 
Act specifies that a medical service or technology will be considered 
new if it meets criteria established by the Secretary after notice and 
opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act 
specifies that a new medical service or technology may be considered 
for new technology add-on payment if, ``based on the estimated costs 
incurred with respect to discharges involving such service or 
technology, the DRG prospective payment rate otherwise applicable to 
such discharges under this subsection is inadequate.'' We note that 
beginning with discharges occurring in FY 2008, CMS transitioned from 
CMS-DRGs to MS-DRGs.
    The regulations implementing these provisions specify three 
criteria for a new medical service or technology to receive the 
additional payment: (1) The medical service or technology must be new; 
(2) the medical service or technology must be costly such that the DRG 
rate otherwise applicable to discharges involving the medical service 
or technology is determined to be inadequate; and (3) the service or 
technology must demonstrate a substantial clinical improvement over 
existing services or technologies. These

[[Page 25859]]

three criteria are explained below in the ensuing paragraphs in further 
detail.
    Under the first criterion, as reflected in 42 CFR 412.87(b)(2), a 
specific medical service or technology will be considered ``new'' for 
purposes of new medical service or technology add-on payments until 
such time as Medicare data are available to fully reflect the cost of 
the technology in the MS-DRG weights through recalibration. Typically, 
there is a lag of 2 to 3 years from the point a new medical service or 
technology is first introduced on the market (generally on the date 
that the technology receives FDA approval/clearance) and when data 
reflecting the use of the medical service or technology are used to 
calculate the MS-DRG weights. For example, data from discharges 
occurring during FY 2010 are used to calculate the FY 2012 MS-DRG 
weights in this proposed rule. Section 412.87(b)(2) of the regulations 
therefore provides that ``a medical service or technology may be 
considered new within 2 or 3 years after the point at which data begin 
to become available reflecting the ICD-9-CM code assigned to the new 
medical service or technology (depending on when a new code is assigned 
and data on the new medical service or technology become available for 
DRG recalibration). After CMS has recalibrated the MS-DRGs, based on 
available data to reflect the costs of an otherwise new medical service 
or technology, the medical service or technology will no longer be 
considered `new' under the criterion for this section.''
    The 2-year to 3-year period during which a medical service or 
technology can be considered new would ordinarily begin on the date on 
which the medical service or technology received FDA approval or 
clearance. (We note that, for purposes of this section of this proposed 
rule, we generally refer to both FDA approval and FDA clearance as FDA 
``approval.'') However, in some cases, there may be few to no Medicare 
data available for the new service or technology following FDA 
approval. For example, the newness period could extend beyond the 2-
year to 3-year period after FDA approval is received in cases where the 
product initially was generally unavailable to Medicare patients 
following FDA approval, such as in cases of a national noncoverage 
determination or a documented delay in bringing the product onto the 
market after that approval (for instance, component production or drug 
production has been postponed following FDA approval due to shelf life 
concerns or manufacturing issues). After the MS-DRGs have been 
recalibrated to reflect the costs of an otherwise new medical service 
or technology, the medical service or technology is no longer eligible 
for special add-on payment for new medical services or technologies (as 
specified under Sec.  412.87(b)(2)). For example, an approved new 
technology that received FDA approval in October 2009 and entered the 
market at that time may be eligible to receive add-on payments as a new 
technology for discharges occurring before October 1, 2012 (the start 
of FY 2013). Because the FY 2013 MS-DRG weights would be calculated 
using FY 2011 MedPAR data, the costs of such a new technology would be 
fully reflected in the FY 2013 MS-DRG weights. Therefore, the new 
technology would no longer be eligible to receive add-on payments as a 
new technology for discharges occurring in FY 2013 and thereafter.
    We do not consider a service or technology to be new if it is 
substantially similar to one or more existing technologies. That is, 
even if a technology receives a new FDA approval, it may not 
necessarily be considered ``new'' for purposes of new technology add-on 
payments if it is ``substantially similar'' to a technology that was 
approved by FDA and has been on the market for more than 2 to 3 years. 
In the FY 2006 IPPS final rule (70 FR 47351), we explained our policy 
regarding substantial similarity in detail and its relevance for 
assessing if the hospital charge data used in the development of the 
relative weights for the relevant DRGs reflect the costs of the 
technology. In that final rule, we stated that, for determining 
substantial similarity, we consider (1) Whether a product uses the same 
or a similar mechanism of action to achieve a therapeutic outcome, and 
(2) whether a product is assigned to the same or a different DRG. We 
indicated that both of the above criteria should be met in order for a 
technology to be considered ``substantially similar'' to an existing 
technology. However, in that same final rule, we also noted that, due 
to the complexity of issues regarding the substantial similarity 
component of the newness criterion, it may be necessary to exercise 
flexibility when considering whether technologies are substantially 
similar to one another. Specifically, we stated that we may consider 
additional factors, depending on the circumstances specific to each 
application.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 and 
43814), we noted that the discussion of substantial similarity in the 
FY 2006 IPPS final rule related to comparing two separate technologies 
made by different manufacturers. Nevertheless, we stated that the 
criteria discussed in the FY 2006 IPPS final rule also are relevant 
when comparing the similarity between a new use and existing uses of 
the same technology (or a very similar technology manufactured by the 
same manufacturer). In other words, we stated that it is necessary to 
establish that the new indication for which the technology has received 
FDA approval is not substantially similar to that of the prior 
indication. We explained that such a distinction is necessary to 
determine the appropriate start date of the newness period in 
evaluating whether the technology would qualify for add-on payments 
(that is, the date of the ``new'' FDA approval or that of the prior 
approval), or whether the technology could qualify for separate new 
technology add-on payments under each indication.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43814), we 
added a third factor of consideration to our analysis of whether a new 
technology is substantially similar to one or more existing 
technologies. Specifically, in making a determination of whether a 
technology is substantially similar to an existing technology, we 
adopted a policy to consider whether the new use of the technology 
involves the treatment of the same or similar type of disease and the 
same or similar patient population (74 FR 24130), in addition to 
considering the already established factors described in the FY 2006 
IPPS final rule (that is, (1) whether a product uses the same or a 
similar mechanism of action to achieve a therapeutic outcome; and (2) 
whether a product is assigned to the same or a different DRG). As we 
noted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule, if all three 
components are present and the new use is deemed substantially similar 
to one or more of the existing uses of the technology (that is, beyond 
the newness period), we would conclude that the technology is not new 
and, therefore, is ineligible for the new technology add-on payment.
    Under the second criterion, Sec.  412.87(b)(3) further provides 
that, to be eligible for the add-on payment for new medical services or 
technologies, the MS-DRG prospective payment rate otherwise applicable 
to the discharge involving the new medical services or technologies 
must be assessed for adequacy. Under the cost criterion, to assess the 
adequacy of payment for a new technology paid under the applicable MS-
DRG prospective payment rate, we evaluate whether the charges for cases 
involving the new technology exceed certain threshold

[[Page 25860]]

amounts. In the FY 2004 IPPS final rule (68 FR 45385), we established 
the threshold at the geometric mean standardized charge for all cases 
in the MS-DRG plus 75 percent of 1 standard deviation above the 
geometric mean standardized charge (based on the logarithmic values of 
the charges and converted back to charges) for all cases in the MS-DRG 
to which the new medical service or technology is assigned (or the 
case-weighted average of all relevant MS-DRGs, if the new medical 
service or technology occurs in more than one MS-DRG).
    However, section 503(b)(1) of Public Law 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, 
CMS will apply ``a threshold * * * that is the lesser of 75 percent of 
the standardized amount (increased to reflect the difference between 
cost and charges) or 75 percent of one standard deviation for the 
diagnosis-related group involved.'' (We refer readers to section IV.D. 
of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a 
discussion of the revision of the regulations to incorporate the change 
made by section 503(b)(1) of Pub. L. 108-173.) Table 10 that was 
included in the IPPS/LTCH PPS final rule published in the Federal 
Register on August 16, 2010, contained the final thresholds that were 
used to evaluate applications for new technology add-on payments for 
this proposed rule for FY 2012 (75 FR 50605 through 50613).
    In the September 7, 2001 final rule that established the new 
technology add-on payment regulations (66 FR 46917), we discussed the 
issue of whether the Health Insurance Portability and Accountability 
Act (HIPAA) Privacy Rule at 45 CFR Parts 160 and 164 applies to claims 
information that providers submit with applications for new technology 
add-on payments. Specifically, we explained that health plans, 
including Medicare, and providers that conduct certain transactions 
electronically, including hospitals that would receive new technology 
add-on payments, are required to comply with the HIPAA Privacy Rule. We 
further explained how such entities could meet the applicable HIPAA 
requirements by discussing how the HIPAA Privacy Rule permitted 
providers to share with health plans information needed to ensure 
correct payment, if they had obtained consent from the patient to use 
that patient's data for treatment, payment, or health care operations. 
We also explained that, because the information to be provided within 
applications for new technology add-on payment would be needed to 
ensure correct payment, no additional consent would be required. The 
HHS Office for Civil Rights has since amended the HIPAA Privacy Rule, 
but the results remain. The HIPAA Privacy Rule does not require a 
covered entity to obtain consent from patients to use or disclose 
protected health information for the covered entity's treatment, 
payment, or health care operations purposes, and expressly permits such 
entities to use or to disclose protected health information for these 
purposes and for the treatment purposes of another health care provider 
and the payment purposes of another covered entity or health care 
provider. (We refer readers to 45 CFR 164.502(a)(1)(ii) and 
164.506(c)(1) and (c)(3) and the Standards for Privacy of Individually 
Identifiable Health Information published in the Federal Register (67 
FR 53208 through 53214) on August 14, 2002, for a full discussion of 
consent in the context of the HIPAA Privacy Rule.)
    Under the third criterion, Sec.  412.87(b)(1) of our existing 
regulations provides that a new technology is an appropriate candidate 
for an additional payment when it represents ``an advance that 
substantially improves, relative to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries.'' For example, a 
new technology represents a substantial clinical improvement when it 
reduces mortality, decreases the number of hospitalizations or 
physician visits, or reduces recovery time compared to the technologies 
previously available. (We refer readers to the September 7, 2001 final 
rule for a complete discussion of this criterion (66 FR 46902).)
    The new medical service or technology add-on payment policy under 
the IPPS provides additional payments for cases with relatively high 
costs involving eligible new medical services or technologies while 
preserving some of the incentives inherent under an average-based 
prospective payment system. The payment mechanism is based on the cost 
to hospitals for the new medical service or technology. Under Sec.  
412.88, if the costs of the discharge (determined by applying cost to 
charge ratios (``CCRs'') as described in Sec.  412.84(h)) exceed the 
full DRG payment (including payments for IME and DSH, but excluding 
outlier payments), Medicare will make an add-on payment equal to the 
lesser of: (1) 50 percent of the estimated costs of the new technology 
(if the estimated costs for the case including the new technology 
exceed Medicare's payment); or (2) 50 percent of the difference between 
the full DRG payment and the hospital's estimated cost for the case. 
Unless the discharge qualifies for an outlier payment, Medicare payment 
is limited to the full MS-DRG payment plus 50 percent of the estimated 
costs of the new technology.
    Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments 
to annual MS-DRG classifications and relative weights be made in a 
manner that ensures that aggregate payments to hospitals are not more 
or less than they were in the prior fiscal year (i.e., they are 
``budget neutral''). Therefore, in the past, we accounted for projected 
payments under the new medical service and technology provision during 
the upcoming fiscal year, while at the same time estimating the payment 
effect of changes to the MS-DRG classifications and recalibration. The 
impact of additional payments under this provision was then included in 
the budget neutrality factor, which was applied to the standardized 
amounts and the hospital-specific amounts. However, section 503(d)(2) 
of Public Law 108-173 provides that there shall be no reduction or 
adjustment in aggregate payments under the IPPS due to add-on payments 
for new medical services and technologies. Therefore, in accordance 
with section 503(d)(2) of Public Law 108-173, add-on payments for new 
medical services or technologies for FY 2005 and later years have not 
been subjected to budget neutrality.
    In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we 
modified our regulations at Sec.  412.87 to codify our longstanding 
practice of how CMS evaluates the eligibility criteria for new medical 
service or technology add-on payment applications. That is, we first 
determine whether a medical service or technology meets the newness 
criteria, and only if so, do we then make a determination as to whether 
the technology meets the cost threshold and represents a substantial 
clinical improvement over existing medical services or technologies. We 
also amended Sec.  412.87(c) to specify that all applicants for new 
technology add-on payments must have FDA approval or clearance for 
their new medical service or technology by July 1 of each year prior to 
the beginning of the fiscal year that the application is being 
considered.
    The Council on Technology and Innovation (CTI) at CMS oversees the 
agency's cross-cutting priority on coordinating coverage, coding and 
payment processes for Medicare with respect to new technologies and 
procedures, including new drug therapies, as well as promoting the 
exchange of information on new technologies between CMS and other

[[Page 25861]]

entities. The CTI, composed of senior CMS staff and clinicians, was 
established under section 942(a) of Public Law 108-173. The Council is 
co-chaired by the Director of the Office of Clinical Standards and 
Quality (OCSQ) and the Director of the Center for Medicare (CM), who is 
also designated as the CTI's Executive Coordinator.
    The specific processes for coverage, coding, and payment are 
implemented by CM, OCSQ, and the local claims-payment contractors (in 
the case of local coverage and payment decisions). The CTI supplements, 
rather than replaces, these processes by working to assure that all of 
these activities reflect the agency-wide priority to promote high-
quality, innovative care. At the same time, the CTI also works to 
streamline, accelerate, and improve coordination of these processes to 
ensure that they remain up to date as new issues arise. To achieve its 
goals, the CTI works to streamline and create a more transparent coding 
and payment process, improve the quality of medical decisions, and 
speed patient access to effective new treatments. It is also dedicated 
to supporting better decisions by patients and doctors in using 
Medicare-covered services through the promotion of better evidence 
development, which is critical for improving the quality of care for 
Medicare beneficiaries.
    CMS plans to continue its Open Door forums with stakeholders who 
are interested in CTI's initiatives. In addition, to improve the 
understanding of CMS' processes for coverage, coding, and payment and 
how to access them, the CTI has developed an ``Innovator's Guide'' to 
these processes. The intent is to consolidate this information, much of 
which is already available in a variety of CMS documents and in various 
places on the CMS Web site, in a user-friendly format. This guide was 
published in August 2008 and is available on the CMS Web site at: 
http://www.cms.gov/CouncilonTechInnov/Downloads/InnovatorsGuide5_10_10.pdf.
    As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we 
invite any product developers or manufacturers of new medical 
technologies to contact the agency early in the process of product 
development if they have questions or concerns about the evidence that 
would be needed later in the development process for the agency's 
coverage decisions for Medicare.
    The CTI aims to provide useful information on its activities and 
initiatives to stakeholders, including Medicare beneficiaries, 
advocates, medical product manufacturers, providers, and health policy 
experts. Stakeholders with further questions about Medicare's coverage, 
coding, and payment processes, or who want further guidance about how 
they can navigate these processes, can contact the CTI at 
[email protected].
    We note that applicants for add-on payments for new medical 
services or technologies for FY 2013 must submit a formal request, 
including a full description of the clinical applications of the 
medical service or technology and the results of any clinical 
evaluations demonstrating that the new medical service or technology 
represents a substantial clinical improvement, along with a significant 
sample of data to demonstrate that the medical service or technology 
meets the high-cost threshold. Complete application information, along 
with final deadlines for submitting a full application, will be posted 
as it becomes available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to 
identify the new medical services or technologies under review before 
the publication of the proposed rule for FY 2013, the Web site also 
will post the tracking forms completed by each applicant.
2. Public Input Before Publication of a Notice of Proposed Rulemaking 
on Add-On Payments
    Section 1886(d)(5)(K)(viii) of the Act, as amended by section 
503(b)(2) of Public Law 108-173, provides for a mechanism for public 
input before publication of a notice of proposed rulemaking regarding 
whether a medical service or technology represents a substantial 
clinical improvement or advancement. The process for evaluating new 
medical service and technology applications requires the Secretary to--
     Provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology represents an 
advance in medical technology that substantially improves the diagnosis 
or treatment of Medicare beneficiaries;
     Make public and periodically update a list of the services 
and technologies for which applications for add-on payments are 
pending;
     Accept comments, recommendations, and data from the public 
regarding whether a service or technology represents a substantial 
clinical improvement; and
     Provide, before publication of a proposed rule, for a 
meeting at which organizations representing hospitals, physicians, 
manufacturers, and any other interested party may present comments, 
recommendations, and data regarding whether a new medical service or 
technology represents a substantial clinical improvement to the 
clinical staff of CMS.
    In order to provide an opportunity for public input regarding add-
on payments for new medical services and technologies for FY 2012 prior 
to publication of the FY 2012 IPPS/LTCH PPS proposed rule, we published 
a notice in the Federal Register on November 29, 2010 (75 FR 73091 
through 73094), and held a town hall meeting at the CMS Headquarters 
Office in Baltimore, MD, on February 2, 2011. In the announcement 
notice for the meeting, we stated that the opinions and alternatives 
provided during the meeting would assist us in our evaluations of 
applications by allowing public discussion of the substantial clinical 
improvement criterion for each of the FY 2012 new medical service and 
technology add-on payment applications before the publication of the FY 
2012 proposed rule.
    Approximately 50 individuals registered to attend the town hall 
meeting in person, while additional individuals listened over an open 
telephone line. Each of the three FY 2012 applicants presented 
information on its technology, including a discussion of data 
reflecting the substantial clinical improvement aspect of the 
technology. We considered each applicant's presentation made at the 
town hall meeting, as well as written comments submitted on the 
applications, in our evaluation of the new technology add-on 
applications for FY 2012 in this proposed rule.
    In response to the published notice and the new technology town 
hall meeting, we received three written comments regarding applications 
for FY 2012 new technology add-on payments. We summarize these comments 
or, if applicable, indicate that there were no comments received, at 
the end of each discussion of the individual applications in this 
proposed rule.
    Comment: A number of attendees at the new technology town hall 
meeting provided comments that were unrelated to ``substantial clinical 
improvement.''
    Response: As explained above and in the Federal Register notice 
announcing the meeting (75 FR 73091), the purpose of the new technology 
town hall meeting was specifically to discuss substantial clinical 
improvement of pending new technology applications for FY 2012. 
Therefore, we are not summarizing those comments in this proposed rule. 
Commenters are welcome to resubmit these comments in

[[Page 25862]]

response to proposals in this proposed rule.
    Comment: One commenter, a major device association, requested that 
CMS provide more flexibility for the substantial clinical improvement 
criteria by allowing new technologies to demonstrate a substantial 
likelihood that clinical improvement will result. The commenter 
believed that this request was not unreasonable, given the fact that 
conclusive evidence would not necessarily be available in the short 
period of time for which an add-on payment would be available. The 
commenter also suggested that CMS consider a broader range of evidence 
in assessing whether a new technology meets the test of providing 
substantial clinical improvement over an older technology.
    Response: As stated in the 2001 new technology add-on payment final 
rule (66 FR 46913), we believe that the ``substantial clinical 
improvement'' criterion is intended ``to limit these special payments 
for those technologies that afford clear improvements over the use of 
previously available technologies.'' We believe that special payments 
for new technology should be limited to those new technologies that 
have been demonstrated to represent a substantial clinical improvement 
in caring for Medicare beneficiaries, such that there is a clear 
advantage to creating a payment incentive for physicians and hospitals 
to utilize the new technology. If such an improvement is not 
demonstrated, we continue to believe the incentives of the MS-DRG 
system provide a useful balance to the introduction of new 
technologies. In that regard, we point out that various new 
technologies introduced over the years have been demonstrated to have 
been less effective than initially thought, or in some cases even 
potentially harmful. We believe it is in the best interest of Medicare 
beneficiaries for CMS to proceed carefully with respect to the 
incentives created to quickly adopt new technologies.
    With respect to the comment that CMS should consider a broader 
range of evidence in assessing whether a new technology meets the test 
of providing substantial clinical improvement over an older technology, 
we accept different types of data (for example, peer-reviewed articles, 
study results, or letters from major associations, among others) that 
demonstrate and support the substantial clinical improvement associated 
with the new technology. In addition to clinical data, we will consider 
any evidence that would support the substantial clinical improvement 
associated with a new technology. Therefore, we believe we already 
consider an appropriate range of evidence as the commenter has 
requested.
    Comment: One commenter stated that, while it appreciated that new 
technology add-on payments are intended to encourage innovation, CMS' 
application of the substantial clinical improvement criterion fails to 
account for how many technological advances may occur in practice. The 
commenter expressed confidence that many recent design improvements in 
medical devices represent significant advances in clinical utility of 
older/established technologies, and indicated CMS may fail to recognize 
these improvements in the current context of applying add-on payments.
    Response: As discussed above, a service or technology is not 
``new'' for purposes of the new technology add-on payment if it is 
substantially similar to one or more existing technologies. That is, 
even if a technology receives a new FDA approval, it may not 
necessarily be considered ``new'' for purposes of new technology add-on 
payments if it is ``substantially similar'' to a technology that was 
approved by FDA and has been on the market for more than 2 to 3 years. 
To determine substantial similarity, we consider (1) Whether a product 
uses the same or a similar mechanism of action to achieve a therapeutic 
outcome, (2) whether a product is assigned to the same or a different 
DRG and (3) whether the new use of the technology involves the 
treatment of the same or similar type of disease and the same or 
similar patient population. As we noted in the FY 2010 IPPS/RY 2010 
LTCH PPS final rule (74 FR 43813 through 43814), if all three 
components are present and the new use is deemed substantially similar 
to one or more of the existing uses of the technology (that is, beyond 
the newness period), we would conclude that the technology is not new 
and, therefore, is ineligible for the new technology add-on payment. A 
complete discussion of the substantial similarity criteria and policy 
can be found in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43813 through 43814)
    Comment: One commenter believed that CMS has narrowly interpreted 
the statutory criteria for granting new technology add-on payments, 
which has created a situation in which it has become increasingly 
difficult for new technologies to qualify for this add-on payment. The 
commenter asserted that the criteria are so steep and the process so 
opaque that many companies, especially small companies, cannot afford 
to undertake the process at all. The commenter recommended that CMS 
continue to engage stakeholders to improve the new technology add-on 
payment process. The commenter also recommended that CMS consider 
creating additional guidance to further clarify the requirements as to 
what qualifies as a new technology. The commenter believed that 
additional guidance could provide greater certainty and predictability 
for many companies developing novel technologies.
    Response: We believe it is important to maintain an open dialogue 
on the IPPS new technology add-on payment process, as well as the 
broader issue of how new technology is introduced into all of the 
Medicare payment systems. As announced in a notice published in the 
Federal Register (75 FR 73091 through 73094), on February 2, 2011, 
prior to the new technology town hall meeting, we held an informational 
workshop for the general public that gave an overview on the processes 
of the new technology provisions in both the inpatient hospital and 
outpatient hospital settings, in addition to the procedures involved 
with ICD-9-CM coding and MS-DRG reassignment under the IPPS. We believe 
that our annual new technology town hall meeting and rulemaking process 
(including the posting of the applicants' tracking forms on the CMS Web 
site) allow for an ongoing dialogue between CMS and the public on the 
new technology add-on payment process. Furthermore, we are willing to 
meet with potential applicants prior to and after an application has 
been submitted in order to ensure an application meets the submission 
requirements and to provide technical feedback on an applicant's 
application.
    In reference to the commenter's general statement that CMS' 
interpretation of the statutory criteria has been narrowly cited, we 
are interested in and welcome comment on any specific criteria or data 
quality standards that commenters believe we should adopt to improve 
the new technology add-on application process, or any concerns or 
challenges that commenters believe we may encounter in undertaking this 
effort. Again, as we stated at the new technology town hall meeting, we 
are interested in working with stakeholders to improve the inpatient 
new technology add-on payment process. We are interested in ensuring 
that the latest medical technology that improves care for the Medicare 
patient population continues to be available to our beneficiaries. In 
addition, we invite potential applicants to contact CMS with any 
specific questions or concerns they may have prior to the submission of 
their

[[Page 25863]]

application for new technology add-on payment.
3. FY 2012 Status of Technologies Approved for FY 2011 Add-On Payments
a. Spiration[supreg] IBV[supreg] Valve System
    Spiration, Inc. submitted an application for new technology add-on 
payments for the Spiration[supreg] IBV[supreg] Valve System 
(Spiration[supreg] IBV[supreg]). The Spiration[supreg] IBV[supreg] is a 
device that is used to place, via bronchoscopy, small, one-way valves 
into selected small airways in the lung in order to limit airflow into 
selected portions of lung tissue that have prolonged air leaks 
following surgery while still allowing mucus, fluids, and air to exit, 
thereby reducing the amount of air that enters the pleural space. The 
device is intended to control prolonged air leaks following three 
specific surgical procedures: Lobectomy; segmentectomy; or lung volume 
reduction surgery (LVRS). According to the applicant, an air leak that 
is present on postoperative day 7 is considered ``prolonged'' unless 
present only during forced exhalation or cough. In order to help 
prevent valve migration, there are five anchors with tips that secure 
the valve to the airway. The implanted valves are intended to be 
removed no later than 6 weeks after implantation.
    With regard to the newness criterion, the Spiration[supreg] 
IBV[supreg] received a HDE approval from the FDA on October 24, 2008. 
We were unaware of any previously FDA-approved predicate devices, or 
otherwise similar devices, that could be considered substantially 
similar to the Spiration[supreg] IBV[supreg]. However, the applicant 
asserted that the FDA had precluded the device from being used in the 
treatment of any patients until the Institutional Review Board (IRB) 
granted approvals regarding its study sites. Therefore, the 
Spiration[supreg] IBV[supreg] met the newness criterion once it 
obtained at least one IRB approval because the device would then be 
available on the market to treat Medicare beneficiaries. In the FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43819), the applicant stated 
that the first IRB approval for the Spiration[supreg] IBV[supreg] was 
March 12, 2009. In that final rule, based on the information above from 
the applicant, we determined that the Spiration[supreg] IBV[supreg] 
meets the newness criterion and the newness period for the 
Spiration[supreg] IBV[supreg] begins on March 12, 2009.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology payments for the 
Spiration[supreg] IBV[supreg] and consideration of the public comments 
we received in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, including the additional analysis of clinical data and supporting 
information submitted by the applicant, we approved the 
Spiration[supreg] IBV[supreg] for new technology add-on payments for FY 
2010 with a maximum add-on payment of $3,437.50.
    In the FY 2011 IPPS/LTCH PPS proposed rule, we did not propose any 
changes to the new technology add-on payments for the Spiration[supreg] 
IBV[supreg]. We did not receive any public comments on whether to 
continue or discontinue the new technology add-on payment for the 
Spiration[supreg] IBV[supreg] for FY 2011. Therefore, for FY 2011, we 
continued new technology add-on payments for cases involving the 
Spiration[supreg] IBV[supreg] in FY 2011, with a maximum add-on payment 
of $3,437.50.
    The new technology add-on payment regulations provide that ``a 
medical service or technology may be considered new within 2 or 3 years 
after the point at which data begin to become available reflecting the 
ICD-9-CM code assigned to the new medical service or technology'' (42 
CFR 412.87(b)(2)). Our practice has been to begin and end new 
technology add-on payments on the basis of a fiscal year, and we have 
generally followed a guideline that uses a 6-month window before and 
after the start of the fiscal year to determine whether to extend the 
new technology add-on payment for an additional fiscal year. In 
general, we extend add-on payments for an additional year only if the 
3-year anniversary date of the product's entry on the market occurs in 
the latter half of the fiscal year (70 FR 47362). With regard to the 
newness criterion for the Spiration[supreg] IBV[supreg], as stated 
above, we consider the beginning of the newness period for the device 
to have commenced on the date of the first IRB approval for the 
Spiration[supreg] IBV[supreg], which was March 12, 2009. For FY 2012, 
as of March 12, 2012, the Spiration[supreg] IBV[supreg] will have been 
on the market for 3 years, and is therefore no longer considered 
``new'' as of March 12, 2012. Because the 3-year anniversary date of 
the Spiration[supreg] IBV[supreg]'s entry onto the market will occur in 
the first half of the fiscal year, we are proposing to discontinue its 
new technology add-on payment for FY 2012.
b. CardioWestTM Temporary Total Artificial Heart System 
(CardioWestTM TAH-t)
    SynCardia Systems, Inc. submitted an application for approval of 
the CardioWestTM Temporary Total Artificial Heart System 
(TAH-t) in FY 2009. The TAH-t is a technology that is used as a bridge 
to heart transplant device for heart transplant-eligible patients with 
end-stage biventricular failure. The TAH-t pumps up to 9.5 liters of 
blood per minute. This high level of perfusion helps improve 
hemodynamic function in patients, thus making them better heart 
transplant candidates.
    The TAH-t was approved by the FDA on October 15, 2004, for use as a 
bridge to transplant device in cardiac transplant-eligible candidates 
at risk of imminent death from biventricular failure. The TAH-t is 
intended to be used in hospital inpatients. One of the FDA's post-
approval requirements is that the manufacturer agrees to provide a 
post-approval study demonstrating that success of the device at one 
center can be reproduced at other centers. The study was to include at 
least 50 patients who would be followed up to 1 year, including (but 
not limited to) the following endpoints: Survival to transplant; 
adverse events; and device malfunction.
    In the past, Medicare did not cover artificial heart devices, 
including the TAH-t. However, on May 1, 2008, CMS issued a final 
national coverage determination (NCD) expanding Medicare coverage of 
artificial hearts when they are implanted as part of a study that is 
approved by the FDA and is determined by CMS to meet CMS' Coverage with 
Evidence Development (CED) clinical research criteria. (The final NCD 
is available on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211.)
    We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, 
because Medicare's previous coverage policy with respect to this device 
had precluded payment from Medicare, we did not expect the costs 
associated with this technology to be currently reflected in the data 
used to determine the relative weights of MS-DRGs. As we have indicated 
in the past, and as we discussed in the FY 2009 IPPS final rule, 
although we generally believe that the newness period would begin on 
the date that FDA approval was granted, in cases where the applicant 
can demonstrate a documented delay in market availability subsequent to 
FDA approval, we would consider delaying the start of the newness 
period. This technology's situation represented such a case. We also 
noted that section 1886(d)(5)(K)(ii)(II) of the Act requires that we 
provide for the collection of cost data for a new medical service or 
technology for a period of at least 2 years and no more than 3 years 
``beginning on the date on which an inpatient hospital code is issued 
with

[[Page 25864]]

respect to the service or technology.'' Furthermore, the statute 
specifies that the term ``inpatient hospital code'' means any code that 
is used with respect to inpatient hospital services for which payment 
may be made under the IPPS and includes ICD-9-CM codes and any 
subsequent revisions. Although the TAH-t has been described by the ICD-
9-CM code(s) since the time of its FDA approval, because the TAH-t had 
not been covered under the Medicare program (and, therefore, no 
Medicare payment had been made for this technology), this code could 
not be ``used with respect to inpatient hospital services for which 
payment'' is made under the IPPS, and thus we assumed that none of the 
costs associated with this technology would be reflected in the 
Medicare claims data used to recalibrate the MS-DRG relative weights 
for FY 2009. For this reason, as discussed in the FY 2009 IPPS final 
rule, despite the FDA approval date of the technology, we determined 
that TAH-t would still be eligible to be considered ``new'' for 
purposes of the new technology add-on payment because the TAH-t met the 
newness criterion on the date that Medicare coverage began, consistent 
with issuance of the final NCD, effective on May 1, 2008.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology add-on payments for the TAH-t 
and consideration of the public comments we received in response to the 
FY 2009 IPPS proposed rule, we approved the TAH-t for new technology 
add-on payments for FY 2009 (73 FR 48557). We also continued to make 
new technology add-on payments for the TAH-t in FY 2010 and FY 2011.
    We describe the new technology add-on payment requirements with 
regard to newness above. With regard to the newness criterion for the 
TAH-t, as stated above, we consider the beginning of the newness period 
for the device to have commenced from the Medicare NCD date of May 1, 
2008; it is no longer considered new as of May 11, 2011. Because the 3-
year anniversary date of the TAH-t will occur prior to the start of FY 
2012, we are proposing to discontinue the new technology add-on payment 
for the TAH-t in FY 2012.
c. Auto Laser Interstitial Thermal Therapy (AutoLITT\TM\) System
    Monteris Medical submitted an application for new technology add-on 
payments for FY 2011 for the AutoLITT\TM\. AutoLITT\TM\ is a minimally 
invasive, MRI-guided laser tipped catheter designed to destroy 
malignant brain tumors with interstitial thermal energy causing 
immediate coagulation and necrosis of diseased tissue. The technology 
can be identified by ICD-9-CM procedure codes 17.61 (Laser interstitial 
thermal therapy [LITT] of lesion or tissue of brain under guidance), 
and 17.62 (Laser interstitial thermal therapy [LITT] of lesion or 
tissue of head and neck under guidance), which became effective on 
October 1, 2009.
    The AutoLITT\TM\ received a 510K FDA clearance in May 2009. The 
AutoLITT\TM\ is indicated for use to necrotize or coagulate soft tissue 
through interstitial irradiation or thermal therapy in medicine and 
surgery in the discipline of neurosurgery with 1064 nm lasers. The 
AutoLITT\TM\ may be used in patients with glioblastoma multiforme brain 
(GBM) tumors. The applicant stated in its application and through 
supplemental information that, due to required updates, the technology 
was actually introduced to the market in December 2009. The applicant 
explained that it was necessary to reduce the thermal damage lines from 
three to one and complete International Electrotechnical Commission/
Underwriter Laboratory testing, which led to the introduction of the 
technology to the market in December 2009, although the technology was 
approved by FDA in May 2009. The applicant also stated through 
supplementary information to its application that the first sale of the 
product took place on March 19, 2010. However, because the product was 
already available for use in December 2009, it appears that the newness 
date would begin in December 2009. In the FY 2011 IPPS/LTCH PPS 
proposed rule, we welcomed public comments on this issue.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology payments for the AutoLITT\TM\ 
and consideration of the public comments we received in response to the 
FY 2011 IPPS/RY 2011 LTCH PPS proposed rule, including the additional 
analysis of clinical data and supporting information submitted by the 
applicant, we approved the AutoLITT\TM\ for new technology add-on 
payments for FY 2011. Consistent with the applicant's clinical trial, 
the add-on payment is intended only for use of the device in cases of 
Glioblastoma Multiforme. Therefore, we limited the new technology add-
on payment to cases involving the AutoLITT\TM\ in MS-DRGs 025 
(Craniotomy and Endovascular Intracranial Procedures with MCC), 026 
(Craniotomy and Endovascular Intracranial Procedures with CC), and 027 
(Craniotomy and Endovascular Intracranial Procedures without CC or 
MCC). Cases involving the AutoLITT\TM\ that are eligible for the new 
technology add-on payment are identified by assignment to MS-DRGs 025, 
026, and 027 with a procedure code of 17.61 (Laser interstitial 
thermotherapy of lesion or tissue of brain under guidance) in 
combination with a primary diagnosis code that begins with a prefix of 
191 (Malignant neoplasm of brain). We note that using the procedure and 
diagnosis codes above and restricting the add-on payment to cases that 
map to MS-DRGs 025, 026, and 027 is consistent with information 
provided by the applicant, which demonstrated that cases of the 
AutoLITT\TM\ would only map to MS-DRGs 025, 026, and 027. Procedure 
code 17.62 (Laser interstitial thermotherapy of lesion or tissue of 
head and neck under guidance) does not map to MS-DRGs 025, 026, or 027 
under the GROUPER software and, therefore, is ineligible for new 
technology add-on payment.
    The average cost of the AutoLITT\TM\ is reported as $10,600 per 
case. Under Sec.  412.88(a)(2) of the regulations, new technology add-
on payments are limited to the lesser of 50 percent of the average cost 
of the device or 50 percent of the costs in excess of the MS-DRG 
payment for the case. As a result, the maximum add-on payment for a 
case involving the AutoLITT\TM\ is $5,300.
    We describe the new technology add-on payment requirements with 
regard to newness above. With regard to the newness criterion for the 
AutoLITT\TM\, as stated above, we consider the beginning of the newness 
period for the device to commence from the market release date of 
December 2009. Therefore, the device will be considered ``new'' until 
December 2012. Because the 3-year anniversary date for the AutoLITT\TM\ 
will occur after FY 2012, we are proposing to continue to make new 
technology add-on payments for the AutoLITT\TM\ in FY 2012.
4. FY 2012 Applications for New Technology Add-On Payments
a. AxiaLIF[supreg] 2L+\TM\ System
    TranS1 submitted an application for new technology add-on payments 
for the AxiaLIF[supreg] 2L+\TM\ System for FY 2012. The AxiaLIF[supreg] 
2L+\TM\ System is an implantable spinal fixation system, delivered 
through a pre-sacral approach, facilitating spinal fusion through axial 
stabilization of the anterior lumbar spine at Lumbar vertebrae 4 
through Sacral vertebrae 1 (L4-S1).

[[Page 25865]]

    The AxiaLIF[supreg] 2L+\TM\ System received 510K FDA clearance 
(K092124) on January 21, 2010, and the applicant asserts that the 
device was available on the market immediately afterward through a 
limited market release program. The AxiaLIF[supreg] 2L+\TM\ System is 
indicated for use to provide anterior stabilization of the L4-S1 spinal 
segments as an adjunct to spinal fusion. It is also indicated for 
minimally invasive access to the anterior portion of the lower spine 
for assisting in the treatment of degeneration of the lumbar disc, 
performing lumbar discectomy, or for assistance in the performance of 
L4-S1 interbody fusion. The AxiaLIF[supreg] 2L+\TM\ System may be used 
in patients requiring fusion to treat pseudoarthrosis, unsuccessful 
previous fusion, spinal stenosis, spondylolisthesis (Grade 1), or 
degenerative disc disease as defined as back pain of discogenic origin 
with degeneration of the disc confirmed by history and radiographic 
studies. The AxiaLIF[supreg] 2L+\TM\ System is coded using ICD-9-CM 
procedure code 81.08 (Lumbar and lumbosacral fusion of the anterior 
column, posterior technique).
    With regard to the newness criterion, we are concerned that the 
AxiaLIF[supreg] 2L+\TM\ System may be substantially similar to the 
other devices manufactured by the applicant, AxiaLIF[supreg] System and 
AxiaLIF[supreg] II\TM\ System, the latter of which is listed as the 
predicate device on the AxiaLIF[supreg] 2L+\TM\ System's application 
for FDA approval. Specifically, in making a determination of 
substantial similarity, we consider the following: (1) Whether a 
product uses the same or similar mechanism of action to achieve a 
therapeutic outcome; (2) whether a product is assigned to the same or 
different DRG; and (3) whether the new use of a technology involves the 
treatment of the same or similar type of disease and the same or 
similar patient population.
    We are particularly concerned that the AxiaLIF[supreg] 2L+\TM\ 
System uses the same or similar mechanism of action as the 
AxiaLIF[supreg] II\TM\ System to achieve a therapeutic outcome. 
According to the applicant's 510K summary submitted to the FDA 
(K073514), the AxiaLIF[supreg] System is a multicomponent system 
including titanium alloy implantable devices and instrumentation for 
creating a pre-sacral axial track to the L5-S1 disk space. Similarly, 
the AxiaLIF[supreg] II\TM\ System is described in the applicant's 510K 
summary submitted to the FDA (K073643) as a system of medical grade 
titanium alloy for the anterior stabilization of the L4-S1 spinal 
segments as an adjunct to spinal fusion. The applicant states that the 
AxiaLIF[supreg] 2L+\TM\ System was created from the AxiaLIF[supreg] 
II\TM\ System platform. The applicant submitted the following to 
distinguish the AxiaLIF[supreg] 2L+\TM\ System from the AxiaLIF[supreg] 
II\TM\ System:
     There have been internal thread changes for the 2L+ 
implant to accompany the Spanning Distraction Rod, which is designed to 
create and hold distraction in the L5-S1 disc space and allow for a 
higher degree of control over the Rod advancement and distraction;
     The design enhancements in the 2L+ System remove the 
dependence of distraction on size and placement of the S1 Rod, thus 
allowing precise implant placement in the vertebral bodies;
     In the 2L+ Implant, the L4 section of the L4-L5 Rod 
incorporates a conical design to increase fixation. The outer diameter 
(O.D.) of the L5 section is increased to be identical to the O.D. of 
the S1 implant to provide more surface area bone contact;
     The 2L+ Instrumentation incorporates Dilator Trials as an 
opportunity to enhance and simplify the intraoperative measuring 
technique by providing a direct visual means of measurement; and
     The 2L+ Fixation Rod fills the cannulation to prevent 
graft from moving into the rod from the disc space. The Fixation Rod 
also fixates the S1 Anchor and L4-L5 Rod together such that these 
components cannot passively separate.
    Based on indications for use listed by the FDA for the 
AxiaLIF[supreg] System (K073514), the AxiaLIF[supreg] II\TM\ System 
(K073643), and the AxiaLIF[supreg] 2L+\TM\ System (as described above), 
we also are concerned that all of these devices involve the treatment 
of the same or similar type of disease and the same or similar patient 
population. With respect to whether a product is assigned to the same 
or different DRG, we note that currently the AxiaLIF[supreg] System and 
the AxiaLIF[supreg] 2L+\TM\ System both generally map to MS-DRGs 459 
(Spinal Fusion Except Cervical with MCC) and 460 (Spinal Fusion Except 
Cervical without MCC). Though the AxiaLIF[supreg] II\TM\ System is no 
longer on the market, it would also map to the same DRGs.
    If the AxiaLIF[supreg] 2L+\TM\ System is found to be substantially 
similar to the AxiaLIF[supreg] System or the AxiaLIF[supreg] II\TM\ 
System, the AxiaLIF[supreg] 2L+\TM\ System would no longer qualify for 
the new technology add-on payment. Specifically, the appropriate start 
date for the AxiaLIF[supreg] 2L+\TM\ System would be the start date of 
the device that is found to be substantially similar to the 
AxiaLIF[supreg] 2L+\TM\ System. As noted above, the AxiaLIF[supreg] 
II\TM\ System received FDA approval on April 28, 2008. The 3-year 
newness period for the AxiaLIF[supreg] II\TM\ System ends prior to the 
start of FY 2012 (July 28, 2011). Given the length of time since the 
AxiaLIF[supreg] II\TM\ System's entry into the market, cost-related 
data for the AxiaLIF[supreg] II\TM\ System is already reflected in the 
most recent MS-DRG relative weights. Additionally, the AxiaLIF[supreg] 
System received multiple FDA approvals, the most recent of which was on 
January 11, 2008. The 3-year newness period for the AxiaLIF[supreg] 
System also ends prior to the start of FY 2012 (January 11, 2011). 
Given the length of time since the AxiaLIF[supreg] System's entry into 
the market, cost-related data for the AxiaLIF[supreg] System is already 
reflected in the most recent MS-DRG relative weights. However, if the 
AxiaLIF[supreg] 2L+\TM\ System is not substantially similar to any of 
the predicate devices mentioned above, then the newness period for the 
AxiaLIF[supreg] 2L+\TM\ System would begin on January 21, 2010 (the 
AxiaLIF[supreg] 2L+\TM\ System's FDA approval date) and would be within 
the year newness period for FY 2012. We invite public comment regarding 
whether or not the AxiaLIF[supreg] 2L+\TM\ System meets the newness 
criteria, and, in particular, whether it is substantially similar to 
the AxiaLIF[supreg] System or the AxiaLIF[supreg] II\TM\ System.
    In an effort to demonstrate that the AxiaLIF[supreg] 2L+\TM\ System 
meets the cost criterion, the applicant used data from the FY 2009 
MedPAR file. The applicant explained through supplemental information 
to its application that most cases of the AxiaLIF[supreg] 2L+\TM\ 
System would map to MS-DRGs 459 (Spinal Fusion Except Cervical with 
MCC) and 460 (Spinal Fusion Except Cervical without MCC). The applicant 
searched the FY 2009 MedPAR file for cases with an ICD-9-CM procedure 
code of 81.08 (Lumbar and lumbosacral fusion of the anterior column, 
posterior technique). The applicant found 2,533 cases in MS-DRG 459 (5 
percent of all cases) and 48,135 cases in MS-DRG 460 (95 percent of all 
cases). The average standardized charge per case was $117,847 for MS-
DRG 459 and $84,153 for MS-DRG 460, equating to a case-weighted average 
standardized charge per case of $77,195.
    This case-weighted standardized charge per case contains charges 
related to other implantable devices. Therefore, it is necessary to 
remove charges of other implantable devices from the case-weighted 
standardized charge per case (before substituting charges for the 
AxiaLIF[supreg] 2L+\TM\ System). The applicant used the following 
methodology to

[[Page 25866]]

determine the average amount of charges related to other implantable 
devices within the case-weighted average standardized charge per case. 
The applicant estimated a standardized medical/surgical supplies charge 
of $47,860. After searching all claims in the CY 2008 100 percent 
inpatient limited data set standardized file, the applicant determined 
that, on average, implantable devices (revenue center 0278) accounted 
for 75 percent of the of medical/surgical supplies charges, equating to 
$36,104 for the cases the applicant found in MS-DRGs 459 and 460. The 
applicant then subtracted this amount from the case-weighted average 
standardized charge per case, which resulted in a case-weighted average 
standardized charge per case, excluding an implantable device, of 
$41,090 ($77,195-$36,104).
    The applicant then estimated the charges for the AxiaLIF[supreg] 
2L+\TM\ System by inflating the expected purchase price of the 
AxiaLIF[supreg] 2L+\TM\ System by 2.77 times the purchase price of 
defibrillators, resulting in a standardized charge of $51,482 for the 
AxiaLIF[supreg] 2L+\TM\ System. The applicant stated that using a 
markup based on defibrillators was appropriate because, like the 
AxiaLIF[supreg] 2L+\TM\ System, defibrillators are also a high-cost 
implantable device. The applicant then added the average standardized 
charge for the AxiaLIF[supreg] 2L+\TM\ System to the average 
standardized charge per case excluding an implantable device, which 
resulted in a total case-weighted average standardized charge per case 
of $92,557 ($41,075 + $51,482). The applicant calculated a case-
weighted threshold of $78,354 for MS-DRGs 459 and 460. Because the 
total average standardized charge per case ($92,557), as calculated by 
the applicant, exceeds the case-weighted threshold ($78,354), the 
applicant maintains that it meets the cost criteria.
    We have concerns with the applicant's methodology. Specifically, in 
determining the projected standardized charge for the AxiaLIF[supreg] 
2L+\TM\ System, the applicant relies on a charge markup for 
defibrillators because it is also a high-cost implantable device for 
which a hospital purchase price is known. We are concerned about 
whether more direct data or different proxies are available, including 
a charge markup for the AxiaLIF[supreg] System or AxiaLIF[supreg] 
II\TM\ System. In reviewing the applicant's charge markup, we also are 
concerned about the source data for determining the 2.77 charge markup 
ratio for defibrillators. We invite public comment on whether the 
AxiaLIF[supreg] 2L+\TM\ System meets the cost criterion for a new 
technology add-on payment for FY 2012.
    With respect to the substantial clinical improvement criterion, the 
applicant asserts that it meets this criterion in its application. The 
applicant stated that substantial clinical improvement is demonstrated 
by the AxiaLIF[supreg] 2L+\TM\ System's facilitation of spinal fusion 
surgery without a laparotomy. By avoiding a laparotomy, the 
AxiaLIF[supreg] 2L+\TM\ System reduces blood loss, postoperative pain, 
narcotic use, denervation, morbidity, the probability of complications, 
and the risk of trauma to the tissue area surrounding the lumbar. The 
applicant further stated that the AxiaLIF[supreg] 2L+\TM\ System 
reduces morbidity and has reduced risk of injuring vital organs and 
important intrinsic stabilizing structures, with a lower complication 
profile than traditional open fusion techniques. The applicant noted 
that long-term results can include better support of lordosis and 
prevention of adjacent level disease. We are concerned that this does 
not demonstrate a substantial clinical improvement from the 
AxiaLIF[supreg] II\TM\ System, which also facilitated spinal fusion 
surgery without a laparotomy.
    The applicant has not conducted clinical trials, but the 300 cases 
of AxiaLIF[supreg] 2L+\TM\ System's use (through the Limited Market 
Release) yielded a complication rate of 0.7 percent. The applicant also 
asserts that the pre-sacral approach results in a lower average length 
of stay than a non-sacral approach.
    The applicant has referred us to several sources of literature 
presenting data related to the pre-sacral approach for the applicant's 
AxiaLIF[supreg] device. We are concerned that the applicant has 
generally repeated the statements made regarding the clinical 
improvement of its AxiaLIF[supreg] device and has not provided 
information that indicates that the AxiaLIF[supreg] 2L+\TM\ System 
offers a substantial clinical benefit over the earlier AxiaLIF[supreg] 
or AxiaLIF[supreg] II\TM\ devices. Moreover, the applicant has not 
provided any clinical outcomes data for the AxiaLIF[supreg] 2L+\TM\ 
System to substantiate its assertions regarding substantial clinical 
improvement for the AxiaLIF[supreg] 2L+\TM\ System. While the applicant 
maintains that data from the AxiaLIF[supreg] device are relevant and 
can be used to substantiate its assertions for the AxiaLIF[supreg] 
2L+\TM\ System, we are concerned that data directly associated with the 
use of the AxialLIF[supreg] 2L+\TM\ System are not available. For 
example, it is not clear the degree to which the population that 
requires treatment with the AxiaLIF[supreg] 2L+\TM\ System differs from 
the population that requires treatment with the AxiaLIF[supreg] device 
or the AxiaLIF[supreg] II\TM\ System, and it is also not clear the 
degree to which the differences between the devices discussed above may 
affect clinical outcomes.
    The applicant also believes that an inline placement of the 
fixation implant may provide an advantage due to closeness of the 
implant to functional axis of the spine and through alignment with the 
direction of the compressive forces on the vertebral bodies. The 
applicant maintains that evaluation and testing have proven the 
AxiaLIF[supreg] 2L+\TM\ System to be a biomechanically sturdy L4-S1 
axial construct that significantly reduces the range of motion at the 
desired point and achieves decompression by increasing the L4-S1 disc 
spaces. We note that the only clinical change from the AxiaLIF[supreg] 
device and the AxiaLIF[supreg] 2L+\TM\ System is that the latter 
reaches the L4. There is no stated clinical change between the 
AxiaLIF[supreg] II\TM\ and the AxiaLIF[supreg] 2L+\TM\ System. We 
invite public comment on whether the AxiaLIF[supreg] 2L+\TM\ System 
meets the substantial clinical improvement criterion for the new 
technology add-on payment for FY 2012.
b. Champion\TM\ HF Monitoring System
    CardioMEMS, Inc. submitted an application for new technology add-on 
payment for FY 2012 for the Champion\TM\ HF Monitoring System, an 
Implantable Hemodynamic Monitor System (IHMS). The IHMS is comprised of 
an implantable sensor/monitor placed in the distal pulmonary artery. 
Pulmonary artery hemodynamic monitoring is used in the management of 
heart failure. The IHMS measures multiple pulmonary artery pressure 
parameters for an ambulatory patient to measure and transmit data via a 
wireless sensor to a secure Web site. The IHMS utilizes radiofrequency 
energy to power the sensor and to measure pulmonary artery pressure. 
The data are accessed by clinicians via the Internet. Interpretation of 
trend data allows the clinician to make adjustments to therapy while 
the patient is at home. Changes in pulmonary artery pressure can be 
used along with heart failure signs and symptoms to adjust medications. 
There are currently no FDA approved devices performing this IHMS 
function. The IHMS consists of three components: (1) A wireless 
implantable hemodynamic sensor/monitor which is implanted in the distal 
pulmonary artery (sensor); (2) an external patient measurement system; 
and (3) a patient data management system.

[[Page 25867]]

    CardioMEMS, Inc. believes that a large majority of patients 
receiving the sensor will be admitted to an inpatient hospital with a 
diagnosis of ``acute or chronic heart failure'' (ICD-9-CM code 428.43 
(Acute or chronic combine systolic and diastolic heart failure)) and 
the sensor will be implanted during this hospital stay. For safety 
considerations, a small portion of these patients may be discharged and 
the sensor implanted at a future date in the hospital outpatient 
setting. In addition, there will likely be a group of patients in 
chronic heart failure who are not currently hospitalized, but who have 
been hospitalized in the past few months for whom the treating 
physician believes that regular pulmonary artery pressure readings are 
necessary to optimize patient management. Depending on the patient's 
status, these patients may have the sensor implanted in the hospital 
inpatient or outpatient setting.
    With respect to the newness criterion, we note that this device is 
not currently approved by the FDA, but the manufacturer anticipates 
that FDA approval will be granted in the second quarter of 2011. No 
ICD-9-CM procedure code exists at this time that uniquely identifies 
the System. As noted in Table 6B, which is listed in section VI. of the 
Addendum to this proposed rule and available via the Internet, we have 
approved the use of new procedure code 38.26 (Insertion of implantable 
wireless pressure sensor for intracardiac or great vessel hemodynamic 
monitoring), which will identify use of the System. The new ICD-9-CM 
procedure code 38.26 will be assigned to MS-DRG 264 (Other Circulatory 
System O.R. Procedures).
    In an effort to demonstrate that the System meets the cost 
criteria, the applicant used data from a clinical trial. Specifically, 
the manufacturer used data from the CardioMEMS Heart Sensor Allows 
Monitoring of Pressure to Improve Outcomes in NYHA Class III heart 
failure patients (CHAMPION) trial \4\ which enrolled 550 patients in 30 
hospitals within the United States. We note that there were 575 
patients initially enrolled in the trial. Of these 575 patients, 25 
underwent a right heart catheterization and did not receive an implant 
primarily because of anatomical/physiological conditions identified 
during the catheterization. The manufacturer collected 310 hospital 
claims from the 550 patients enrolled in the CHAMPION trial. The 
applicant eliminated claims with incomplete data or statistical 
outliers, and was left with 137 claims for its cost analysis. 
CardioMEMS funded the clinical trial and, therefore, did not submit 
these 137 claims. The applicant believes that cases eligible for the 
System would map to MS-DRG 264. Using the 137 claims from the CHAMPION 
trial, the manufacturer determined an average standardized charge per 
case without the new technology to equal $12,817. The applicant 
indicated that the case-weighted average standardized charge per case 
does not include charges related to the System, so it is then necessary 
to add the charges related to the device to the average standardized 
charge per case to evaluate the cost threshold criterion. To convert 
the costs of the technology to charges, CardioMEMS used an average 
cost-to-charge ratio (CCR) of 0.311 based on FY 2008 hospital cost 
reports from the 30 hospitals who participated in the CHAMPION trial. 
Based on this CCR, the manufacturer determined an average charge for 
the System to equal $45,016. Using this methodology, the total average 
standardized charge per case including the new technology equals 
$57,833 ($45,016 + $12,817). This amount exceeds the cost threshold of 
$46,546 for MS-DRG 264 (Table 10 of the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50607)). Because the total average standardized charge per 
case ($57,833) exceeds the threshold ($46,546), the applicant maintains 
that it meets the cost criteria.
---------------------------------------------------------------------------

    \4\ Wireless pulmonary artery haemodynamic monitoring in chronic 
heart failure: a randomised controlled trial. Abraham WT, Adamson 
PB, Bourge RC, Aaron MF, Costanzo MR, Stevenson LW, Strickland W, 
Neelagaru S, Raval N, Krueger S, Weiner S, Shavelle D, Jeffries B, 
Yadav JS; for the CHAMPION Trial Study Group. Lancet. 2011 Feb 
19;377(9766):658-666.
---------------------------------------------------------------------------

    In addition to the methodology described above, the manufacturer 
searched for claims for patients in the CHAMPION trial that were aged 
65 years or older at the time of device implantation as a proxy for 
Medicare patients. Out of the original 137 hospital claims, 56 (41 
percent) were for patients aged 65 years or older. From these 56 claims 
(across 23 hospitals from the CHAMPION study), the applicant calculated 
an average standardized charge of $13,031, which did not include 
charges for the device. The applicant added the charges related to the 
device ($45,016, calculated as described above) to the average 
standardized charge per case to evaluate the cost threshold criterion. 
Using this methodology, the total average standardized charge per case 
including the new technology equals $58,047 ($45,016 + $13,031). This 
amount also exceeds the FY 2012 cost threshold of $46,546 for MS-DRG 
264. Because the total average standardized charge per case ($58,047) 
exceeds the threshold ($46,546), the applicant maintains that it meets 
the cost criteria. We invite public comment on whether or not the 
Champion\TM\ HF Monitoring System meets the cost criterion.
    With regard to substantial clinical improvement, the applicant 
cited clinical data from the CHAMPION trial. The trial is a 
prospective, multicenter, randomized, single-blinded clinical trial 
conducted in the United States, designed to evaluate the safety and 
efficacy of the System in reducing heart failure-related 
hospitalizations in a subset of subjects suffering from heart failure. 
The applicant shared several major findings from the CHAMPION trial \5\ 
as described below. First, at 6 months, the treatment group exhibited a 
30 percent relative risk reduction in the rate of heart failure-related 
hospitalization (0.31 vs. 0.44, p system-related. There were two reports 
of Serious Adverse Device Events due to hemoptysis and a blood clot, 
both of which resolved without permanent sequelae. The Clinical Events 
Committee adjudicated both events as device/system-related. The 
applicant maintained that during the first 6 months, there were 336 
Serious Adverse Events (hospitalizations or deaths due to heart failure 
or other common comorbidities seen in this population) in 121 patients 
in the treatment group (44.8 percent) versus 385 Serious Adverse Events 
in 155 patients in the control group (55.4 percent).
---------------------------------------------------------------------------

    \5\ Wireless pulmonary artery haemodynamic monitoring in chronic 
heart failure: a randomised controlled trial. Abraham WT, Adamson 
PB, Bourge RC, Aaron MF, Costanzo MR, Stevenson LW, Strickland W, 
Neelagaru S, Raval N, Krueger S, Weiner S, Shavelle D, Jeffries B, 
Yadav JS; for the CHAMPION Trial Study Group. Lancet. 2011 Feb 
19;377(9766):658-666
---------------------------------------------------------------------------

    In addition, the manufacturer stated that the CHAMPION trial 
suggests the safety and effectiveness of the device was maintained 
during longer term follow-up. (The primary efficacy endpoint of the 
CHAMPION trial was 6 months. However, patients remained in their 
assigned groups until the last patient reached 6 months, which is 
referred to as ``the entire follow-up.'' The mean time of this entire 
follow up was up to 15 months.) Therefore, the manufacturer believes 
that the System meets the substantial clinical improvement criterion. 
We invite public comment on whether or not the Champion\TM\ HF 
Monitoring System technology represents a substantial clinical 
improvement in the Medicare population.
c. PerfectCLEAN With Micrillon[supreg]
    UMF Corporation (the manufacturer) submitted an application for a 
technology called the PerfectCLEAN with Micrillon[supreg] 
(PerfectCLEAN). PerfectCLEAN is a cleaning textile product (or cleaning 
mat/wipe) with chlorine embedded or bound to the extruded fiber. The 
manufacturer asserts that PerfectCLEAN is intended to be used to trap 
and eliminate pathogens such as Methicillin-resistant Staphylococcus 
aureus (MRSA), Clostridium difficile (C diff.) and the H1N1 flu virus 
from surfaces within the hospital (as well as other health care 
facilities and locations). The applicant asserts that it can trap and 
remove more than 99.99 percent of bacteria on hard surfaces.
    The manufacturer stated that the PerfectCLEAN is an Environmental 
Protection Agency (EPA) approved antimicrobial/disinfectant that will 
be available on the market in the first quarter of 2011. The applicant 
maintains that PerfectCLEAN is subject to review and approval by the 
EPA per the EPA's Federal Insecticide, Fungicide, Rodenticide Act 
(FIFRA) Treated Article Exemption and, therefore, is not subject to 
review by the FDA. The applicant states that it was determined in a 
pre-registry meeting with the EPA that the underlying chemistries used 
to create the chlorine binding effects of Micrillon[supreg] chemistry 
are EPA and FDA approved even though no FDA claims are being sought.
    With respect to whether the PerfectCLEAN is eligible for new 
technology add-on payments, we note that our regulations at Sec.  
412.87(c) state, ``CMS will only consider, for add-on payments for a 
particular fiscal year, an application for which the new medical 
service or technology has received FDA approval or clearance by July 1 
prior to the particular fiscal year.'' FDA ``approval,'' refers to the 
premarket approval application (PMA) process for most Class III 
devices, and FDA ``clearance'' refers to the 510(k) premarket 
notification submission process for most Class II devices and some 
Class I and Class III devices (section 515 of the Food, Drug and 
Cosmetic Act (FDCA) for PMA) and sections 510(k) and 513(i) of the FDCA 
(for premarket notification submission process)). Therefore, we believe 
our regulations, by requiring applicants to receive an FDA approval or 
clearance in order to be eligible for new technology add-on payments, 
limit the universe of items and services eligible to receive these 
payments to those that require FDA approval or clearance. The applicant 
has informed CMS that it is in the process of registering and listing 
its product with the FDA under section 510(b) through (d) and (j) and 
anticipates this process to be completed prior to the July 1 regulatory 
deadline. The registration process that the applicant is currently 
pursing will result in neither FDA approval nor clearance, and we are 
therefore concerned that the PerfectCLEAN is not eligible for new 
technology add-on payments under our existing regulations., which 
require ``FDA approval or clearance by July 1 prior to the particular 
fiscal year'' (42 CFR Sec.  412.87(c)). We welcome public comments on 
whether the PerfectCLEAN is eligible for new technology add-on payments 
under the current regulations.
    With regard to the cost criterion, the applicant used data from the 
FY 2011 After Outliers Removed (AOR) file (posted on the CMS Web site) 
for its cost analysis, which is based on the FY 2009 MedPAR file. The 
applicant considered MS-DRGs that relate to surgeries, skin abrasions, 
open sores, wounds, and similar inflamed tissue conditions where 
infection sites are thought to be more likely to occur for inpatient 
care situations. This resulted in the applicant determining that the 
technology would be most frequently used in 622 different MS-DRGs. The 
applicant noted that the charges from the FY 2011 AOR file were not 
inflated from FY 2009 to FY 2011; therefore the applicant applied a 2-
year inflation factor of 12 percent (to update the charges from FY 2009 
to FY 2011). The applicant based the 2-year inflation factor of 12 
percent on a 3-year average of the 2 year rate-of-change in charges 
(the 2-year rate-of-change for FY 2009 of 11.841 percent (73 FR 48764); 
the 2-year rate-of-change for FY 2010 of 14.184 percent (74 FR 44010); 
and the 2-year rate-of-change for FY 2011 of 9.8843 percent (75 FR 
50429)) that CMS uses in its outlier threshold calculation as published 
in section II. of the Addendum to the annual IPPS final rule. The 
applicant computed a case-weighted standardized charge per case of 
$40,442 for all 622 MS-DRGs, which did not include any charges related 
to the PerfectCLEAN. Therefore, it added the charges related to the 
technology to the case-weighted average standardized charge per case in 
evaluating the cost threshold criterion. The manufacturer estimates a 
charge per patient of $100 per day for the PerfectCLEAN. The applicant 
includes in this amount charges for payroll, treated textiles, 
packaging and protective gloves, laundering, storage, and distribution. 
The applicant multiplied the average length of stay for each MS-DRG (as 
found in Table 5 of the Addendum to the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50547 through 50566)) by the charge per patient per day to 
determine the total charges per stay by MS-DRG related to the 
PerfectCLEAN. The applicant added additional charges per stay for the 
PerfectCLEAN to the case-weighted standardized charge per case and 
determined a total case-weighted average standardized charge per case 
of $41,105. Based on the 622 MS-DRGs to which the technology mapped, 
the applicant computed a case-weighted threshold of $40,834. Because 
the total case-weighted average standardized charge per case of $41,105 
exceeds the case weighted threshold of $40,834, the

[[Page 25869]]

applicant maintains that it meets the cost criteria.
    We have several concerns regarding the applicant's cost analysis. 
First, although the technology can potentially be used in every single 
Medicare case, the application targets specific MS-DRGs. The applicant 
did not provide a detailed clinical justification regarding their 
selection of MS-DRGs, or a detailed justification for why the 
technology could not be used in other MS-DRGs. We believe it would be 
more appropriate to target all cases in every MS-DRG when conducting 
the cost analysis for this type of non-procedure or condition specific 
item. Using the FY 2011 AOR file, we conducted our own analysis with 
the same methodology above (and inflated the charges and included the 
total charges per stay related to the PerfectCLEAN) across all MS-DRGs. 
Based on our analysis, we determined a total case-weighted average 
standardized charge per case of $29,535. Using the applicant's 
methodology, we also determined a case-weighted threshold of $37,384 
across all MS-DRGs. Because the total case-weighted average 
standardized charge per case of $29,535 is less than the case-weighted 
threshold of $37,384, we believe the PerfectCLEAN may not meet the cost 
criteria.
    Second, the applicant included in the average charge per day more 
general charges unrelated to the specific new technology, such as 
payroll, packaging and protective gloves, laundering, storage and 
distribution. We do not believe it is appropriate to include charges 
for expenses already accounted for in MS-DRG based payments, such as 
laundering, storage, and distribution, and supplies already used by 
hospital staff such as packaging and protective gloves. We also note 
that the applicant states in its substantial clinical improvement 
discussion that the PerfectCLEAN represents the first comprehensive 
process for the removal and elimination of harmful micro-organisms 
responsible for HAIs from patient environments, the elimination of 
cross-contamination, and significant savings across many cost centers. 
If the PerfectCLEAN is a substitute for other cleaning mechanisms such 
as wiping down a hospital room with a spray and can produce significant 
savings across many cost centers, then it would be appropriate to 
deduct some charges from the average charge per day in order to 
accurately reflect the cost to hospitals of this technology. For these 
reasons, we remain concerned about the accuracy of the computation of a 
charge per patient of $100 per day and whether the PerfectCLEAN meets 
the cost criterion.
    Thirdly, the applicant based the 12-percent, 2-year rate-of-change 
in charges on a 3-year average (FY 2009 through FY 2011) of the 2-year 
rate-of-change in charges as published in section II. of the Addendum 
to the annual IPPS final rule. We do not believe it is appropriate to 
use a 3-year average of the 2-year rate-of-change in charges as the 2-
year rate-of-change in charges already uses the most recent data 
available to measure this change and, therefore, does not need to be 
averaged with prior years. Specifically, as described in section II. of 
the Addendum to this proposed rule, to calculate the proposed FY 2012 
2-year rate-of-change in charges, we compared the 1-year average 
annualized rate-of-change in charges per case from the last quarter of 
FY 2009 in combination with the first quarter of FY 2010 (July 1, 2009 
through December 31, 2009) to the last quarter of FY 2010 in 
combination with the first quarter of FY 2011 (July 1, 2010 through 
December 31, 2010). This rate-of-change was 4.43 percent (1.044394) or 
9.07 percent (1.090759) over 2 years. If we substitute the FY 2012 
proposed 2-year rate-of-change in charges of 9.07 percent for the 12-
percent 3-year average of the 2-year rate-of-change in charges that the 
applicant used in its cost analysis, the total case-weighted average 
standardized charge per case would be $40,047 across the 622 MS-DRGs to 
which the applicant believes the technology would map. As mentioned 
above, the applicant computed a case-weighted threshold of $40,834. 
Because the total case-weighted average standardized charge per case of 
$40,047 is less than the case-weighted threshold of $40,834, it appears 
the applicant would not meet the cost criteria. We invite public 
comment on whether the PerfectCLEAN meets the cost criterion.
    The applicant maintains that it meets the substantial clinical 
improvement criteria for the following reasons: The applicant believes 
the PerfectCLEAN significantly improves clinical outcomes for a patient 
population as compared to currently available treatments, decreases 
rate of subsequent diagnostic or therapeutic interventions, and 
decreases the number of future hospitalizations or physician visits. 
The applicant cited independent laboratory studies that set forth the 
level of removal and elimination of pathogens achieved by the 
PerfectCLEAN. The applicant stated that the PerfectCLEAN includes 
``more precise and focused patient room procedures that when properly 
applied utilize the textile and micro-denier efficacies'' listed in the 
product's independent test reports. The applicant states that this 
results ``in a safer patient environment where the likelihood of cross 
contamination is reasonable.'' The applicant included test report data 
for the product, which demonstrated a 99.99 percent effectiveness of 
removing pathogens such as MRSA and C diff. The applicant cited 
industry and clinical support to demonstrate that improved patient 
environment can save lives. The applicant also stated that PerfectCLEAN 
represents the first comprehensive process for the removal and 
elimination of harmful micro-organisms responsible for hospital 
acquired infections from patient environments, the elimination of 
cross-contamination, and significant savings across many cost centers. 
The applicant stated that this new innovative system delivers reliable 
and repeatable results not currently achieved using currently available 
protocols and products. The applicant provided the following example: a 
traditional method of disinfection is to apply liquid disinfectants, 
which the applicant stated typically requires a 10-minute dwell time 
(which in most cases is not completed by the hospital) and then wiping 
or mopping up the nonevaporated liquids. Compared to this method, the 
applicant asserts that the PerfectCLEAN first removes the micro-
organisms from those surfaces using specially designed microscopic 
fibers. The applicant asserts that these pathogens are trapped in a 
formulation of a chlorine binding technology which eliminates the 
pathogens.
    The applicant further asserts that the PerfectCLEAN maintains its 
disinfecting capability longer than other methods because the chlorine-
binding technology is introduced at the pellet stage of fiber extrusion 
so that it is present throughout the fiber, as opposed to a finish or 
coating process that wears off as textiles are used and laundered. 
Additionally, the applicant asserts that the technology's non-leaching 
chlorination system recharges in the wash process by attracting and 
binding free molecules of chlorine. The applicant further asserts that 
in this way the PerfectCLEAN recharges back to its original strength 
and efficacy which allows it to work more rapidly than other 
techniques. The applicant asserts that this reduces cross-contamination 
by those persons handling soiled textiles after the people contact 
surfaces which have been cleaned of harmful micro-organisms. The 
applicant added that the training in use of color coated textiles 
(different color mats) affords superior monitoring and compliance 
supervision of the hygiene specialists charged with

[[Page 25870]]

responsibility to reduce cross-contamination. We invite public comment 
on whether the PerfectCLEAN meets the substantial clinical improvement 
criterion.

III. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals

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 delineations 
of statistical areas established by the Office of Management and Budget 
(OMB). A discussion of the proposed FY 2012 hospital wage index based 
on the statistical areas, including OMB's revised definitions of 
Metropolitan Areas, appears under section III.B. of this preamble.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act 
requires that we update the wage index annually. Furthermore, this 
section of the Act provides that the Secretary base the update on a 
survey of wages and wage-related costs of short-term, acute care 
hospitals. The survey must exclude the wages and wage-related costs 
incurred in furnishing skilled nursing services. This provision also 
requires us to make any updates or adjustments to the wage index in a 
manner that ensures that aggregate payments to hospitals are not 
affected by the change in the wage index. The proposed adjustment for 
FY 2012 is discussed in section II.B. of the Addendum to this proposed 
rule.
    As discussed below in section III.H. of this preamble, we also take 
into account the geographic reclassification of hospitals in accordance 
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating 
IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the 
Secretary is required to adjust the standardized amounts so as to 
ensure that aggregate payments under the IPPS after implementation of 
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the 
Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. The proposed budget neutrality 
adjustment for FY 2012 is discussed in section II.A.4.b. of the 
Addendum to this proposed rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the occupational mix adjustment that we are proposing to 
apply beginning October 1, 2011 (the FY 2012 wage index) appears under 
section III.C. of this preamble.

B. Core-Based Statistical Areas for the Hospital Wage Index

    The wage index is calculated and assigned to hospitals on the basis 
of the labor market area in which the hospital is located. In 
accordance with the broad discretion under section 1886(d)(3)(E) of the 
Act, beginning with FY 2005, we define hospital labor market areas 
based on the Core-Based Statistical Areas (CBSAs) established by OMB 
and announced in December 2003 (69 FR 49027). For a discussion of OMB's 
revised delineations of CBSAs and our implementation of the CBSA 
definitions, we refer readers to the preamble of the FY 2005 IPPS final 
rule (69 FR 49026 through 49032).
    As with the FY 2011 final rule, in this FY 2012 proposed rule, we 
are proposing to provide that hospitals receive 100 percent of their 
wage index based upon the CBSA configurations. Specifically, for each 
hospital, we are proposing to determine a wage index for FY 2012 
employing wage index data from hospital cost reports for cost reporting 
periods beginning during FY 2008 and using the CBSA labor market 
definitions. We consider CBSAs that are Metropolitan Statistical Areas 
(MSAs) to be urban, and CBSAs that are Micropolitan Statistical Areas 
as well as areas outside of CBSAs to be rural. In addition, it has been 
our longstanding policy that where an MSA has been divided into 
Metropolitan Divisions, we consider the Metropolitan Division to 
comprise the labor market areas for purposes of calculating the wage 
index (69 FR 49029) (regulations at Sec.  412.64(b)(1)(ii)(A)).
    In OMB Bulletin No. 10-2, issued on December 1, 2009, OMB announced 
that the CBSA changes in that bulletin would be the final update prior 
to the 2010 Census of Population and Housing. CMS adopted those changes 
in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50162), beginning 
October 1, 2010, and they are reflected in this FY 2012 proposed rule. 
In 2013, OMB plans to announce new area delineations based on its 2010 
standards (75 FR 37246) and the 2010 Census data.
    The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB--go to ``Agency Information'' and click on 
``Bulletins''.

C. Proposed Occupational Mix Adjustment to the FY 2012 Wage Index

    As stated earlier, section 1886(d)(3)(E) of the Act provides for 
the collection of data every 3 years on the occupational mix of 
employees for each short-term, acute care hospital participating in the 
Medicare program, in order to construct an occupational mix adjustment 
to the wage index, for application beginning October 1, 2004 (the FY 
2005 wage index). The purpose of the occupational mix adjustment is to 
control for the effect of hospitals' employment choices on the wage 
index. For example, hospitals may choose to employ different 
combinations of registered nurses, licensed practical nurses, nursing 
aides, and medical assistants for the purpose of providing nursing care 
to their patients. The varying labor costs associated with these 
choices reflect hospital management decisions rather than geographic 
differences in the costs of labor.
1. Development of Data for the Proposed FY 2012 Occupational Mix 
Adjustment Based on the 2007-2008 Occupational Mix Survey
    As provided for under section 1886(d)(3)(E) of the Act, we collect 
data every 3 years on the occupational mix of employees for each short-
term, acute care hospital participating in the Medicare program.
    For the FY 2010 hospital wage index, we used occupational mix data 
collected on a revised 2007-2008 Medicare Wage Index Occupational Mix 
Survey (the 2007-2008 survey) to compute the occupational mix 
adjustment for FY 2010. (We refer readers to the FY 2010 IPPS final 
rule (74 FR 43827) for a detailed discussion of the 2007-2008 survey.) 
Again, for the FY 2011 hospital wage index, we used data from the 2007-
2008 survey (including revised data for 45 hospitals) to compute the FY 
2011 adjustment.
    For the FY 2012 hospital wage index, we are proposing to again use 
occupational mix data collected on the 2007-2008 Medicare Wage Index 
Occupational Mix Survey to compute the occupational mix adjustment for 
FY 2012. We are including data for 3,165 hospitals that also have wage 
data included in the proposed FY 2012 wage index.

[[Page 25871]]

2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index
    As stated earlier, section 304(c) of Public Law 106-554 amended 
section 1886(d)(3)(E) of the Act to require CMS to collect data every 3 
years on the occupational mix of employees for each short-term, acute 
care hospital participating in the Medicare program. We used 
occupational mix data collected on the 2007-2008 survey to compute the 
occupational mix adjustment for FY 2010 and the FY 2011 wage index and 
are proposing to use the 2007-2008 occupational mix survey data in this 
proposed rule for the FY 2012 wage index. Therefore, a new measurement 
of occupational mix will be required for FY 2013.
    The new 2010 survey (Form CMS-10079 (2010)) provides for the 
collection of hospital-specific wages and hours data for calendar year 
2010 (that is, payroll periods ending between January 1, 2010 and 
December 31, 2010) and will be applied beginning with the FY 2013 wage 
index. The 2010 survey was adopted in the Federal Register on January 
15, 2010 (75 FR 2548) and approved by OMB on February 26, 2010 (OMB 
control number 0938-0907). The survey is available on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage 
and through the fiscal intermediaries/MACs. Hospitals are required to 
submit their completed 2010 surveys to their fiscal intermediaries/MACs 
by July 1, 2011. The preliminary, unaudited 2010 survey data will be 
released in early October 2011, along with the FY 2009 Worksheet S-3 
wage data, for the FY 2013 wage index review and correction process.
3. Calculation of the Proposed Occupational Mix Adjustment for FY 2012
    For FY 2012 (as we did for FY 2011), we are proposing to calculate 
the occupational mix adjustment factor using the following steps:
    Step 1--For each hospital, determine the percentage of the total 
nursing category attributable to a nursing subcategory by dividing the 
nursing subcategory hours by the total nursing category's hours. Repeat 
this computation for each of the four nursing subcategories: (1) 
Registered nurses; (2) licensed practical nurses; (3) nursing aides, 
orderlies, and attendants; and (4) medical assistants.
    Step 2--Determine a national average hourly rate for each nursing 
subcategory by dividing a subcategory's total salaries for all 
hospitals in the occupational mix survey database by the subcategory's 
total hours for all hospitals in the occupational mix survey database.
    Step 3--For each hospital, determine an adjusted average hourly 
rate for each nursing subcategory by multiplying the percentage of the 
total nursing category (from Step 1) by the national average hourly 
rate for that nursing subcategory (from Step 2). Repeat this 
calculation for each of the four nursing subcategories.
    Step 4--For each hospital, determine the adjusted average hourly 
rate for the total nursing category by summing the adjusted average 
hourly rate (from Step 3) for each of the nursing subcategories.
    Step 5--Determine the national average hourly rate for the total 
nursing category by dividing total nursing category salaries for all 
hospitals in the occupational mix survey database by total nursing 
category hours for all hospitals in the occupational mix survey 
database.
    Step 6--For each hospital, compute the occupational mix adjustment 
factor for the total nursing category by dividing the national average 
hourly rate for the total nursing category (from Step 5) by the 
hospital's adjusted average hourly rate for the total nursing category 
(from Step 4).
    If the hospital's adjusted average hourly rate is less than the 
national average hourly rate (indicating the hospital employs a less 
costly mix of nursing employees), the occupational mix adjustment 
factor is greater than 1.0000. If the hospital's adjusted average 
hourly rate is greater than the national average hourly rate, the 
occupational mix adjustment factor is less than 1.0000.
    Step 7--For each hospital, calculate the occupational mix adjusted 
salaries and wage-related costs for the total nursing category by 
multiplying the hospital's total salaries and wage-related costs (from 
Step 5 of the unadjusted wage index calculation in section III.F. of 
this preamble) by the percentage of the hospital's total workers 
attributable to the total nursing category (using the occupational mix 
survey data, this percentage is determined by dividing the hospital's 
total nursing category salaries by the hospital's total salaries for 
``nursing and all other'') and by the total nursing category's 
occupational mix adjustment factor (from Step 6 above).
    The remaining portion of the hospital's total salaries and wage-
related costs that is attributable to all other employees of the 
hospital is not adjusted by the occupational mix. A hospital's all 
other portion is determined by subtracting the hospital's nursing 
category percentage from 100 percent.
    Step 8--For each hospital, calculate the total occupational mix 
adjusted salaries and wage-related costs for a hospital by summing the 
occupational mix adjusted salaries and wage-related costs for the total 
nursing category (from Step 7) and the portion of the hospital's 
salaries and wage-related costs for all other employees (from Step 7).
    To compute a hospital's occupational mix adjusted average hourly 
wage, divide the hospital's total occupational mix adjusted salaries 
and wage-related costs by the hospital's total hours (from Step 4 of 
the unadjusted wage index calculation in section III.F. of this 
preamble).
    Step 9--To compute the occupational mix adjusted average hourly 
wage for an urban or rural area, sum the total occupational mix 
adjusted salaries and wage-related costs for all hospitals in the area, 
then sum the total hours for all hospitals in the area. Next, divide 
the area's occupational mix adjusted salaries and wage-related costs by 
the area's hours.
    Step 10--To compute the national occupational mix adjusted average 
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the Nation, then sum the total hours 
for all hospitals in the Nation. Next, divide the national occupational 
mix adjusted salaries and wage-related costs by the national hours. The 
proposed FY 2012 occupational mix adjusted national average hourly wage 
is $36.1406.
    Step 11--To compute the occupational mix adjusted wage index, 
divide each area's occupational mix adjusted average hourly wage (Step 
9) by the national occupational mix adjusted average hourly wage (Step 
10).
    Step 12--To compute the Puerto Rico specific occupational mix 
adjusted wage index, follow Steps 1 through 11 above. The proposed FY 
2012 occupational mix adjusted Puerto Rico-specific average hourly wage 
is $15.4107.
    The table below is an illustrative example of the occupational mix 
adjustment.
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    Because the occupational mix adjustment is required by statute, all 
hospitals that are subject to payments under the IPPS, or any hospital 
that would be subject to the IPPS if not granted a waiver, must 
complete the occupational mix survey, unless the hospital has no 
associated cost report wage data that are included in the proposed FY 
2012 wage index. For the FY 2007-2008 survey, the response rate was 
90.8 percent.
    In computing the proposed FY 2012 wage index, if a hospital did not 
respond to the occupational mix survey, or if we determined that a 
hospital's submitted data were too erroneous to include in the wage 
index, we assigned the hospital the average occupational mix adjustment 
for its labor market area. This method has the least impact on the wage 
index for other hospitals in the area. For areas where no hospital 
submitted data for purposes of calculating the occupational mix 
adjustment, we applied the national occupational mix factor of 1.0000 
in calculating the area's proposed FY 2012 occupational mix adjusted 
wage index. In addition, if a hospital submitted a survey, but that 
survey data could not be used because we determined the survey data to 
be aberrant, we also assigned the hospital the average occupational mix 
adjustment for its labor market area. For example, if a hospital's 
individual nurse category average hourly wages were out of range (that 
is, unusually high or low), and the hospital did not provide sufficient 
documentation to explain the aberrancy, or the hospital did not submit 
any registered nurse salaries or hours data, we assigned the hospital 
the average occupational mix adjustment for the labor market area in 
which it is located.
    In calculating the average occupational mix adjustment factor for a 
labor market area, we replicated Steps 1 through 6 of the calculation 
for the occupational mix adjustment. However, instead of performing 
these steps at the hospital level, we aggregated the data at the labor 
market area level. In following these steps, for example, for CBSAs 
that contain providers that did not submit occupational mix survey 
data, the occupational mix adjustment factor ranged from a low of 
0.9246 (CBSA 17780, College Station-Bryan, TX), to a high of 1.0761 
(CBSA 19, Rural Louisiana). Also, in computing a hospital's 
occupational mix adjusted salaries and wage-related costs for nursing 
employees (Step 7 of the calculation), in the absence of occupational 
mix survey data, we multiplied the hospital's total salaries and wage-
related costs by the percentage of the area's total workers 
attributable to the area's total nursing category. For FY 2012, there 
are five CBSAs (that include six hospitals) for which we did not have 
occupational mix data for any of its hospitals. The CBSAs are:
     CBSA 36140, Ocean City, NJ (1 hospital)
     CBSA 22140, Farmington, NM (1 hospital)
     CBSA 41900, San German-Cabo Rojo, PR (2 hospitals)
     CBSA 49500, Yauco, PR (1 hospital)
     CBSA 21940, Fajardo, PR (1 hospital)
    Since the FY 2007 IPPS final rule, we have periodically discussed 
applying a hospital-specific penalty to hospitals that fail to submit 
occupational mix survey data (71 FR 48013 through 48014; 72 FR 47314 
through 47315; 73 FR 48580; 74 FR 43832, and 75 FR 50167). During the 
FY 2008 rulemaking cycle, some commenters suggested a penalty equal to 
a 1- to 2-percent reduction in the hospital's wage index value or a set 
percentage of the standardized amount. During the FY 2009 and FY 2010 
rulemaking cycles, several commenters reiterated their view that full 
participation in the occupational mix survey is critical, and that CMS 
should develop a methodology that encourages hospitals to report 
occupational mix survey data but does not unfairly penalize neighboring 
hospitals. We indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule that, while we were not proposing a penalty at that time, we would 
consider the public comments we previously received, as well as any 
public comments on the proposed rule, as we developed the FY 2011 wage 
index.
    In the FY 2011 IPPS/LTCH PPS proposed and final rules (75 FR 23943 
and 50167, respectively), we stated that, in order to gain a better 
understanding of why some hospitals are not submitting the occupational 
mix data, we will require hospitals that do not submit occupational mix 
data to provide an explanation for not complying. This requirement will 
be effective beginning with the new 2010 occupational mix survey (the 
2010 survey is discussed in section III.C.2. of this preamble). We will 
instruct fiscal intermediaries/MACs to begin gathering this information 
as part of the FY 2013 wage index desk review process. We note that we 
reserve the right to apply a different approach in future years, 
including potentially penalizing nonresponsive hospitals.

D. Worksheet S-3 Wage Data for the Proposed FY 2012 Wage Index

    The proposed FY 2012 wage index values are based on the data 
collected from the Medicare cost reports submitted by hospitals for 
cost reporting periods beginning in FY 2008 (the FY 2011 wage index was 
based on data from cost reporting periods beginning during FY 2007).
1. Included Categories of Costs
    The proposed FY 2012 wage index includes the following categories 
of data associated with costs paid under the IPPS (as well as 
outpatient costs):
     Salaries and hours from short-term, acute care hospitals 
(including paid lunch hours and hours associated with military leave 
and jury duty)
     Home office costs and hours
     Certain contract labor costs and hours (which includes 
direct patient care, certain top management, pharmacy, laboratory, and 
nonteaching physician Part A services, and certain contract indirect 
patient care services (as discussed in the FY 2008 final rule with 
comment period (72 FR 47315))
     Wage-related costs, including pensions and other deferred 
compensation costs.
2. Proposal for Changes to the Reporting Requirements for Pension Costs 
for the Medicare Wage Index
a. Background
    The instructions for determining and reporting defined benefit 
pension costs on the cost report for Medicare cost-finding purposes are 
located in section 2142 of the Provider Reimbursement Manual, Part I 
(PRM-I). For Medicare wage index purposes, the instructions in section 
3605.2 of the Provider Reimbursement Manual, Part II (PRM-II) for 
Worksheet S-3, Part II, Lines 13 through 20, require hospitals to 
comply with the requirements in section 2142 of the PRM-I.
    Specifically, section 2142.5 of the PRM-I defines the current 
period liability for pension cost (that is, the maximum allowable 
pension cost) based on the actuarial accrued liability, normal cost, 
and unfunded actuarial liability. Under section 2142.4(A) of the PRM-I, 
these liability measurements are to be computed in accordance with the 
Employee Retirement Income Security Act of 1974 (ERISA), regardless of 
whether or not the pension plan is subject to ERISA. Also, section 
2142.6(A) of the PRM-I requires the current period liability for 
pension costs to be funded in order to be allowable. In addition, 
section 2142.6(C) of the PRM-I allows for funding in excess of

[[Page 25875]]

the current period liability to be carried forward and recognized in 
future periods. We note that, on March 28, 2008, CMS published Revision 
436, a technical clarification to section 2142 of the PRM-I.
    Actuarial accrued liability and normal cost are typically 
determined on an ongoing plan basis using long-term, best-estimate 
assumptions. The interest assumption reflects the average rates of 
return expected over the period during which benefits were payable, 
taking into account the investment mix of plan assets. Pension costs 
for plans not subject to ERISA (such as church plans and plans 
sponsored by public sector employers) are also typically based on the 
actuarial accrued liability and normal cost using long-term, best 
estimate assumptions.
    The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended 
ERISA. Under the PPA amendments to ERISA, the actuarial accrued 
liability and normal cost are no longer used as a basis for determining 
ERISA minimum required or maximum tax deductible contributions. ERISA 
contribution limits are now based on a ``funding target'' and ``target 
normal cost'' measured on a settlement basis using the current market 
interest rates for investment grade corporate bonds that match the 
duration of the benefit payouts. The Internal Revenue Service (IRS) 
publishes the applicable interest rate tables on a monthly basis. 
Because pension liabilities are very sensitive to changes in the 
interest rate used to discount future benefit payouts, pension costs 
based on the PPA ``funding target'' and ``target normal cost'' values 
are expected to be less stable than those based on the pre-PPA 
traditional long-term, best-estimate assumptions, which change 
infrequently. Furthermore, plans not subject to the ERISA requirements, 
as amended by the PPA, are not likely to use the new ``funding target'' 
and ``target normal cost'' basis for determining pension costs, and 
ERISA plans are not likely to continue to report costs developed using 
the actuarial accrued liability and normal cost based on long-term, 
best estimate assumptions. Accordingly, there is no longer a standard 
actuarial basis used by all plans.
    In response to the PPA amendments to ERISA, we began a review of 
the rules for determining pension costs for Medicare cost finding and 
wage index purposes. As an interim measure, we issued a Joint Signature 
Memorandum (JSM) in November 2009 that contained instructions and a 
spreadsheet to assist hospitals and Medicare contractors in determining 
the annual allowable defined benefit pension cost for the FY 2011 wage 
index (JSM/TDL-10061, 11-20-09, December 3, 2009). Although these 
instructions were released for purposes of the wage index, these 
instructions also serve as interim guidance for Medicare cost-finding 
purposes.
    In this proposed rule, we are proposing to revise our policy for 
determining pension cost for Medicare purposes. As mentioned above, due 
to the ERISA rules, as amended by the PPA, there is no longer a 
standard actuarial cost basis to be used by all types of plans. 
Therefore, we are proposing to no longer rely on actuarial computation 
to determine the maximum annual cost limitation for Medicare. Instead, 
the general parameters of our proposal would maintain the current 
requirement that pension costs must be funded to be reportable, and 
would require all hospitals to report the actual pension contributions 
funded during the reporting period, on a cash basis.
    In addition, under this cash basis approach, we are proposing 
separate methodologies for measuring pension costs for Medicare cost-
finding purposes (discussed in section IV.M. of this preamble) and for 
purposes of updating the wage index (discussed below in section 
III.D.2.b. of this preamble). We believe it is necessary to have two 
distinct proposals in order to address the different goals of 
determining a hospital's payments and updating the average hourly wage 
to establish the geographic area wage index. The function of the wage 
index is to measure relative hospital labor costs across areas. This 
function is distinct from Medicare payment determinations, where the 
goal is to measure the actual costs incurred by individual hospitals. 
These two distinct proposals would require separate updated 
instructions to section 2142 of the PRM-I for Medicare cost-finding 
purposes and section 3605.2 of the PRM-II for purposes of the wage 
index. Below is a detailed discussion of our proposal for reporting 
pension costs under the wage index. A full discussion of our proposal 
for Medicare cost-finding is discussed in section IV.M. of this 
preamble.
    The proposal below reflects our commitment to the general 
principles of the President's Executive Order released January 18, 
2011, entitled ``Improving Regulation and Regulatory Review.''
b. Proposal for Allowable Pension Cost for the Medicare Wage Index
    As mentioned above, the function of the Medicare wage index is to 
measure relative hospital labor costs across all areas. Therefore, 
while we believe pension costs must be funded in order to be reportable 
(we refer readers to the August 12, 2010 Federal Register (74 FR 47369) 
for an explanation of this longstanding policy), it also is important 
for pension costs to be relatively stable from year to year so that 
there is less volatility in the wage index. Thus, we are proposing to 
include, in the wage index, pension costs equal to the average actual 
cash contributions deposited to a hospital's defined benefit pension 
plan by the hospital and/or the hospital system over a 3-year period. 
The use of cash contributions as a measure of the costs incurred is 
necessary to ensure uniformity among all hospitals, regardless of their 
tax status or ERISA coverage. The 3-year average is intended to reduce 
the volatility that often occurs due to timing of contributions. Most 
pension plan sponsors have flexibility to determine the pension funding 
for a particular period and their decisions may be based on cash-flow 
considerations or other factors unrelated to the normal operation of 
the plan. Furthermore, the funding of current period pension costs may 
be delayed by almost a full year after the close of the period to which 
it applies. By using a 3-year average, we hope to enhance the stability 
of the wage index.
    To ensure that the average annual pension cost reflected in the 
wage index is consistent with the reporting period applicable to all 
other costs included in the index, we are proposing that the 3-year 
average be centered on the base cost reporting year for the wage index. 
For example, the FY 2013 wage index will be based on Medicare cost 
reporting periods beginning during FY 2009 and would reflect the 
average pension contributions made in hospitals' cost reporting periods 
beginning during FYs 2008, 2009, and 2010. Thus, this proposal would 
require pension plan contribution data for the cost reporting periods 
immediately preceding and immediately following the base cost reporting 
period for the wage index.
    We do not anticipate that the use of contributions made in the cost 
reporting period immediately following the reporting year will create 
an administrative burden because, even under the existing rule, 
contributions to fund current period costs are often deferred until the 
following period. In addition, trust account statements and general 
ledger reports to support the contributions should be readily 
available. We are proposing to apply the above methodology for 
reporting pension costs for the wage index beginning with the FY 2013 
IPPS update. We invite public comment on

[[Page 25876]]

this policy proposal and are especially interested in receiving 
comments related to the proposed 3-year averaging period.
3. Excluded Categories of Costs
    Consistent with the wage index methodology for FY 2011, the 
proposed wage index for FY 2012 also excludes the direct and overhead 
salaries and hours for services not subject to IPPS payment, such as 
SNF services, home health services, costs related to GME (teaching 
physicians and residents) and certified registered nurse anesthetists 
(CRNAs), and other subprovider components that are not paid under the 
IPPS. The proposed FY 2012 wage index also excludes the salaries, 
hours, and wage-related costs of hospital-based rural health clinics 
(RHCs), and Federally qualified health centers (FQHCs) because Medicare 
pays for these costs outside of the IPPS (68 FR 45395). In addition, 
salaries, hours, and wage-related costs of CAHs are excluded from the 
wage index, for the reasons explained in the FY 2004 IPPS final rule 
(68 FR 45397).
4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals 
Under the IPPS
    Data collected for the IPPS wage index are also currently used to 
calculate wage indices applicable to other providers, such as SNFs, 
home health agencies (HHAs), and hospices. In addition, they are used 
for prospective payments to IRFs, IPFs, and LTCHs, and for hospital 
outpatient services. We note that, in the IPPS rules, we do not address 
comments pertaining to the wage indices for non-IPPS providers, other 
than for LTCHs. Such comments should be made in response to separate 
proposed rules for those providers.

E. Verification of Worksheet S-3 Wage Data

    The wage data for the proposed FY 2012 wage index were obtained 
from Worksheet S-3, Parts II and III of the Medicare cost report for 
cost reporting periods beginning on or after October 1, 2007, and 
before October 1, 2008. For wage index purposes, we refer to cost 
reports during this period as the ``FY 2008 cost report,'' the ``FY 
2008 wage data,'' or the ``FY 2008 data.'' Instructions for completing 
Worksheet S-3, Parts II and III are in the Provider Reimbursement 
Manual (PRM), Part II, sections 3605.2 and 3605.3. The data file used 
to construct the proposed wage index includes FY 2008 data submitted to 
us as of March 3, 2011. As in past years, we performed an intensive 
review of the wage data, mostly through the use of edits designed to 
identify aberrant data.
    We asked our fiscal intermediaries/MACs to revise or verify data 
elements that result in specific edit failures. For the proposed FY 
2012 wage index, we identified and excluded 23 providers with data that 
was too aberrant to include in the proposed wage index, although if 
data elements for some of these providers are corrected, we intended to 
include some of these providers in the FY 2012 final wage index. We 
instructed fiscal intermediaries/MACs to complete their data 
verification of questionable data elements and to transmit any changes 
to the wage data no later than April 13, 2011. We intend that all 
unresolved data elements will be resolved by the date the final rule is 
issued. The revised data will be reflected in the FY 2012 IPPS final 
rule.
    In constructing the proposed FY 2012 wage index, we included the 
wage data for facilities that were IPPS hospitals in FY 2008, inclusive 
of those facilities that have since terminated their participation in 
the program as hospitals, as long as those data did not fail any of our 
edits for reasonableness. We believe that including the wage data for 
these hospitals is, in general, appropriate to reflect the economic 
conditions in the various labor market areas during the relevant past 
period and to ensure that the current wage index represents the labor 
market area's current wages as compared to the national average of 
wages. However, we excluded the wage data for CAHs as discussed in the 
FY 2004 IPPS final rule (68 FR 45397). For this proposed rule, we 
removed 19 hospitals that converted to CAH status between February 16, 
2010, the cut-off date for CAH exclusion from the FY 2011 wage index, 
and February 15, 2011, the cut-off date for CAH exclusion from the FY 
2012 wage index. After removing hospitals with aberrant data and 
hospitals that converted to CAH status, the proposed FY 2012 wage index 
is calculated based on 3,484 hospitals.
    In the FY 2008 final rule with comment period (72 FR 47317) and the 
FY 2009 IPPS final rule (73 FR 48582), we discussed our policy for 
allocating a multicampus hospital's wages and hours data, by full-time 
equivalent (FTE) staff, among the different labor market areas where 
its campuses are located. During the FY 2011 wage index desk review 
process, we requested fiscal intermediaries/MACs to contact multicampus 
hospitals that had campuses in different labor market areas to collect 
the data for the allocation. The FY 2011 wage index included separate 
wage data for campuses of three multicampus hospitals.
    For FY 2012, as we discussed in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50168), we are proposing to no longer allow hospitals to 
use discharge data for the allocation of a multicampus hospital's wage 
data among the different labor market areas where its campuses are 
located. The Medicare cost report was updated in May 2008 to provide 
for the reporting of FTE data by campus for multicampus hospitals (Form 
CMS-2552-96, Worksheet S-2, lines 61 and 62). The data from cost 
reporting periods that begin in FY 2008 are now available for 
calculating the wage index for FY 2012. Therefore, a multicampus 
hospital will not have the option to use either FTE or discharge data 
for allocating wage data among its campuses by providing the 
information from the applicable cost reporting period to CMS through 
its fiscal intermediary/MAC. The table containing the proposed FY 2012 
wage index, which is listed in section VI. of the Addendum to this 
proposed rule and available via the Internet, includes separate wage 
data for campuses of three multicampus hospitals.

F. Method for Computing the Proposed FY 2012 Unadjusted Wage Index

1. Steps for Computation
    The method used to compute the proposed FY 2012 wage index without 
an occupational mix adjustment follows:
    Step 1--As noted above, we are proposing to base the proposed FY 
2012 wage index on wage data reported on the FY 2008 Medicare cost 
reports. We gathered data from each of the non-Federal, short-term, 
acute care hospitals for which data were reported on the Worksheet S-3, 
Parts II and III of the Medicare cost report for the hospital's cost 
reporting period beginning on or after October 1, 2007, and before 
October 1, 2008. In addition, we included data from some hospitals that 
had cost reporting periods beginning before October 2007 and reported a 
cost reporting period covering all of FY 2008. These data are included 
because no other data from these hospitals would be available for the 
cost reporting period described above, and because particular labor 
market areas might be affected due to the omission of these hospitals. 
However, we generally describe these wage data as FY 2008 data. We note 
that, if a hospital had more than one cost reporting period beginning 
during FY 2008 (for example, a hospital had two short cost reporting

[[Page 25877]]

periods beginning on or after October 1, 2007, and before October 1, 
2008), we included wage data from only one of the cost reporting 
periods, the longer, in the wage index calculation. If there was more 
than one cost reporting period and the periods were equal in length, we 
included the wage data from the later period in the wage index 
calculation.
    Step 2--Salaries--The method used to compute a hospital's average 
hourly wage excludes certain costs that are not paid under the IPPS. 
(We note that, beginning with FY 2008 (72 FR 47315), we include Lines 
22.01, 26.01, and 27.01 of Worksheet S-3, Part II for overhead services 
in the wage index. However, we note that the wages and hours on these 
lines are not incorporated into Line 101, Column 1 of Worksheet A, 
which, through the electronic cost reporting software, flows directly 
to Line 1 of Worksheet S-3, Part II. Therefore, the first step in the 
wage index calculation for FY 2011 is to compute a ``revised'' Line 1, 
by adding to the Line 1 on Worksheet S-3, Part II (for wages and hours 
respectively) the amounts on Lines 22.01, 26.01, and 27.01.) In 
calculating a hospital's average salaries plus wage-related costs, we 
subtract from Line 1 (total salaries) the GME and CRNA costs reported 
on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 
5 and 5.01, home office salaries reported on Line 7, and exclude 
salaries reported on Lines 8 and 8.01 (that is, direct salaries 
attributable to SNF services, home health services, and other 
subprovider components not subject to the IPPS). We also subtract from 
Line 1 the salaries for which no hours were reported. To determine 
total salaries plus wage-related costs, we add to the net hospital 
salaries the costs of contract labor for direct patient care, certain 
top management, pharmacy, laboratory, and nonteaching physician Part A 
services (Lines 9 and 10), home office salaries and wage-related costs 
reported by the hospital on Lines 11 and 12, and nonexcluded area wage-
related costs (Lines 13, 14, and 18).
    We note that contract labor and home office salaries for which no 
corresponding hours are reported are not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are 
excluded if no corresponding salaries are reported for those employees 
on Line 4.
    Step 3--Hours--With the exception of wage-related costs, for which 
there are no associated hours, we compute total hours using the same 
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocate overhead 
costs to areas of the hospital excluded from the wage index 
calculation. First, we determine the ratio of excluded area hours (sum 
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours 
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 
7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts 
of overhead salaries and hours to be allocated to excluded areas by 
multiplying the above ratio by the total overhead salaries and hours 
reported on Line 13 of Worksheet S-3, Part III. Next, we compute the 
amounts of overhead wage-related costs to be allocated to excluded 
areas using three steps: (1) We determine the ratio of overhead hours 
(Part III, Line 13 minus the sum of Lines 22.01, 26.01, and 27.01) to 
revised hours excluding the sum of Lines 22.01, 26.01, and 27.01 (Line 
1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 
22.01, 26.01, and 27.01). (We note that for the FY 2008 and subsequent 
wage index calculations, we are excluding the sum of Lines 22.01, 
26.01, and 27.01 from the determination of the ratio of overhead hours 
to revised hours because hospitals typically do not provide fringe 
benefits (wage-related costs) to contract personnel. Therefore, it is 
not necessary for the wage index calculation to exclude overhead wage-
related costs for contract personnel. Further, if a hospital does 
contribute to wage-related costs for contracted personnel, the 
instructions for Lines 22.01, 26.01, and 27.01 require that associated 
wage-related costs be combined with wages on the respective contract 
labor lines.); (2) we compute overhead wage-related costs by 
multiplying the overhead hours ratio by wage-related costs reported on 
Part II, Lines 13, 14, and 18; and (3) we multiply the computed 
overhead wage-related costs by the above excluded area hours ratio. 
Finally, we subtract the computed overhead salaries, wage-related 
costs, and hours associated with excluded areas from the total salaries 
(plus wage-related costs) and hours derived in Steps 2 and 3.
    Step 5--For each hospital, we adjust the total salaries plus wage-
related costs to a common period to determine total adjusted salaries 
plus wage-related costs. To make the wage adjustment, we estimate the 
percentage change in the employment cost index (ECI) for compensation 
for each 30-day increment from October 14, 2005, through April 15, 
2007, for private industry hospital workers from the BLS' Compensation 
and Working Conditions. We use the ECI because it reflects the price 
increase associated with total compensation (salaries plus fringes) 
rather than just the increase in salaries. In addition, the ECI 
includes managers as well as other hospital workers. This methodology 
to compute the monthly update factors uses actual quarterly ECI data 
and assures that the update factors match the actual quarterly and 
annual percent changes. We also note that, since April 2006 with the 
publication of March 2006 data, the BLS' ECI uses a different 
classification system, the North American Industrial Classification 
System (NAICS), instead of the Standard Industrial Codes (SICs), which 
no longer exist. We have consistently used the ECI as the data source 
for our wages and salaries and other price proxies in the IPPS market 
basket, and we are not proposing to make any changes to the usage for 
FY 2012. The factors used to adjust the hospital's data were based on 
the midpoint of the cost reporting period, as indicated below.

[[Page 25878]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.046

    For example, the midpoint of a cost reporting period beginning 
January 1, 2008, and ending December 31, 2008, is June 30, 2008. An 
adjustment factor of 1.01766 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 2008 and covered a 
period of less than 360 days or more than 370 days, we annualize the 
data to reflect a 1-year cost report. Dividing the data by the number 
of days in the cost report and then multiplying the results by 365 
accomplishes annualization.
    Step 6--Each hospital is assigned to its appropriate urban or rural 
labor market area before any reclassifications under section 
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the 
Act. Within each urban or rural labor market area, we add 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 divide the total adjusted salaries plus wage-related 
costs obtained under both methods in Step 6 by the sum of the 
corresponding total hours (from Step 4) for all hospitals in each labor 
market area to determine an average hourly wage for the area.
    Step 8--We add the total adjusted salaries plus wage-related costs 
obtained in Step 5 for all hospitals in the Nation and then divide 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 
proposed national average hourly wage (unadjusted for occupational mix) 
is $36.1697.
    Step 9--For each urban or rural labor market area, we calculate the 
hospital wage index value, unadjusted for occupational mix, by dividing 
the area average hourly wage obtained in Step 7 by the national average 
hourly wage computed in Step 8.
    Step 10--Following the process set forth above, we develop a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is adjusted by a wage index calculated for all 
Puerto Rico labor market areas based on the national average hourly 
wage as described above.) We add the total adjusted salaries plus wage-
related costs (as calculated in Step 5) for all hospitals in Puerto 
Rico and divide the sum by the total hours for Puerto Rico (as 
calculated in Step 4) to arrive at an overall proposed average hourly 
wage (unadjusted for occupational mix) of $15.3863 for Puerto Rico. For 
each labor market area in Puerto Rico, we calculate the Puerto Rico-
specific wage index value by dividing the area average hourly wage (as 
calculated in Step 7) by the overall Puerto Rico average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for 
discharges on or after October 1, 1997, the area wage index applicable 
to any hospital that is located in an urban area of a State may not be 
less than the area wage index applicable to hospitals located in rural 
areas in that State. The areas affected by this provision are 
identified in Table 4D which is listed in section VI. of the Addendum 
to this proposed rule and available via the Internet.
2. Expiration of the Imputed Floor Policy
    In the FY 2005 IPPS final rule (69 FR 49109 through 49111), we 
adopted the ``imputed'' floor as a temporary 3-year regulatory measure 
to address a concern by some individuals that hospitals in all-urban 
States were disadvantaged by the absence of rural hospitals to set a 
wage index floor in those States. There are two States that have no 
rural areas (New Jersey and Rhode Island). Rhode Island has only one 
urban area. In accordance with the imputed floor calculation (Sec.  
412.64(h)(4) of the regulations), Rhode Island receives no benefit from 
the policy. As a result, the imputed floor policy only benefits one 
State--New Jersey. Although New Jersey may argue that it is 
disadvantaged by

[[Page 25879]]

the statutory rural floor because it has no rural areas, the imputed 
floor policy provides New Jersey with a guaranteed benefit that no 
other State has. In any given year, approximately one-half of the 
States have no hospitals that benefit from the rural floor provision. 
However, New Jersey benefits each year that the imputed floor policy is 
in place.
    The imputed floor was originally set to expire in FY 2007, but we 
extended it an additional year in the FY 2008 IPPS final rule with 
comment period (72 FR 47321). In the FY 2009 IPPS final rule (73 FR 
48570 through 48574 and 48584), we extended the imputed floor for an 
additional 3 years, through FY 2011, linking the extension to a policy 
to apply budget neutrality for the rural and imputed floors within each 
State, instead of nationally, over a 3-year transition period. Section 
3141 of the Affordable Care Act replaced the statewide budget 
neutrality policy with the national budget neutrality policy that was 
in place during FY 2008. That is, section 3141 required that budget 
neutrality for the rural and imputed floor be applied ``through a 
uniform, national adjustment to the area wage index'' instead of within 
each State beginning in FY 2011 (75 FR 50160). However, we note that 
the Affordable Care Act did not include a provision to extend the 
imputed floor or to make the imputed floor permanent. Therefore, the 
imputed floor is set to expire with the FY 2011 wage index, and we are 
not proposing to extend the imputed floor policy. Thus, the imputed 
floor is not reflected in the table containing the proposed FY 2012 
wage index, which is listed in section VI. of the Addendum to this 
proposed rule and available via the Internet.
    As we discussed in the FY 2008 IPPS proposed rule and final rule 
with comment period (72 FR 24786 and 72 FR 47322, respectively), the 
application of the national budget neutrality requirement for the rural 
and imputed floors requires a transfer of payments from hospitals in 
States with rural hospitals but where the rural floor is not applied to 
hospitals in States where the rural or imputed floor is applied. For 
this reason, we believe that the floor policy should apply only when 
required by statute. Thus, only States containing both rural areas and 
hospitals located in such areas (including any hospital reclassified as 
rural under Sec.  412.103) would benefit from the rural floor, as 
required by section 4410 of Public Law 105-33.
    In the proposed FY 2012 wage index, the rural floor will apply to 
189 hospitals in 26 States. If the imputed floor policy was to continue 
into FY 2012, it would apply to 39 additional hospitals in New Jersey. 
We are seeking public comments regarding the expiration of the imputed 
floor.
3. Proposed FY 2012 Puerto Rico Wage Index
    We note that, for the proposed FY 2012 wage index, there is one new 
hospital in rural Puerto Rico when previously there were none. However, 
this hospital has no cost reporting period beginning during FY 2008 
and, therefore, has no wage data for inclusion in the proposed FY 2012 
wage index calculation for rural Puerto Rico. We discussed in the FY 
2005 IPPS final rule that, under these circumstances, we would 
determine a State's rural floor based on the imputed floor policy in 
Sec.  412.64(h)(4) of the regulations. However, as discussed above, the 
imputed floor is set to expire with the FY 2011 wage index. We adopted 
the policy in the FY 2008 IPPS final rule with comment period (72 FR 
47323) that if there are no hospitals' cost report wage data available 
to calculate a State's rural floor, and the imputed floor policy has 
expired, ``we will use the unweighted average of the wage indices from 
all CBSAs (urban areas) that are contiguous to the rural counties of 
the State to compute the State's rural floor. (We define contiguous as 
sharing a border.)'' Except for Fajardo, Puerto Rico (CBSA 21940), all 
other Puerto Rico urban areas are contiguous to a rural area. 
Therefore, based on our existing policy, the proposed FY 2012 rural 
Puerto Rico wage index is calculated based on the average of the 
proposed FY 2012 wage indices for the following urban areas: Aguadilla-
Isabela-San Sebasti[aacute]n, PR (CBSA 10380); Guayama, PR (CBSA 
25020); Mayag[uuml]ez, PR (CBSA 32420); Ponce, PR (CBSA 38660), San 
Germ[aacute]n-Cabo Rojo, PR (CBSA 41900), San Juan-Caguas-Guaynabo, PR 
(CBSA 41980), and Yauco, PR (CBSA 49500).

G. Analysis and Implementation of the Proposed Occupational Mix 
Adjustment and the Proposed FY 2012 Occupational Mix Adjusted Wage 
Index

    As discussed in section III.C. of this preamble, for FY 2012, we 
are proposing to apply the occupational mix adjustment to 100 percent 
of the proposed FY 2012 wage index. We calculated the proposed 
occupational mix adjustment using data from the 2007-2008 occupational 
mix survey data, using the methodology described in section III.C.3. of 
this preamble.
    Using the occupational mix survey data and applying the 
occupational mix adjustment to 100 percent of the proposed FY 2012 wage 
index results in a proposed national average hourly wage of $36.1406 
and a proposed Puerto-Rico specific average hourly wage of $15.4107. 
After excluding data of hospitals that either submitted aberrant data 
that failed critical edits, or that do not have FY 2008 Worksheet S-3 
cost report data for use in calculating the proposed FY 2012 wage 
index, we calculated the proposed FY 2012 wage index using the 
occupational mix survey data from 3,165 hospitals. Using the Worksheet 
S-3 cost report data of 3,484 hospitals and occupational mix survey 
data from 3,165 hospitals represents a 90.8 percent survey response 
rate. The proposed FY 2012 national average hourly wages for each 
occupational mix nursing subcategory as calculated in Step 2 of the 
occupational mix calculation are as follows:
[GRAPHIC] [TIFF OMITTED] TP05MY11.047

    The proposed national average hourly wage for the entire nurse 
category as computed in Step 5 of the occupational mix calculation is 
$30.442540295. Hospitals with a nurse category average hourly wage (as 
calculated in Step 4) of

[[Page 25880]]

greater than the national nurse category average hourly wage receive an 
occupational mix adjustment factor (as calculated in Step 6) of less 
than 1.0. Hospitals with a nurse category average hourly wage (as 
calculated in Step 4) of less than the national nurse category average 
hourly wage receive an occupational mix adjustment factor (as 
calculated in Step 6) of greater than 1.0.
    Based on the 2007-2008 occupational mix survey data, we determined 
(in Step 7 of the occupational mix calculation) that the national 
percentage of hospital employees in the nurse category is 44.31 
percent, and the national percentage of hospital employees in the all 
other occupations category is 55.69 percent. At the CBSA level, the 
percentage of hospital employees in the nurse category ranged from a 
low of 29.08 percent in one CBSA, to a high of 70.76 percent in another 
CBSA.
    We compared the proposed FY 2012 occupational mix adjusted wage 
indices for each CBSA to the proposed unadjusted wage indices for each 
CBSA. As a result of applying the occupational mix adjustment to the 
wage data, the proposed wage index values for 209 (53.6 percent) urban 
areas and 32 (66.7 percent) rural areas would increase. One hundred 
seven (27.4 percent) urban areas would increase by 1 percent or more, 
and 5 (1.3 percent) urban areas would increase by 5 percent or more. 
Seventeen (35.4 percent) rural areas would increase by 1 percent or 
more, and no rural areas would increase by 5 percent or more. However, 
the wage index values for 181 (46.4 percent) urban areas and 16 (33.3 
percent) rural areas would decrease. Eighty-eight (22.6 percent) urban 
areas would decrease by 1 percent or more, and no urban area would 
decrease by 5 percent or more. Seven (14.6 percent) rural areas would 
decrease by 1 percent or more, and no rural areas would decrease by 5 
percent or more. The largest positive impacts are 7.81 percent for an 
urban area and 2.90 percent for a rural area. The largest negative 
impacts are 3.95 percent for an urban area and 2.78 percent for a rural 
area. No urban or rural areas are unaffected. These results indicate 
that a larger percentage of rural areas (66.7 percent) would benefit 
from the occupational mix adjustment than do urban areas (53.6 
percent). While these results are more positive overall for rural areas 
than under the previous occupational mix adjustment that used survey 
data from 2006, approximately one-third (33.3 percent) of rural CBSAs 
would still experience a decrease in their wage indices as a result of 
the occupational mix adjustment.
    The proposed wage index values for FY 2012 (except those for 
hospitals receiving wage index adjustments under section 1886(d)(13) of 
the Act) included in Tables 4A, 4B, 4C, and 4F, which are listed in 
section VI. of the Addendum to this proposed rule and available via the 
Internet, include the proposed occupational mix adjustment.
    Tables 3A and 3B, which are listed in section VI. of the Addendum 
to this proposed rule and available via the Internet, list the 3-year 
average hourly wage for each labor market area before the redesignation 
or reclassification of hospitals based on FYs 2010, 2011, and 2012 cost 
reporting periods. Table 3A lists these data for urban areas, and Table 
3B lists these data for rural areas. In addition, Table 2, which is 
listed in section VI. of the Addendum to this proposed rule and 
available via the Internet, includes the adjusted average hourly wage 
for each hospital from the FY 2006 and FY 2007 cost reporting periods, 
as well as the FY 2008 period used to calculate the proposed FY 2012 
wage index. The 3-year averages are calculated by dividing the sum of 
the dollars (adjusted to a common reporting period using the method 
described previously) across all 3 years, by the sum of the hours. If a 
hospital is missing data for any of the previous years, its average 
hourly wage for the 3-year period is calculated based on the data 
available during that period. The proposed average hourly wages in 
Tables 2, 3A, and 3B, which are listed in section VI. of the Addendum 
to this proposed rule and available via the Internet, include the 
proposed occupational mix adjustment. The proposed wage index values in 
Tables 4A, 4B, 4C, and 4D also include the proposed national rural 
floor budget neutrality adjustment.

H. Revisions to the Wage Index Based on Hospital Redesignations and 
Reclassifications

1. General
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. Hospitals must apply to the MGCRB to 
reclassify 13 months prior to the start of the fiscal year for which 
reclassification is sought (generally by September 1). Generally, 
hospitals must be proximate to the labor market area to which they are 
seeking reclassification and must demonstrate characteristics similar 
to hospitals located in that area. The MGCRB issues its decisions by 
the end of February for reclassifications that become effective for the 
following fiscal year (beginning October 1). The regulations applicable 
to reclassifications by the MGCRB are located in 42 CFR 412.230 through 
412.280. (We refer readers to a discussion of the proximity 
requirements in the FY 2002 IPPS final rule (66 FR 39874 and 39875).)
    Section 1886(d)(10)(D)(v) of the Act provides that, beginning with 
FY 2001, a MGCRB decision on a hospital reclassification for purposes 
of the wage index is effective for 3 fiscal years, unless the hospital 
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of 
the Act provides that the MGCRB must use average hourly wage data from 
the 3 most recently published hospital wage surveys in evaluating a 
hospital's reclassification application for FY 2003 and any succeeding 
fiscal year.
    Section 304(b) of Public Law 106-554 provides that the Secretary 
must establish a mechanism under which a statewide entity may apply to 
have all of the geographic areas in the State treated as a single 
geographic area for purposes of computing and applying a single wage 
index, for reclassifications beginning in FY 2003. The implementing 
regulations for this provision are located at 42 CFR 412.235.
    Section 1886(d)(8)(B) of the Act requires the Secretary to treat a 
hospital located in a rural county adjacent to one or more urban areas 
as being located in the labor market area to which the greatest number 
of workers in the county commute, if the rural county would otherwise 
be considered part of an urban area under the standards for designating 
MSAs and if the commuting rates used in determining outlying counties 
were determined on the basis of the aggregate number of resident 
workers who commute to (and, if applicable under the standards, from) 
the central county or counties of all contiguous MSAs. In light of the 
CBSA definitions and the Census 2000 data that we implemented for FY 
2005 (69 FR 49027), we undertook to identify those counties meeting 
these criteria. Eligible counties are discussed and identified under 
section III.H.5. of this preamble.
2. Effects of Reclassification/Redesignation
    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. These requirements for determining the wage index values 
for

[[Page 25881]]

redesignated hospitals are applicable both to the hospitals deemed 
urban under section 1886(d)(8)(B) of the Act and hospitals that were 
reclassified as a result of the MGCRB decisions under section 
1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) 
of the Act, the wage index values were determined by considering the 
following:
     If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the wage data for the redesignated 
hospitals applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the area wage index 
determined inclusive of the wage data for the redesignated hospitals 
(the combined wage index value) applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
increases the wage index value for the urban area to which the 
hospitals are redesignated, both the area and the redesignated 
hospitals receive the combined wage index value. Otherwise, the 
hospitals located in the urban area receive a wage index excluding the 
wage data of hospitals redesignated into the area.
     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 (otherwise, redesignated rural hospitals 
are excluded from the calculation of the rural wage index). The wage 
index value for a redesignated rural hospital cannot be reduced below 
the wage index value for the rural areas of the State in which the 
hospital is located.
    CMS also has adopted the following policies:
     The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the urban area to which 
the hospital is reclassified (subject to the rules described above) and 
the wage index calculation of the urban area where the hospital is 
physically located.
     In cases where hospitals have reclassified to rural areas, 
such as urban hospitals reclassifying to rural areas under 42 CFR 
412.103, the hospital's wage data are: (a) included in the rural wage 
index calculation, unless doing so would reduce the rural wage index; 
and (b) included in the urban area where the hospital is physically 
located. The effect of this policy, in combination with the statutory 
requirement at section 1886(d)(8)(C)(ii) of the Act, is that rural 
areas may receive a wage index based upon the highest of: (1) Wage data 
from hospitals geographically located in the rural area; (2) wage data 
from hospitals geographically located in the rural area, but excluding 
all data associated with hospitals reclassifying out of the rural area 
under section 1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) 
wage data associated with hospitals geographically located in the area 
plus all hospitals reclassified into the rural area.
    In addition, in accordance with the statutory language referring to 
``hospitals'' in the plural under sections 1886(d)(8)(C)(i) and 
1886(d)(8)(C)(ii) of the Act, our longstanding policy is to consider 
reclassified hospitals as a group when deciding whether to include or 
exclude them from both urban and rural wage index calculations.
3. FY 2012 MGCRB Reclassifications
a. FY 2012 Reclassification Requirements and Approvals
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. The specific procedures and rules that apply 
to the geographic reclassification process are outlined in 42 CFR 
412.230 through 412.280.
    At the time this proposed rule was constructed, the MGCRB had 
completed its review of FY 2012 reclassification requests. Based on 
such reviews, there were 280 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2012. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2012, hospitals 
reclassified during FY 2010 or FY 2011 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 283 hospitals approved for wage index 
reclassifications in FY 2010 and 294 hospitals approved for wage index 
reclassifications in FY 2011. Of all of the hospitals approved for 
reclassification for FY 2010, FY 2011, and FY 2012, based upon the 
review at the time of this proposed rule, 857 hospitals are in a 
reclassification status for FY 2012.
    Under 42 CFR 412.273, hospitals that have been reclassified by the 
MGCRB are permitted to withdraw their applications within 45 days of 
the publication of a proposed rule. Generally stated, the request for 
withdrawal of an application for reclassification or termination of an 
existing 3-year reclassification that would be effective in FY 2012 has 
to be received by the MGCRB within 45 days of the publication of the 
proposed rule. Hospitals also may cancel prior reclassification 
withdrawals or terminations in certain circumstances. For further 
information about withdrawing, terminating, or canceling a previous 
withdrawal or termination of a 3-year reclassification for wage index 
purposes, we refer the reader to 42 CFR 412.273, as well as the FY 2002 
IPPS final rule (66 FR 39887) and the FY 2003 IPPS final rule (67 FR 
50065). Additional discussion on withdrawals and terminations, and 
clarifications regarding reinstating reclassifications and ``fallback'' 
reclassifications, were included in the FY 2008 IPPS final rule (72 FR 
47333).
    Changes to the wage index that result from withdrawals of requests 
for reclassification, terminations, wage index corrections, appeals, 
and the Administrator's review process for FY 2012 will be incorporated 
into the wage index values published in the FY 2012 IPPS/LTCH PPS final 
rule. These changes affect not only the wage index value for specific 
geographic areas, but also the wage index value redesignated/
reclassified hospitals receive; that is, whether they receive the wage 
index that includes the data for both the hospitals already in the area 
and the redesignated/reclassified hospitals. Further, the wage index 
value for the area from which the hospitals are redesignated/
reclassified may be affected.
b. Applications for Reclassifications for FY 2013
    Applications for FY 2013 reclassifications are due to the MGCRB by 
September 1, 2011. We note that this is also the deadline for canceling 
a previous wage index reclassification withdrawal or termination under 
42 CFR 412.273(d). Applications and other information about MGCRB 
reclassifications may be obtained, beginning in mid-July 2011, via the 
CMS Internet Web site at: http://cms.hhs.gov/MGCRB/02_instructions_and_applications.asp, or by calling the MGCRB at (410) 786-1174. The 
mailing address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, 
Baltimore, MD 21244-2670.
4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act
    Section 1886(d)(8)(B) of the Act requires us to treat a hospital 
located in a rural county adjacent to one or more

[[Page 25882]]

urban areas as being located in the MSA if certain criteria are met. 
Effective beginning FY 2005, we use OMB's 2000 CBSA standards and the 
Census 2000 data to identify counties in which hospitals qualify under 
section 1886(d)(8)(B) of the Act to receive the wage index of the urban 
area. Hospitals located in these counties have been known as ``Lugar'' 
hospitals and the counties themselves are often referred to as 
``Lugar'' counties. We provide the FY 2011 chart below with the listing 
of the rural counties containing the hospitals designated as urban 
under section 1886(d)(8)(B) of the Act. For discharges occurring on or 
after October 1, 2011, hospitals located in the rural county in the 
first column of this chart will be redesignated for purposes of using 
the wage index of the urban area listed in the second column.
BILLING CODE 4120-01-P

[[Page 25883]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.048

[[Page 25884]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.049

[[Page 25885]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.050

BILLING CODE 4120-01-C
    As in the past, hospitals redesignated under section 1886(d)(8)(B) 
of the Act are also eligible to be reclassified to a different area by 
the MGCRB. Affected hospitals are permitted to compare the reclassified 
wage index for the labor market area in Table 4C (which is listed in 
section VI. of the Addendum to this proposed rule and available via the 
Internet) into which they would be reclassified by the MGCRB to the 
wage index for the area to which they are redesignated under section 
1886(d)(8)(B) of the Act. Hospitals may withdraw from an MGCRB 
reclassification within 45 days of the publication of this proposed 
rule.
5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar 
hospitals are treated like reclassified hospitals for purposes of 
determining their applicable wage index and receive the reclassified 
wage index for the urban area to which they have been redesignated. 
Because Lugar hospitals are treated like reclassified hospitals, when 
they are seeking reclassification by the MGCRB, they are subject to the 
rural reclassification rules set forth at 42 CFR 412.230. The 
procedural rules set forth at Sec.  412.230 list the criteria that a 
hospital must meet in order to reclassify as a rural hospital. Lugar 
hospitals are subject to the proximity criteria and payment thresholds 
that apply to rural hospitals. Specifically, the hospital must be no 
more than 35 miles from the area to which it seeks reclassification 
(Sec.  412.230(b)(1)); and the hospital must show that its average 
hourly wage is at least 106 percent of the average hourly wage of all 
other hospitals in the area in which the hospital is located (Sec.  
412.230(d)(1)(iii)(C)). In accordance with the requirements of section 
3137(c) of the Affordable Care Act, beginning with reclassifications 
for the FY 2011 wage index, a Lugar hospital must also demonstrate that 
its average hourly wage is equal to at least 82 percent of the average 
hourly wage of hospitals in the area to which it seeks redesignation 
(Sec.  412.230(d)(1)(iv)(C)).
    Hospitals not located in a Lugar county seeking reclassification to 
the urban area where the Lugar hospitals have been redesignated are not 
permitted to measure to the Lugar county to demonstrate proximity (no 
more than 15 miles for an urban hospital, and no more than 35 miles for 
a rural hospital or the closest urban or rural area for RRCs or SCHs) 
in order to be reclassified to such urban area. These hospitals must 
measure to the urban area exclusive of the Lugar County to meet the 
proximity or nearest urban or rural area requirement. We treat New 
England deemed counties in a manner consistent with how we treat Lugar 
counties. (We refer readers to FY 2008 IPPS final rule with comment 
period (72 FR 47337) for a discussion of this policy.)
6. Reclassifications Under Section 508 of Public Law 108-173
    Section 508 of Public Law 108-173 allowed certain qualifying 
hospitals to receive wage index reclassifications and assignments that 
they otherwise would not have been eligible to receive under the law. 
Although section 508 originally was scheduled to expire after a 3-year 
period, Congress extended the provision several times, as well as 
certain special exceptions that would have otherwise expired. For a 
discussion of the original section 508 provision and its various 
extensions, we refer readers to the FY 2010 notice issued in the 
Federal Register on June 2, 2010 (75 FR 31118). Prior to the enactment 
of the Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111-309) on 
December 15, 2010, the extension of the 508 provision was included in 
sections 3137(a) and 10317 of the Affordable Care Act (Pub. L. 111-
148). Section 3137 of the Affordable Care Act extended, through FY 
2010, section 508 reclassifications as well as certain special 
exceptions. The most recent extension of the provision was included in 
section 102 of the Medicare and Medicaid Extender Act, which extends, 
through FY 2011, section 508 reclassifications as well as certain 
special exceptions. The latest extension of these provisions expires on 
September 30, 2011, and will no longer be applicable effective with FY 
2012.
7. Waiving Lugar Redesignation for the Out-Migration Adjustment
    We have received several inquiries regarding the effect on a 
hospital's deemed urban status when a hospital waives its 
reclassification under section 1886(d)(8) of the Act in order to accept 
an out-migration adjustment to the wage index under section 1886(d)(13) 
of the Act. (We refer readers to a discussion of the out-migration 
adjustment under section III.I. of the preamble of this proposed rule.) 
In this proposed rule,

[[Page 25886]]

we are clarifying that Lugar hospitals will be required to waive their 
Lugar urban status in its entirety in order to receive the out-
migration adjustment. We believe this represents a permissible reading 
of the statute, as section 1886(d)(13)(G) of the Act states that a 
hospital with an out-migration adjustment is not ``eligible'' for a 
reclassification under subsection (8). Therefore, beginning with FY 
2012, we are proposing that an eligible hospital that waives its Lugar 
status in order to receive the out-migration adjustment has effectively 
waived its deemed urban status and, thus, is rural for all purposes 
under the IPPS, including being considered rural for the DSH payment 
adjustment, effective for the fiscal year in which the hospital 
receives the out-migration adjustment. (We refer readers to a 
discussion of DSH payment adjustment under section IV.G. of this 
preamble.)
    In addition, we are proposing to make a minor procedural change 
that would allow a Lugar hospital that qualifies for and accepts the 
out-migration adjustment (through written notification to CMS within 45 
days from the publication of the proposed rule) to automatically waive 
its urban status for the 3-year period for which its out-migration 
adjustment is effective. That is, such a Lugar hospital would no longer 
be required during the second and third years of eligibility for the 
out-migration adjustment to advise us annually that it prefers to 
continue being treated as rural and receive the adjustment. We are 
making this proposal in response to public comments we received on the 
FY 2011 IPPS/LTCH proposed rule that discussed the burden of this 
annual request (74 FR 43840). Thus, under the proposed procedural 
change, a Lugar hospital that requests to waive its urban status in 
order to receive the rural wage index in addition to the out-migration 
adjustment would be deemed to have accepted the out-migration 
adjustment and agrees to be treated as rural for the duration of its 3-
year eligibility period, unless prior to its second or third year of 
eligibility the hospital explicitly notifies CMS in writing, within 45 
days from the publication of the proposed rule, that it instead elects 
to return to its deemed urban status and no longer wishes to accept the 
out-migration adjustment.
8. Other Geographic Reclassification Issues
a. Requested Reclassification for Single Hospital MSAs
    Section 412.230 of the regulations sets forth criteria for an 
individual hospital to apply for geographic reclassification to a 
higher rural or urban wage index area. Specifically, under Sec.  
412.230(a)(3)(ii), an individual hospital may be redesignated from an 
urban area to another urban area, from a rural area to another rural 
area, or from a rural area to an urban area for the purpose of using 
the other area's wage index value. Such a hospital must also meet other 
criteria. One required criterion (under Sec.  412.230(d)(1)(iii)(C) of 
the regulations) is that the hospital must demonstrate that its own 
average hourly wage is higher than the average hourly wage of hospitals 
in the area in which the hospital is located (108 percent for urban 
hospitals and 106 percent for rural hospitals). In cases where a 
hospital wishing to reclassify is the only hospital in its MSA, that 
hospital is unable to satisfy this criterion because it cannot 
demonstrate that its average hourly wage is higher than that of the 
other hospitals in the area in which the hospital is located (because 
there are no other hospitals in the area). For hospitals in the 
category described above, our current policy provides an alternative 
that allows hospitals to seek reclassification using the group 
reclassification rules under Sec.  412.232 or Sec.  412.234. 
Specifically, if a hospital is the single hospital in its area for the 
3-year period over which the average hourly wage is calculated for the 
purpose of the comparison under Sec.  412.230(d)(1)(iii)(C), the 
hospital may apply for geographic reclassification as a single hospital 
county group in accordance with the procedures set forth at Sec.  
412.232 or Sec.  412.234. In addition to specifying the average hourly 
wage criteria, these regulations state that the county in which the 
hospital is located must be adjacent to the urban area to which it 
seeks redesignation. In addition, a certain level of economic 
integration needs to exist between the two areas. For example, for 
urban county group reclassifications (for FY 2008 and subsequent 
periods), Sec.  412.234(a)(3)(iv) states that ``hospitals located in 
counties that are in the same Combined Statistical Area (CSA) or Core-
Based Statistical Area (CBSA) * * * as the urban area to which they 
seek redesignation qualify as meeting the proximity requirements for 
reclassification to the urban area to which they seek redesignation.''
    Recently, we have been advised of a single hospital MSA scenario of 
concern to a particular hospital. In this scenario, an urban hospital 
located in an area in which there was only one other hospital had 
previously applied for and was granted a reclassification by the MGCRB 
to an adjacent urban area with a higher wage index. During the 3-year 
reclassification timeframe, the other hospital in its labor market area 
closed. After the expiration of its reclassification, the hospital 
became ineligible for reclassification to that same adjacent urban area 
with a higher wage index because it was no longer able to satisfy the 
wage data comparison criteria to reclassify individually under Sec.  
412.230(d)(1)(iii)(C). In addition, the hospital could not apply for 
redesignation under the urban county group regulation at Sec.  412.234 
because the hospital was not located in the same CSA or CBSA as the 
urban area to which it sought reclassification. In this example, the 
concern that was shared with CMS was that the hospital was 
competitively disadvantaged in competing for labor with neighboring 
hospitals where the hospital had a comparable average hourly wage, 
compared to the other hospitals in its surrounding area, because it 
receives a lower wage index.
    We believe that the geographic reclassification regulations should 
not be revised to accommodate this situation. We have repeatedly 
rejected special rules to accommodate single hospital MSAs (69 FR 
48915, 49109; 71 FR 47869, 48071 and 48072). In these explanations, we 
have highlighted the fact that hospitals in single hospital MSAs not 
only may be eligible for out-commuting adjustments, but that they also 
may apply to an adjacent MSA within the same CSA using the group 
reclassification rules without meeting the 108-percent test. Each year, 
we propose to adopt the OMB's statistical area definitions (75 FR 
50162), so if a hospital in a single hospital MSA cannot meet group 
reclassification criteria because of the CSA standard, it means that 
OMB has determined that there is not a sufficient degree of employment 
interchange to suggest that the areas compete for the same labor. In 
addition, when we originally adopted the 108-percent test, we noted 
that ``with respect to single hospital MSAs, a hospital in such an MSA 
receives a wage index value that is based entirely on its own wage data 
and, therefore, its actual wage levels. Since such a hospital is 
clearly not disadvantaged by its inclusion in a labor market area where 
its wage index is determined based on

[[Page 25887]]

its own wage levels, it is appropriate under this guideline that a 
hospital should not be reclassified if it is the only one in its 
area.'' (57 FR 39746) Allowing a hospital representing 100 percent of 
its area's wages to be exempt from the wage data comparison test could 
undermine the 108-percent test for hospitals in other circumstances 
where the standard cannot be met. Finally, we note that section 3137(c) 
of the Affordable Care Act prohibits us from altering average hourly 
wage comparison criteria for FY 2012. That provision states that 
``notwithstanding any other provision of law,'' the MGCRB is required 
to use the ``average hourly wage comparison criteria used in making 
such decisions as of September 30, 2008,'' until the first fiscal year 
beginning on the date that is one year after the Secretary submits a 
report to Congress.
    We are soliciting public comments on this issue. In particular, we 
invite comments on the types of regulatory solutions that could be made 
available to a hospital in this type of situation.
b. Requests for Exceptions to Geographic Reclassification Rules
    Over the last several years, CMS has received numerous requests for 
exceptions to current Medicare law and regulation regarding geographic 
reclassification or requests to revise the existing regulations in 
order to allow a hospital or group of hospitals the ability to 
reclassify to a labor market area with a higher wage index. Section 
3137(b) of the Affordable Care Act requires the Secretary to submit a 
report to Congress that includes a ``plan to reform the hospital wage 
index.'' This report to Congress is due by December 31, 2011. As part 
of our efforts in this regard, we are soliciting public comments, to be 
considered only as part of our report to Congress and not to be 
addressed in the FY 2012 IPPS/LTCH PPS final rule, on ways to redefine 
the geographic reclassification requirements to more accurately define 
labor markets.

I. Proposed FY 2012 Wage Index Adjustment Based on Commuting Patterns 
of Hospital Employees

    In accordance with the broad discretion granted to the Secretary 
under section 1886(d)(13) of the Act, as added by section 505 of Public 
Law 108-173, beginning with FY 2005, we established a process to make 
adjustments to the hospital wage index based on commuting patterns of 
hospital employees (the ``out-migration'' adjustment). The process, 
outlined in the FY 2005 IPPS final rule (69 FR 49061), provides for an 
increase in the wage index for hospitals located in certain counties 
that have a relatively high percentage of hospital employees who reside 
in the county but work in a different county (or counties) with a 
higher wage index. Such adjustments to the wage index are effective for 
3 years, unless a hospital requests to waive the application of the 
adjustment. A county will not lose its status as a qualifying county 
due to hospital wage index changes during the 3-year period, and 
counties will receive the same wage index increase for those 3 years. 
However, a county that qualifies in any given year may not necessarily 
qualify after the 3-year period, or it may qualify but receive a 
different adjustment to the wage index level. Hospitals that receive 
this adjustment to their wage index are not eligible for 
reclassification under section 1886(d)(8) or section 1886(d)(10) of the 
Act. Adjustments under this provision are not subject to the budget 
neutrality requirements under section 1886(d)(3)(E) of the Act.
    Hospitals located in counties that qualify for the wage index 
adjustment are to receive an increase in the wage index that is equal 
to the average of the differences between the wage indices of the labor 
market area(s) with higher wage indices and the wage index of the 
resident county, weighted by the overall percentage of hospital workers 
residing in the qualifying county who are employed in any labor market 
area with a higher wage index. Beginning with the FY 2008 wage index, 
we use post-reclassified wage indices when determining the out-
migration adjustment (72 FR 47339).
    For the proposed FY 2012 wage index, we are proposing to calculate 
the out-migration adjustment using the same formula described in the FY 
2005 IPPS final rule (69 FR 49064), with the addition of using the 
post-reclassified wage indices, to calculate the out-migration 
adjustment. This adjustment is calculated as follows:
    Step 1--Subtract the wage index for the qualifying county from the 
wage index of each of the higher wage area(s) to which hospital workers 
commute.
    Step 2--Divide the number of hospital employees residing in the 
qualifying county who are employed in such higher wage index area by 
the total number of hospital employees residing in the qualifying 
county who are employed in any higher wage index area. For each of the 
higher wage index areas, multiply this result by the result obtained in 
Step 1.
    Step 3--Sum the products resulting from Step 2 (if the qualifying 
county has workers commuting to more than one higher wage index area).
    Step 4--Multiply the result from Step 3 by the percentage of 
hospital employees who are residing in the qualifying county and who 
are employed in any higher wage index area.
    These adjustments will be effective for each county for a period of 
3 fiscal years. For example, hospitals that received the adjustment for 
the first time in FY 2011 will be eligible to retain the adjustment for 
FY 2012. For hospitals in newly qualified counties, adjustments to the 
wage index are effective for 3 years, beginning with discharges 
occurring on or after October 1, 2011.
    Hospitals receiving the wage index adjustment under section 
1886(d)(13)(F) of the Act are not eligible for reclassification under 
sections 1886(d)(8) or (d)(10) of the Act unless they waive the out-
migration adjustment. Consistent with our FYs 2005 through 2011 IPPS 
final rules, we are specifying that hospitals redesignated under 
section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) 
of the Act are deemed to have chosen to retain their redesignation or 
reclassification. Hospitals that reclassified under section 1886(d)(10) 
of the Act that wish to receive the out-migration adjustment, rather 
than their reclassification adjustment, are instructed to follow the 
termination/withdrawal procedures specified in 42 CFR 412.273 and 
section III.H.3. of the preamble of this proposed rule. Otherwise, they 
will be deemed to have waived the out-migration adjustment. Hospitals 
redesignated under section 1886(d)(8)(B) of the Act will be deemed to 
have waived the out-migration adjustment unless they explicitly notify 
CMS within 45 days from the publication of this proposed rule that they 
elect to receive the out-migration adjustment instead. These 
notifications should be sent to the following address: Centers for 
Medicare and Medicaid Services, Center for Medicare, Attention: Wage 
Index Adjustment Waivers, Division of Acute Care, Room C4-08-06, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    Table 4J, which is listed in section VI. of the Addendum to this 
proposed rule and available via the Internet, lists the proposed out-
migration wage index adjustments for FY 2012. Hospitals that are not 
otherwise reclassified or redesignated under section 1886(d)(8) or 
section 1886(d)(10) of the Act will automatically receive the listed 
adjustment. In accordance with the procedures discussed above, 
redesignated/reclassified hospitals will be deemed to have waived the 
out-

[[Page 25888]]

migration adjustment unless CMS is otherwise notified within the 
timeframe stated above. In addition, hospitals eligible to receive the 
out-migration wage index adjustment and that withdraw their application 
for reclassification will automatically receive the wage index 
adjustment listed in Table 4J, which is listed in section VI. of the 
Addendum to this proposed rule and available via the Internet.

J. Process for Requests for Wage Index Data Corrections

    The preliminary, unaudited Worksheet S-3 wage data and occupational 
mix survey data files for the proposed FY 2012 wage index were made 
available on October 4 2010, through the Internet on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    In the interest of meeting the data needs of the public, beginning 
with the proposed FY 2009 wage index, we post an additional public use 
file on our Web site that reflects the actual data that are used in 
computing the proposed wage index. The release of this new file does 
not alter the current wage index process or schedule. We notified the 
hospital community of the availability of these data as we do with the 
current public use wage data files through our Hospital Open Door 
forum. We encouraged hospitals to sign up for automatic notifications 
of information about hospital issues and the scheduling of the Hospital 
Open Door forums at: http://www.cms.hhs.gov/OpenDoorForums/.
    In a memorandum dated October 13, 2010, we instructed all fiscal 
intermediaries/MACs to inform the IPPS hospitals they service of the 
availability of the wage index data files and the process and timeframe 
for requesting revisions (including the specific deadlines listed 
below). We also instructed the fiscal intermediaries/MACs to advise 
hospitals that these data were also made available directly through 
their representative hospital organizations.
    If a hospital wished to request a change to its data as shown in 
the October 4, 2010 wage and occupational mix data files, the hospital 
was to submit corrections along with complete, detailed supporting 
documentation to its fiscal intermediary/MAC by December 6, 2010. 
Hospitals were notified of this deadline and of all other deadlines and 
requirements, including the requirement to review and verify their data 
as posted on the preliminary wage index data files on the Internet, 
through the October 13, 2010 memorandum referenced above.
    In the October 13, 2010 memorandum, we also specified that a 
hospital requesting revisions to its occupational mix survey data was 
to copy its record(s) from the CY 2007-2008 occupational mix 
preliminary files posted to our Web site in October, highlight the 
revised cells on its spreadsheet, and submit its spreadsheet(s) and 
complete documentation to its fiscal intermediary/MAC no later than 
December 6, 2010.
    The fiscal intermediaries/MACs notified the hospitals by mid-
February 2011 of any changes to the wage index data as a result of the 
desk reviews and the resolution of the hospitals' early-December 
revision requests. The fiscal intermediaries/MACs also submitted the 
revised data to CMS by mid-February 2011. CMS published the proposed 
wage index public use files that included hospitals' revised wage index 
data on February 22, 2011. Hospitals had until March 7, 2011, to submit 
requests to the fiscal intermediaries/MACs for reconsideration of 
adjustments made by the fiscal intermediaries/MACs as a result of the 
desk review, and to correct errors due to CMS's or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the wage 
index data. Hospitals also were required to submit sufficient 
documentation to support their requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries/MACs are required to transmit any additional revisions 
resulting from the hospitals' reconsideration requests by April 13, 
2011. The deadline for a hospital to request CMS intervention in cases 
where the hospital disagrees with the fiscal intermediary's (or, if 
applicable, the MAC's) policy interpretations is April 20, 2011.
    Hospitals should examine Table 2, which is listed in section VI. of 
the Addendum to this proposed rule and available via the Internet. 
Table 2 contains each hospital's adjusted average hourly wage used to 
construct the wage index values for the past 3 years, including the FY 
2008 data used to construct the proposed FY 2012 wage index. We note 
that the hospital average hourly wages shown in Table 2 only reflect 
changes made to a hospital's data and transmitted to CMS by March 2011.
    We will release the final wage index data public use files in early 
May 2011 on the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp. The May 2011 public use files are made available solely 
for the limited purpose of identifying any potential errors made by CMS 
or the fiscal intermediary/MAC in the entry of the final wage index 
data that resulted from the correction process described above 
(revisions submitted to CMS by the fiscal intermediaries/MACs by April 
13, 2011). If, after reviewing the May 2011 final files, a hospital 
believes that its wage or occupational mix data are incorrect due to a 
fiscal intermediary/MAC or CMS error in the entry or tabulation of the 
final data, the hospital should send a letter to both its fiscal 
intermediary/MAC and CMS that outlines why the hospital believes an 
error exists and provide all supporting information, including relevant 
dates (for example, when it first became aware of the error). CMS and 
the fiscal intermediaries (or, if applicable, the MACs) must receive 
these requests no later than June 6, 2011.
    Each request also must be sent to the fiscal intermediary/MAC. The 
fiscal intermediary/MAC will review requests upon receipt and contact 
CMS immediately to discuss any findings.
    At this point in the process, that is, after the release of the May 
2011 wage index data files, changes to the wage and occupational mix 
data will only be made in those very limited situations involving an 
error by the fiscal intermediary/MAC or CMS that the hospital could not 
have known about before its review of the final wage index data files. 
Specifically, neither the fiscal intermediary/MAC nor CMS will approve 
the following types of requests:
     Requests for wage index data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries or the MACs on or before April 13, 2011.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the February 22, 
2011 wage index public use files.
     Requests to revisit factual determinations or policy 
interpretations made by the fiscal intermediary or the MAC or CMS 
during the wage index data correction process.
    Verified corrections to the wage index data received timely by CMS 
and the fiscal intermediaries or the MACs (that is, by June 6, 2011) 
will be incorporated into the final wage index in the FY 2012 IPPS/LTCH 
PPS final rule, which will be effective October 1, 2011.
    We created the processes described above to resolve all substantive 
wage index data correction disputes before we finalize the wage and 
occupational mix data for the FY 2012 payment rates. Accordingly, 
hospitals that do not meet

[[Page 25889]]

the procedural deadlines set forth above will not be afforded a later 
opportunity to submit wage index data corrections or to dispute the 
fiscal intermediary's (or, if applicable, the MAC's) decision with 
respect to requested changes. Specifically, our policy is that 
hospitals that do not meet the procedural deadlines set forth above 
will not be permitted to challenge later, before the Provider 
Reimbursement Review Board, the failure of CMS to make a requested data 
revision. (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV-
75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. Thompson, 
No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 2000 IPPS 
final rule (64 FR 41513) for a discussion of the parameters for 
appealing to the PRRB for wage index data corrections.
    Again, we believe the wage index data correction process described 
above provides hospitals with sufficient opportunity to bring errors in 
their wage and occupational mix data to the fiscal intermediary's (or, 
if applicable, the MAC's) attention. Moreover, because hospitals have 
access to the final wage index data by early May 2011, they have the 
opportunity to detect any data entry or tabulation errors made by the 
fiscal intermediary or the MAC or CMS before the development and 
publication of the final FY 2012 wage index by August 2011, and the 
implementation of the FY 2012 wage index on October 1, 2011. If 
hospitals avail themselves of the opportunities afforded to provide and 
make corrections to the wage and occupational mix data, the wage index 
implemented on October 1 should be accurate. Nevertheless, in the event 
that errors are identified by hospitals and brought to our attention 
after June 6, 2011, we retain the right to make midyear changes to the 
wage index under very limited circumstances.
    Specifically, in accordance with 42 CFR 412.64(k)(1) of our 
existing regulations, we make midyear corrections to the wage index for 
an area only if a hospital can show that: (1) The fiscal intermediary 
or the MAC or CMS made an error in tabulating its data; and (2) the 
requesting hospital could not have known about the error or did not 
have an opportunity to correct the error, before the beginning of the 
fiscal year. For purposes of this provision, ``before the beginning of 
the fiscal year'' means by the June 6 deadline for making corrections 
to the wage data for the following fiscal year's wage index. This 
provision is not available to a hospital seeking to revise another 
hospital's data that may be affecting the requesting hospital's wage 
index for the labor market area. As indicated earlier, because CMS 
makes the wage index data available to hospitals on the CMS Web site 
prior to publishing both the proposed and final IPPS rules, and the 
fiscal intermediaries or the MACs notify hospitals directly of any wage 
index data changes after completing their desk reviews, we do not 
expect that midyear corrections will be necessary. However, under our 
current policy, if the correction of a data error changes the wage 
index value for an area, the revised wage index value will be effective 
prospectively from the date the correction is made.
    In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 
412.64(k)(2) to specify that, effective on October 1, 2005, that is, 
beginning with the FY 2006 wage index, a change to the wage index can 
be made retroactive to the beginning of the Federal fiscal year only 
when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS 
made an error in tabulating data used for the wage index calculation; 
(2) the hospital knew about the error and requested that the fiscal 
intermediary (or, if applicable, the MAC) and CMS correct the error 
using the established process and within the established schedule for 
requesting corrections to the wage index data, before the beginning of 
the fiscal year for the applicable IPPS update (that is, by the June 6, 
2011 deadline for the FY 2012 wage index); and (3) CMS agreed that the 
fiscal intermediary (or, if applicable, the MAC) or CMS made an error 
in tabulating the hospital's wage index data and the wage index should 
be corrected.
    In those circumstances where a hospital requested a correction to 
its wage index data before CMS calculated the final wage index (that 
is, by the June 6, 2011 deadline), and CMS acknowledges that the error 
in the hospital's wage index data was caused by CMS' or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the data, 
we believe that the hospital should not be penalized by our delay in 
publishing or implementing the correction. As with our current policy, 
we indicated that the provision is not available to a hospital seeking 
to revise another hospital's data. In addition, the provision cannot be 
used to correct prior years' wage index data; and it can only be used 
for the current Federal fiscal year. In other situations where our 
policies would allow midyear corrections, we continue to believe that 
it is appropriate to make prospective-only corrections to the wage 
index.
    We note that, as with prospective changes to the wage index, the 
final retroactive correction will be made irrespective of whether the 
change increases or decreases a hospital's payment rate. In addition, 
we note that the policy of retroactive adjustment will still apply in 
those instances where a judicial decision reverses a CMS denial of a 
hospital's wage index data revision request.

K. Labor-Related Share for the Proposed FY 2012 Wage Index

    Section 1886(d)(3)(E) of the Act directs the Secretary to adjust 
the proportion of the national prospective payment system base payment 
rates that are attributable to wages and wage-related costs by a factor 
that reflects the relative differences in labor costs among geographic 
areas. It also directs the Secretary to estimate from time to time the 
proportion of hospital costs that are labor-related: ``The Secretary 
shall adjust the proportion (as estimated by the Secretary from time to 
time) of hospitals' costs which are attributable to wages and wage-
related costs of the DRG prospective payment rates * * *'' We refer to 
the portion of hospital costs attributable to wages and wage-related 
costs as the labor-related share. The labor-related share of the 
prospective payment rate is adjusted by an index of relative labor 
costs, which is referred to as the wage index.
    Section 403 of Public Law 108-173 amended section 1886(d)(3)(E) of 
the Act to provide that the Secretary must employ 62 percent as the 
labor-related share unless this ``would result in lower payments to a 
hospital than would otherwise be made.'' However, this provision of 
Public Law 108-173 did not change the legal requirement that the 
Secretary estimate ``from time to time'' the proportion of hospitals' 
costs that are ``attributable to wages and wage-related costs.'' We 
believe that this reflected Congressional intent that hospitals receive 
payment based on either a 62-percent labor-related share, or the labor-
related share estimated from time to time by the Secretary, depending 
on which labor-related share resulted in a higher payment.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43850 
through 43856), we rebased and revised the hospital market basket for 
operating costs. We established a FY-2006-based IPPS hospital market 
basket to replace the FY as 2002-based IPPS hospital market basket, 
effective October 1, 2009. In that final rule, we presented our 
analysis and conclusions regarding the frequency and methodology for 
updating the labor-related share for FY as 2010. We also recalculated a 
labor-related share of 68.8 percent, using the FY 2006-based IPPS 
market basket, for

[[Page 25890]]

discharges occurring on or after October 1, 2009. In addition, we 
implemented this revised and rebased labor-related share in a budget 
neutral manner, but consistent with section 1886(d)(3)(E) of the Act, 
we did not take into account the additional payments that would be made 
as a result of hospitals with a wage index less than or equal to 1.0 
being paid using a labor-related share lower than the labor-related 
share of hospitals with a wage index greater than 1.0.
    The labor-related share is used to determine the proportion of the 
national IPPS base payment rate to which the area wage index is 
applied. In this proposed rule, we are not proposing to make any 
further changes to the national average proportion of operating costs 
that are attributable to wages and salaries, fringe benefits, contract 
labor, the labor-related portion of professional fees, administrative 
and business support services, and all other labor-related services 
(previously referred to in the FY 2002-based IPPS market basket as 
labor-intensive).
    Therefore, for FY 2012, we are proposing to continue to use a 
labor-related share of 68.8 percent for discharges occurring on or 
after October 1, 2011. Tables 1A and 1B, which are published in section 
VI. of the Addendum to this proposed rule and available via the 
Internet, reflect this labor-related share. We note that section 403 of 
Public Law 108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) 
of the Act to provide that the Secretary must employ 62 percent as the 
labor-related share unless this employment ``would result in lower 
payments to a hospital than would otherwise be made.'' Therefore, for 
all IPPS hospitals whose wage indices are less than 1.0000, we are 
proposing to apply the wage index to a labor-related share of 62 
percent of the national standardized amount. For all IPPS hospitals 
whose wage indices are greater than 1.0000, we are proposing to apply 
the wage index to a labor-related share of 68.8 percent of the national 
standardized amount.
    For Puerto Rico hospitals, the national labor-related share will 
always be 62 percent because the national wage index for all Puerto 
Rico hospitals is less than 1.0. In this proposed rule, we are 
proposing to continue to use a labor-related share for the Puerto Rico-
specific standardized amounts of 62.1 percent for discharges occurring 
on or after October 1, 2011. This Puerto Rico labor-related share of 
62.1 percent was also adopted in the FY 2010 IPPS/LTCH PPS final rule 
(74 FR 43857) at the time the FY 2006-based hospital market basket was 
established, effective October 1, 2009. Consistent with our methodology 
for determining the national labor-related share, we added the Puerto 
Rico-specific relative weights for wages and salaries, fringe benefits, 
contract labor, the labor-related portion of professional fees, 
administrative and business support services, and all other labor-
related services (previously referred to in the FY 2002-based IPPS 
market basket as labor-intensive) to determine the labor-related share. 
Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amounts and 25 percent of the Puerto Rico-specific 
standardized amounts. The labor-related share of a hospital's Puerto 
Rico-specific rate will be either the Puerto Rico-specific labor-
related share of 62.1 percent or 62 percent, depending on which results 
in higher payments to the hospital. If the hospital has a Puerto Rico-
specific wage index of greater than 1.0, we will set the hospital's 
rates using a labor-related share of 62.1 percent for the 25 percent 
portion of the hospital's payment determined by the Puerto Rico 
standardized amounts because this amount will result in higher 
payments. Conversely, a hospital with a Puerto Rico-specific wage index 
of less than 1.0 will be paid using the Puerto Rico-specific labor-
related share of 62 percent of the Puerto Rico-specific rates because 
the lower labor-related share will result in higher payments. The 
Puerto Rico labor-related share of 62.1 percent for FY 2012 is 
reflected in Table 1C, which is published in section VI. of the 
Addendum to this proposed rule and available via the Internet.

IV. Other Proposed Decisions and Changes to the IPPS for Operating 
Costs and GME Costs

A. Hospital Inpatient Quality Reporting (IQR) Program

1. Background
a. Overview
    CMS is seeking to promote higher quality and more efficient health 
care for Medicare beneficiaries. This effort is supported by the 
adoption of an increasing number of widely-agreed upon quality 
measures. CMS has worked with relevant stakeholders to define measures 
of quality in almost every setting and measures various aspects of care 
for almost all Medicare beneficiaries. These measures assess structural 
aspects of care, clinical processes, patient experiences with care, 
and, increasingly, outcomes.
    CMS has implemented quality measure reporting programs for multiple 
settings of care. To measure the quality of hospital inpatient 
services, CMS implemented the Hospital Inpatient Quality Reporting 
(IQR) Program (formerly referred to as the Reporting Hospital Quality 
Data for Annual Payment Update (RHQDAPU) Program). In addition, CMS has 
implemented quality reporting programs for hospital outpatient 
services, the Hospital Outpatient Quality Data Reporting Program (HOP 
QDRP), and for physicians and other eligible professionals, the 
Physician Quality Reporting System (formerly referred to as the 
Physician Quality Reporting Program Initiative (PQRI)). CMS has also 
implemented quality reporting programs for home health agencies and 
skilled nursing facilities that are based on conditions of 
participation, and an end-stage renal disease quality incentive program 
that links payment to performance.
    In implementing the Hospital IQR Program and other quality 
reporting programs, we have focused on measures that have high impact 
and support CMS and HHS priorities for improved quality and efficiency 
of care for Medicare beneficiaries. Our goal for the future is to align 
the clinical quality measure requirements of the Hospital IQR Program 
with various other programs, including those authorized by the Health 
Information Technology for Economic and Clinical Health (HITECH) Act so 
that the burden for reporting will be reduced.
    We also are proposing to implement a Hospital Value-Based 
Purchasing (VBP) Program under section 1886(o) of the Act. On January 
7, 2011, we issued a proposed rule to implement the Hospital VBP 
Program under section 1886(o) of the Act (76 FR 2454 through 2491) (the 
Hospital Inpatient VBP Program proposed rule). We are proposing 
additional policies for the Hospital VBP Program in section IV.B. of 
this proposed rule. In the Hospital Inpatient VBP Program proposed rule 
(76 FR 2454 through 2491), we proposed that hospitals would receive 
value-based incentive payments if they meet performance standards with 
respect to measures for a performance period for the fiscal year 
involved. The measures under the Hospital VBP Program must be selected 
from the measures specified under the Hospital IQR Program. The 
Hospital VBP Program will apply to payments for discharges occurring on 
or after October 1, 2012, in accordance with section 1886(o) of the 
Act.
    The Hospital IQR Program is intertwined with the Hospital VBP 
Program because the measures and reporting infrastructure for both 
programs will overlap. We view the

[[Page 25891]]

Hospital VBP Program as the next step in promoting higher quality care 
for Medicare beneficiaries by transforming Medicare into an active 
purchaser of quality health care for its beneficiaries. As we stated in 
the Hospital Inpatient VBP Program proposed rule (76 FR 2455), in 
developing that proposed rule as well as other value-based payment 
initiatives, we applied the following principles for the development 
and use of measures and scoring methodologies:
    Purpose:
     We view value-based purchasing as an important step to 
revamping how care and services are paid for, moving increasingly 
toward rewarding better value, outcomes, and innovations instead of 
merely volume.
    Use of Measures:
     Public reporting and value-based payment systems should 
rely on a mix of standards, process, outcomes, and patient experience 
of care measures, including measures of care transitions and changes in 
patient functional status. Across all programs, we seek to move as 
quickly as possible to the use of primarily outcome and patient 
experience measures. To the extent practicable and appropriate, outcome 
and patient experience measures should be adjusted for risk or other 
appropriate patient population or provider characteristics.
     To the extent possible and recognizing differences in 
payment system maturity and statutory authorities, measures should be 
aligned across public reporting and payment systems under Medicare and 
Medicaid. The measure sets should evolve so that they include a focused 
core set of measures appropriate to the specific provider category that 
reflects the level of care and the most important areas of service and 
measures for that provider.
     The collection of information should minimize the burden 
on providers to the extent possible. As part of that effort, we will 
continuously seek to align our measures with the adoption of meaningful 
use standards for health information technology (HIT), so the 
collection of performance information is part of care delivery.
     To the extent practicable, measures used by CMS should be 
nationally endorsed by a multi-stakeholder organization. Measures 
should be aligned with best practices among other payers and the needs 
of the end users of the measures.
    We invite public comment on these principles.
b. Statutory History and History of Measures Adopted for the Hospital 
IQR Program
    We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule 
(74 FR 43860) and the FY 2011 IPPS/LTCH PPS final rule (75 FR 50180) 
for detailed discussions of the history of the Hospital IQR Program, 
including the statutory history and the measures we have adopted for 
the Hospital IQR measure set through FY 2014.
    Section 1886(b)(3)(B)(viii)(V) of the Act requires that, effective 
for payments beginning with FY 2008, the Secretary to add quality 
measures that reflect consensus among affected parties, and to the 
extent feasible and practicable, have been set forth by one or more 
national consensus building entities. We are seeking comments on an 
option that would allow us from time to time to consider a range of 
consensus endorsement entities or bodies that can assist us with our 
measure development process. We believe that this approach would 
provide for a diverse endorsement process and the best body of evidence 
to support quality measures used in our quality programs.
c. Maintenance of Technical Specifications for Quality Measures
    The technical specifications for the Hospital IQR Program measures, 
or links to Web sites hosting technical specifications, are contained 
in the CMS/The Joint Commission Specifications Manual for National 
Hospital Inpatient Quality Measures (Specifications Manual). This 
Specifications Manual is posted on the CMS QualityNet Web site at 
https://www.QualityNet.org. We maintain the technical specifications by 
updating this Specifications Manual semiannually, or more frequently in 
unusual cases, and include detailed instructions and calculation 
algorithms for hospitals to use when collecting and submitting data on 
required measures. These semiannual updates are accompanied by 
notifications to users, providing sufficient time between the change 
and the effective date in order to allow users to incorporate changes 
and updates to the specifications into data collection systems.
    The technical specifications for the HCAHPS patient experience of 
care survey are contained in the current HCAHPS Quality Assurance 
Guidelines manual, which is available at the HCAHPS On-Line Web site, 
http://www.hcahpsonline.org. We maintain the HCAHPS technical 
specifications by updating the HCAHPS Quality Assurance Guidelines 
manual annually, and include detailed instructions on survey 
implementation, data collection, data submission and other relevant 
topics. As necessary, HCAHPS Bulletins are issued to provide notice of 
changes and updates to technical specifications in HCAHPS data 
collection systems.
d. Public Display of Quality Measures
    Section 1886(b)(3)(B)(viii)(VII) of the Act, as amended by section 
3001(a)(2) of the Affordable Care Act, requires that the Secretary 
establish procedures for making information regarding measures 
submitted available to the public after ensuring that a hospital has 
the opportunity to review its data before they are made public. We are 
proposing to display information regarding the measures (such as names 
of measures for which data will be displayed in the future) on the 
Hospital Compare Web site under this provision, and invite public 
comment on this proposal. We will continue our current practice of 
reporting data from the Hospital IQR Program as soon as it is feasible 
on CMS Web sites such as the Hospital Compare Web site, http://www.hospitalcompare.hhs.gov after a 30-day preview period.
    The Hospital Compare Web site is an interactive Web tool that 
assists beneficiaries by providing information on hospital quality of 
care to those who need to select a hospital. It further serves to 
encourage beneficiaries to work with their doctors and hospitals to 
discuss the quality of care hospitals provide to patients, thereby 
providing an additional incentive to hospitals to improve the quality 
of care that they furnish. The Hospital IQR Program currently includes 
process of care measures, risk-adjusted outcome measures, the HCAHPS 
patient experience-of-care survey, and structural measures, all of 
which are featured on the Hospital Compare Web site.
    However, information that may not be relevant to or easily 
understood by beneficiaries and information for which there are 
unresolved display issues or design considerations for inclusion on 
Hospital Compare may be made available on other CMS Web sites that are 
not intended to be used as an interactive Web tool, such as http://www.cms.hhs.gov/HospitalQualityInits/. Publicly reporting the 
information in this manner, though not on the Hospital Compare Web 
site, allows CMS to meet the requirement under section 
1886(b)(3)(B)(viii)(VII) of the Act for establishing procedures to make 
information regarding measures submitted under the Hospital IQR Program 
available to the public

[[Page 25892]]

following a preview period. In such circumstances, affected parties are 
notified via CMS listservs, CMS e-mail blasts, national provider calls, 
and QualityNet announcements regarding the release of preview reports 
followed by the posting of data on a Web site other than Hospital 
Compare.
2. Retirement of Hospital IQR Program Measures
a. Considerations in Retiring Quality Measures From the Hospital IQR 
Program
    We generally retain measures from the previous year's Hospital IQR 
Program measure set for subsequent years' measure sets. We previously 
retired one ``topped out'' measure, PN-1: Oxygenation Assessment for 
Pneumonia, from the Hospital IQR Program on the basis of high unvarying 
performance among hospitals, because measures with very high 
performance among hospitals present little opportunity for improvement, 
and do not provide meaningful distinctions in performance for 
consumers.
    We also have retired one measure from the Hospital IQR Program 
because it no longer ``represent[ed] the best clinical practice,'' as 
required under section 1886(b)(3)(B)(viii)(VI) of the Act. We stated 
that when there is reason to believe that the continued collection of a 
measure as it is currently specified raises potential patient safety 
concerns, we believe that it is appropriate for CMS to take immediate 
action to remove a measure from the Hospital IQR Program and not wait 
for the annual rulemaking cycle. Therefore, we adopted the policy (74 
FR 43864 and 43865) that we would promptly retire such a measure, 
confirm the retirement in the next IPPS rulemaking cycle, and notify 
hospitals and the public of the decision to promptly retire measures 
through the usual hospital and QIO communication channels used for the 
Hospital IQR Program. These channels include memos and e-mail 
notification and QualityNet Web site articles and postings.
    As we stated in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50185), 
among the criteria that we consider when determining whether to retire 
Hospital IQR Program measures are the following: (1) Measure 
performance among hospitals is so high and unvarying that meaningful 
distinctions and improvements in performance can no longer be made; (2) 
performance or improvement on a measure does not result in better 
patient outcomes; (3) a measure does not align with current clinical 
guidelines or practice; (4) the availability of a more broadly 
applicable (across settings, populations, or conditions) measure for 
the topic; (5) the availability of a measure that is more proximal in 
time to desired patient outcomes for the particular topic; (6) the 
availability of a measure that is more strongly associated with desired 
patient outcomes for the particular topic; (7) collection or public 
reporting of a measure leads to negative unintended consequences other 
than patient harm. These criteria were suggested by commenters during 
rulemaking, and we agreed that these criteria should be among those 
considered in evaluating Hospital IQR Program measures for retirement.
b. Proposed Retirement of Hospital IQR Program Measures for the FY 2014 
Payment Determination and Subsequent Years
    In order to reduce the reporting burden on hospitals, and in 
particular, the burden associated with reporting chart-abstracted 
measures, we have considered options to accommodate the expansion of 
the measure set through the retirement of additional Hospital IQR 
measures. Specifically, we have considered retiring one or more of the 
measures suggested by various commenters that were listed in the FY 
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43865). We noted in that 
final rule that commenters recommended for retirement 11 Hospital IQR 
Program chart-abstracted measures. Seven of these 11 measures were 
recommended by commenters for retirement based on their performance 
being uniformly high nationwide, with little variability among 
hospitals (topped-out measures). Based on our own analysis, we 
concluded that these measures are topped out and for this reason, we 
proposed not to include them in the FY 2013 Hospital VBP Program 
measure set (76 FR 2460). These measures are listed below:

 AMI-1 Aspirin at arrival
 AMI-3 ACEI/ARB for left ventricular systolic dysfunction
 AMI-4 Adult smoking cessation advice/counseling
 AMI-5 Beta-blocker prescribed at discharge
 HF-4 Adult smoking cessation advice/counseling
 PN-4 Adult smoking cessation advice/counseling
 SCIP INF-6 Appropriate Hair Removal

    The methodology we used to determine that these measures are topped 
out is detailed in the Hospital Inpatient VBP Program proposed rule (76 
FR 2460). We are proposing to retire these topped out measures from the 
Hospital IQR measure set. In addition, we proposed to not include an 
eighth measure in the FY 2013 Hospital VBP Program measure set because 
we believe that inclusion of this measure would result in the 
unintended consequence of inappropriate antibiotic use (76 FR 2462). 
This measure is PN-5c Timing of receipt of initial antibiotic following 
hospital arrival. We are also proposing to retire this measure from the 
Hospital IQR Program because of the potential for this negative 
unintended consequence.
    For these reasons, we are proposing to retire these eight measures 
from the Hospital IQR measure set for FY 2014 and subsequent years, and 
that hospitals would no longer be required to submit data on these 
measures starting with January 1, 2012 discharges. We invite public 
comment on this proposal.
3. Proposed Measures for the FY 2014 and FY 2015 Hospital IQR Payment 
Determinations
a. Considerations in Expanding and Updating Quality Measures Under the 
Hospital IQR Program
    In general, we seek to adopt measures for the Hospital IQR Program 
that promote better, safer, more efficient care. Our measure 
development and selection activities for the Hospital IQR Program take 
into account national priorities, such as those established by the 
National Priorities Partnership, HHS Strategic Plan, the National 
Strategy for Quality Improvement in Healthcare, as well as other widely 
accepted criteria established in medical literature. (We refer readers 
to the following Web sites regarding these priorities: http://www.nationalprioritiespartnership.org/(National Priorities 
Partnership); http://www.hhs.gov/secretary/about/priorities/priorities.html (HHS Strategic Plan); and http://www.healthcare.gov/center/reports/quality03212011a.html (National Strategy for Quality 
Improvement in Healthcare)). To the extent practicable, we have sought 
to adopt measures which have been endorsed by a national consensus 
organization, recommended by multi-stakeholder organizations, and 
developed with the input of providers, purchasers/payers and other 
stakeholders. Because measures for the Hospital VBP Program must be 
selected from the measures specified for the Hospital IQR Program, the 
measures to be selected for inclusion in the Hospital VBP Program also 
reflect these priorities. In addition, we believe it is important to 
expand the pool of measures to include measures that are directed 
toward improving patient

[[Page 25893]]

safety. This goal is supported by at least two Federal reports 
documenting that tens of thousands of patients do not receive safe care 
in the nation's hospitals.6 7
---------------------------------------------------------------------------

    \6\ OEI-06-09-00090, ``Adverse Events in Hospitals: National 
Incidence Among Medicare Beneficiaries.'' Department of Health and 
Human Services, Office of Inspector General, November 2010.
    \7\ 2009 National Healthcare Quality Report, pp. 107-122. 
``Patient Safety,'' Agency for Healthcare Research and Quality.
---------------------------------------------------------------------------

    Section 3001(a)(2) of the Affordable Care Act amended the Act by 
adding a new section 1886(b)(3)(B)(viii)(VIII) of the Act. This section 
states that, ``[e]ffective for payments beginning with fiscal year 
2013, with respect to quality measures for outcomes of care, the 
Secretary shall provide for such risk adjustment as the Secretary 
determines to be appropriate to maintain incentives for hospitals to 
treat patients with severe illnesses or conditions.'' Section 
3001(a)(2) of the Affordable Care Act also added new sections 
1886(b)(3)(B)(viii)(IX)(aa) and (bb) of the Act. These sections state 
that ``* * * effective for payments beginning with fiscal year 2013, 
each measure specified by the Secretary under this clause shall be 
endorsed by the entity with a contract under section 1890(a) [of the 
Act],'' and ``[i]n the case of a specified area or medical topic 
determined appropriate by the Secretary for which a feasible and 
practical has not been endorsed by the entity with a contract under 
section 1890(a) [of the Act], the Secretary may specify a measure that 
is not so endorsed as long as due consideration is given to measures 
that have been endorsed or adopted by a consensus organization 
identified by the Secretary.'' In the FY 2011 IPPS/LTCH PPS final rule, 
we established that all of the measures adopted in that rule for the FY 
2013 and FY 2014 payment determinations meet these standards (75 FR 
50200).
    We have previously acknowledged the data collection burden for 
hospitals participating in the Hospital IQR Program, and reiterated our 
desire to expand the Hospital IQR Program measure set while minimizing 
burden and seeking to provide alternative mechanisms for data 
submission (75 FR 50189). We also stated that in future expansions and 
updates to the Hospital IQR Program measure set, we would be taking 
into consideration several important goals. These goals include: (a) 
Expanding the types of measures beyond process of care measures to 
include an increased number of outcome measures, efficiency measures, 
and patients' experience-of-care measures; (b) expanding the scope of 
hospital services to which the measures apply; (c) considering the 
burden on hospitals in collecting chart-abstracted data; (d) 
harmonizing the measures used in the Hospital IQR Program with other 
CMS quality programs to align incentives and promote coordinated 
efforts to improve quality; (e) seeking to use measures based on 
alternative sources of data that do not require chart abstraction or 
that utilize data already being reported by many hospitals, such as 
data that hospitals report to clinical data registries, or all-payer 
claims databases; and, (f) weighing the relevance and utility of the 
measures compared to the burden on hospitals in submitting data under 
the Hospital IQR Program.
    Specifically, we give priority to measures that assess performance 
on: (a) Conditions that result in the greatest mortality and morbidity 
in the Medicare population; (b) conditions that are high volume and 
high cost for the Medicare program; and, (c) conditions for which wide 
cost and treatment variations have been reported, despite established 
clinical guidelines. We have used and continue to use these criteria to 
guide our decisions regarding what measures to add to the Hospital IQR 
Program measure set. In addition, in selecting measures, we seek to 
address the six quality aims of effective, safe, timely, efficient, 
patient-centered, and equitable healthcare. Current and long term 
priority topics include: Prevention and population health; safety; 
chronic conditions; high cost and high volume conditions; elimination 
of health disparities; healthcare-associated infections (HAIs) and 
other adverse healthcare outcomes; improved care coordination; improved 
efficiency; improved patient and family experience of care; effective 
management of acute and chronic episodes of care; reduced unwarranted 
geographic variation in quality and efficiency; and adoption and use of 
interoperable HIT.
    Hospital IQR Program measures were initially based solely on a 
hospital's submission of chart-abstracted quality measure data. 
However, in recent years we have adopted measures that do not require 
chart abstraction, including structural measures and claims-based 
measures that we can calculate using other data sources. This approach 
supports our goal of expanding the measures for the Hospital IQR 
Program while minimizing the burden on hospitals and, in particular, 
without significantly increasing the chart abstraction burden.
    In addition to structural measures and claims-based measures, we 
previously noted that registries are potential alternative sources of 
hospital data for the Hospital IQR Program. (A registry is a collection 
of clinical data for purposes of assessing clinical performance, 
quality of care, and opportunities for quality improvement.) We 
envisioned that instead of requiring hospitals to submit the same data 
to CMS that many hospitals are already submitting to registries, we 
would collect the data directly from the registries. This could enable 
the expansion of the Hospital IQR Program measure set without 
increasing the burden of data collection for those hospitals 
participating in the registries. We have previously adopted structural 
measures of registry participation, and we continue to evaluate the 
feasibility of leveraging registry-based data collection mechanisms for 
the Hospital IQR Program.
    We also stated our intention to explore mechanisms for data 
submission using electronic health records (EHRs) (73 FR 48614; 74 FR 
43866, 43892; and 75 FR 50189). Establishing such a system will require 
interoperability between EHRs and CMS data collection systems, 
additional infrastructure development on the part of hospitals and CMS, 
and the adoption of standards for capturing, formatting, and 
transmitting the data elements that make up the measures. However, once 
these activities are accomplished, the adoption of measures that rely 
on data obtained directly from EHRs will enable us to expand the 
Hospital IQR Program measure set with less cost and burden to 
hospitals. We believe that automatic collection and reporting of data 
through EHRs will greatly simplify and streamline reporting for various 
CMS quality reporting programs, and that at a future date, such as FY 
2015, hospitals will be able to switch solely to EHR-based reporting of 
data that are currently manually chart-abstracted and submitted to CMS 
for the Hospital IQR Program.
    We reiterate our commitment to pursue our goals to expand and 
update quality measures under the Hospital IQR Program and also to 
minimize burden. We note that in addition to the input we described 
above, we take into consideration the measures adopted by the Hospital 
Quality Alliance (HQA) as well as an array of input from the public. 
The HQA is a national public-private collaboration that is committed to 
making meaningful, relevant, and easily understood information about 
hospital performance accessible to the public and to informing and 
encouraging efforts to improve quality. We appreciate HQA's integral 
efforts to

[[Page 25894]]

improve hospital quality of care and its support of our public quality 
reporting programs.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50191 through 
502192), we finalized our proposal to adopt measures for the Hospital 
IQR Program for three consecutive payment determinations. The intent of 
this policy was to provide greater certainty for hospitals to plan to 
meet future reporting requirements and implement related quality 
improvement efforts. Aside from giving hospitals more advance notice in 
planning quality reporting, this 3-year approach also provides more 
time for us to prepare, organize and implement the infrastructure 
needed to collect data on the measures and make payment determinations. 
We indicated, however, that these preliminary measure sets could still 
be updated through the rulemaking process should we need to respond to 
agency and/or legislative changes.
    Finally, in section IV.A.5.a.(2) of the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50219 through 50220), we adopted a proposal to make 
Hospital IQR Program payment determinations beginning with FY 2013 
using one calendar year of data for chart-abstracted measures. We will 
use this approach, which synchronizes the quarters for which data on 
these measures must be submitted during each year with the quarters 
used to make payment determinations with respect to a fiscal year 
beginning with January 1, 2011 discharges. However, it will not affect 
our payment determinations until FY 2013.
    Section 1886(o)(2)(A) of the Act requires the Secretary to select 
measures, other than readmission measures, for the Hospital VBP Program 
from the measures specified under the Hospital IQR Program. Section 
1886(o)(2)(B)(i)(I) of the Act states that, for FY 2013, the selected 
measures must cover at least the following five specified conditions or 
procedures: Acute myocardial infarction (AMI), Heart failure (HF), 
Pneumonia (PN), Surgeries, as measured by the Surgical Care Improvement 
Project (SCIP), and Healthcare-associated infections (HAIs), as 
measured by the prevention metrics and targets established in the HHS 
Action Plan to Prevent Healthcare-Associated Infections (or any 
successor plan) of the Department of Health and Human Services. Section 
1886(o)(2)(B)(i)(II) of the Act provides that, for FY 2013, measures 
selected for the Hospital Inpatient Program must also be related to the 
Hospital Consumer Assessment of Healthcare Providers and Systems survey 
(HCAHPS).
    In selecting measures for the Hospital IQR Program, we are mindful 
of the conceptual framework of the Hospital VBP Program. We will focus 
on selecting measures that we believe will also meet the Hospital VBP 
Program measure inclusion criteria and advance the goals of the 
Hospital VBP Program by targeting hospitals' ability to improve patient 
care and patient outcomes.
    In addition, in order to support HHS priorities such as patient 
safety and reduction of HAIs and readmissions, and meet more of the 
widespread goals of the Affordable Care Act in terms of improving the 
quality of care provided to Medicare beneficiaries, we are proposing in 
this proposed rule to adopt measures for the FY 2014 and FY 2015 
Hospital IQR payment determinations. However, we note that the final 
measure sets to be used for these years' payment determinations could 
be changed via future rulemaking. This allows CMS the flexibility to 
accommodate changes in program needs and legislative changes. We invite 
public comment on these proposals.
b. Proposed Hospital IQR Program Measures for the FY 2014 Hospital IQR 
Payment Determination
(1) Proposed Retention of 52 Hospital IQR Program Measures Finalized in 
the FY 2011 IPPS/LTCH PPS Final Rule for the FY 2014 Payment 
Determination
    We previously finalized 60 measures for the FY 2014 Hospital IQR 
Program measure set. However, as we discussed above, we are proposing 
to retire 8 measures from the FY 2014 measure set. We are proposing to 
retain the remaining 52 the 60 quality measures finalized in the FY 
2011 IPPS/LTCH PPS final rule for the FY 2014 payment determination. We 
invite public comment on our proposal to retain 52 quality measures for 
the FY 2014 payment determination.
(2) Proposed Additional Hospital IQR Program Measures for the FY 2014 
Payment Determination
(A) Proposed CDC/NHSN-Based Healthcare-Associated Infection (HAI) 
Measures
    HAIs are among the leading causes of death in the U.S. The Centers 
for Disease Control (CDC) estimates that as many as 2 million 
infections are acquired each year in hospitals and result in 
approximately 90,000 deaths per year.\8\ It is estimated that more 
Americans die each year from HAIs than from auto accidents and 
homicides combined. HAIs not only put the patient at risk, but also 
increase the days of hospitalization required for patients and add 
considerable health care costs.
---------------------------------------------------------------------------

    \8\ McKibben L, Horan T. Guidance on public reporting of 
healthcare-associated infections: Recommendations of the Healthcare 
Infection Control Practices Advisory Committee. AJIC 2005; 33:217-26
---------------------------------------------------------------------------

    HAIs are largely preventable with widely publicized interventions 
such as better hygiene and advanced scientifically tested techniques 
for surgical patients. Therefore, the public reporting of HAIs has been 
of great interest to many health care consumers and advocacy 
organizations because it promotes awareness and permits health care 
consumers to choose the hospitals with lower HAI rates, as well as 
gives hospitals an incentive to improve infection control efforts. To 
maximize the efficiency and improve the coordination of HAI prevention 
efforts across the Department, HHS established in 2008 a senior-level 
Steering Committee for the Prevention of Healthcare-Associated 
Infections. In 2009, the Steering Committee, along with scientists and 
program officials across the government, developed the HHS Action Plan 
to Prevent Healthcare-Associated Infections, providing a roadmap for 
HAI prevention in acute care hospitals. In the first iteration of the 
Action Plan, the Steering Committee chose to focus on infections in 
acute care hospitals because the associated morbidity and mortality was 
most severe in that setting and the scientific information on 
prevention and the capacity to measure improvement was most complete. 
Thus, prevention of HAIs in acute care hospitals became the first phase 
of the Action Plan and it focuses on six high priority HAI-related 
areas.
    In addition, the Steering Committee included in the Action Plan 
five-year goals for nine specific measures of improvement tied to the 
six HAI prevention priority areas. Since the release of the first 
Action Plan in June 2009, the Steering Committee has been developing a 
successor plan in collaboration with public and private partners which 
is expected to incorporate advances in science and technology and 
expand the scope to the outpatient environment. The successor plan is 
also expected to address the health and safety of healthcare personnel, 
as well as the risks of influenza transmission from healthcare 
personnel to patients. The second Action Plan is due for publication in 
2011.
    We also note that the House Committee on Appropriations asked in a 
2009 Report that CMS include in its ``pay for reporting'' system two 
infection control measures developed by the

[[Page 25895]]

Hospital Quality Alliance (HQA)--Central line-associated bloodstream 
infections and a surgical site infection rate (H. Rep. No. 111-220, at 
159 (2009)). In the report, the Committee stated that ``if the measures 
are included in Hospital Compare, the public reporting of the data is 
likely to reduce HAI occurrence, an outcome demonstrated in previous 
research.''
    In the FY 2011 IPPS/LTCH PPS final rule, we adopted the two HAI 
measures identified by the House Committee on Appropriations in its 
2009 report: Central Line [catheter] Associated Blood Stream Infection 
(CLABSI) measure, and Surgical Site Infection (SSI) measure. The CLABSI 
measure is currently part of the FY 2013 Hospital IQR measure set, and 
data submission on the measure began with January 2011 events.\9\ The 
Surgical Site Infection (SSI) measure is currently part of the FY 2014 
Hospital IQR measure set, and data submission on the measure will begin 
with January 2012 events.
---------------------------------------------------------------------------

    \9\ The CDC captures HAI data based on the onset of an event, 
rather than based on the discharge date.
---------------------------------------------------------------------------

    In this proposed rule, we are proposing to adopt two additional HAI 
measures for the FY 2014 Hospital IQR measure set. These proposed 
measures were developed by the CDC and are currently collected by the 
CDC via the NHSN. These measures are: (1) Central Line Bundle 
Compliance (NQF 0298) (referred to by the CDC and in this 
proposed rule as Central Line Insertion Practices, or CLIP); and (2) 
Catheter Associated Urinary Tract Infection (CAUTI) (NQF 138). 
Both measures are high priority HAI measures that are included among 
the prevention metrics established in the HHS Action Plan to Prevent 
HAIs which, as we noted above, underscores the importance of reducing 
HAIs. As detailed below, both measures also meet Hospital IQR Program 
statutory requirements for measure selection. Furthermore, both 
measures are currently collected by the NHSN, which is a secure, 
Internet-based surveillance system maintained and managed by the CDC, 
and can be utilized by all types of healthcare facilities in the U.S., 
including acute care hospitals, long term acute care hospitals, 
psychiatric hospitals, rehabilitation hospitals, outpatient dialysis 
centers, ambulatory surgery centers, and long term care facilities. The 
NHSN enables healthcare facilities to collect and use data about HAIs, 
adherence to clinical practices known to prevent HAIs, the incidence or 
prevalence of multidrug-resistant organisms within their organizations, 
and other adverse events. Some States use NHSN as a means for 
healthcare facilities to submit patient-level data on the measures 
mandated through their specific State legislation. Currently, 28 States 
require hospitals to report HAIs using NHSN, and CDC provides support 
to more than 4,000 hospitals that are using NHSN. NHSN data collection 
occurs via a Web-based tool hosted by CDC provided free of charge to 
providers. In addition, data submission for HAI measures through EHRs 
may be possible in the near future.
(i) Central Line Insertion Practice Adherence Percentage (CLIP)
    Central line associated blood stream infections (CLABSIs) can be 
prevented through proper management of the central line. The CDC's 
Healthcare Infection Control Practices Advisory Committee (CDC/HICPAC) 
Guidelines for the Prevention of Intravascular Catheter-Related 
Infections recommends evidence-based central line insertion practices 
known to reduce the risk of subsequent central line-associated 
bloodstream infection.\10\ These include hand-washing by inserters, use 
of maximal sterile barriers during insertion, proper use of a skin 
antiseptic prior to insertion, and allowing that skin antiseptic to dry 
before catheter insertion. Despite the scientific evidence supporting 
these practices, several reports suggest that adherence to these 
practices remains low in United States hospitals. The proposed CLIP 
process measure is a companion measure to the previously adopted CLABSI 
measure, and it assesses the extent to which a facility employs 
practices consistent with CDC/HICPAC recommendations that are known to 
reduce CLABSI. There are 2 States that currently require facilities to 
report to NHSN at least one month of CLIP data.
---------------------------------------------------------------------------

    \10\ O'Grady NP, Alexander M, Dellinger EP, Gerberding JL, Heard 
SO, Maki DG, et al., Guidelines for the prevention of intravascular 
catheter-related infections. MMWR 2002;51(No. RR-10:1-26).
---------------------------------------------------------------------------

    The CLIP measure is used in State reporting initiatives and is an 
NQF-endorsed measure (NQF 298) that is operationalized for 
collection via the NHSN. Therefore, the measure meets the selection 
criteria under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act. This 
CLIP prevention metric is also listed in the HHS Action Plan to Prevent 
HAIs and, as we detailed above, has been widely identified as a high 
priority for public reporting.
(ii) Catheter Associated Urinary Tract Infection (CAUTI)
    The urinary tract is the most common site of HAI, accounting for 
more than 30 percent of infections reported by acute care 
hospitals.\11\ Healthcare-associated urinary tract infections (UTIs) 
are commonly attributed to catheterization of the urinary tract. CAUTI 
can lead to such complications as cystitis, pyelonephritis, gram-
negative bacteremia, prostatitis, epididymitis, and orchitis in males 
and, less commonly, endocarditis, vertebral osteomyelitis, septic 
arthritis, endophthalmitis, and meningitis in all patients. 
Complications associated with CAUTI cause discomfort to the patient, 
prolonged hospital stay, and increased cost and mortality. Each year, 
more than 13,000 deaths are associated with UTIs.\12\ Prevention of 
CAUTIs is discussed in the CDC/HICPAC document, Guideline for 
Prevention of Catheter-associated Urinary Tract Infections. The NQF-
endorsed CAUTI measure we are proposing is currently collected by the 
NHSN as part of State-mandated reporting and surveillance requirements 
for hospitals. There are 3 States that require facilities to report to 
NHSN at least one month of CAUTI data.
---------------------------------------------------------------------------

    \11\ Klevens RM, Edward JR, et al., Estimating health care-
associated infections and deaths in U.S. hospitals, 2002. Public 
Health Reports 2007;122:160-166.
    \12\ Wong ES., Guideline for prevention of catheter-associated 
urinary tract infections. Infect Control 1981;2:126-30.
---------------------------------------------------------------------------

    Section 1886(b)(3)(B)(viii)(IX)(aa) of the Act requires that 
effective for payments beginning with FY 2013, each measure specified 
by the Secretary for inclusion in the Hospital IQR Program be endorsed 
by the entity with a contract under section 1890(a) of the Act, unless 
the exception set forth in section 1886(b)(3)(B)(viii)(IX)(bb) of the 
Act applies. The NQF currently holds the contract under section 1890(a) 
of the Act, and the NQF has endorsed this CAUTI measure (NQF 
138). For this reason, we believe that this measure satisfies 
the endorsement requirement applicable to the Hospital IQR Program. 
This proposed measure is currently risk stratified,and therefore is 
consistent with section 1886(b)(3)(B)(viii)(VIII) of the Act. Risk 
stratification means that it is calculated using different categories 
of patients with varying risk of developing an infection. At the time 
of this proposed rule, this CAUTI measure (NQF 138) is 
undergoing measure maintenance review by the NQF and we note that the 
review may result in changes to the specifications. We invite

[[Page 25896]]

public comment on our proposal to adopt these two HAI measures into the 
Hospital IQR Program for the FY 2014 payment determination. We are 
proposing that hospitals would begin submitting data on these measures 
beginning with events that occur on or after January 1, 2012. We are 
also proposing that hospitals use the NHSN infrastructure and 
protocols, as well as the specifications (available at http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf) to report the measures 
for Hospital IQR Program purposes. The proposed reporting mechanism for 
these HAI measures is discussed in greater detail in section IV.A.5.i. 
of this proposed rule.
(B) Proposed New Claims-Based Measure
    We are proposing to add the following new claim-based measure to 
the Hospital IQR Program measure set for the FY 2014 payment 
determination: Medicare Spending per Beneficiary. The details of this 
measure are discussed below.
(i) Medicare Spending per Beneficiary Measure
    Healthcare costs consume an ever-increasing amount of our Nation's 
resources, straining family, business, and government budgets. 
Healthcare costs take up a growing share of Federal and State budgets 
and imperil the governments' long-term fiscal outlooks. In the U.S., 
the sources of inefficiency that are leading to rising healthcare costs 
include payment systems that reward medical inputs rather than 
outcomes. Medicare is transforming from a system that rewards volume of 
service to one that rewards efficient, effective care and reduces 
delivery system fragmentation.
    In order to further this transformation and help address the 
critical issue of health care costs, we are proposing to add a measure 
of Medicare spending per beneficiary to the Hospital IQR Program 
measure set for the FY 2014 payment determination. This proposed 
Medicare spending per beneficiary measure addressing the cost of care 
is a type of measure that is not currently included in the Hospital IQR 
Program. We are not aware that the NQF or any other consensus 
organizations under section 1886(b)(3)(B)(viii)(IX) of the Act have 
currently endorsed any Medicare spending per beneficiary measures. We 
will give due consideration under section 1886(b)(3)(B)(viii)(IX)(bb) 
of the Act to any Medicare spending per beneficiary measures that 
become endorsed in the future. It is important that the cost of care be 
explicitly measured so that, in conjunction with other measures that we 
have adopted and are proposing to adopt for the Hospital IQR Program, 
we can recognize hospitals that are involved in the provision of high 
quality care at lower cost.
    We are proposing that this Medicare spending per beneficiary 
measure would be calculated using claims data for hospital discharges 
occurring between May 15, 2012 and February 14, 2013. Therefore, the 
addition of this proposed measure would not increase the data 
submission burden on hospitals. We outline below the methodology that 
we are proposing to use to calculate the measure, if finalized.
 The Medicare Spending per Beneficiary Episode
    In order to calculate the Medicare spending per beneficiary for 
each hospital, we believed that it would be necessary to determine: (1) 
The timeframe, or length of the ``spending per beneficiary episode'' 
during which Medicare payments would be aggregated; (2) the types of 
Medicare payments to be aggregated over this timeframe; and (3) how to 
adjust or standardize these payments across hospitals (for example, 
risk adjustment).
 Length of the Medicare Spending per Beneficiary Episode
    We are proposing an episode that runs from three days prior to an 
inpatient PPS hospital admission (the index admission) through 90 days 
post hospital discharge. We are proposing to include the time period 90 
days post hospital discharge in order to emphasize the importance of 
care transitions and care coordination in improving patient care. We 
believe inclusion of this time period surrounding the hospital 
admission would reinforce the need to reduce adverse outcomes, 
including readmissions. Encouraging delivery of coordinated care in an 
efficient manner is an important goal which can best be achieved 
through inclusion of Medicare payments made outside the timeframe of 
the hospital inpatient stay.
    We recognize that some outcome measures are based on an episode 
that runs 30 days post discharge. We considered proposing 30 days as 
the post discharge time period for the episode. However, we believe 
this shorter time period does not place sufficient emphasis on longer 
term care transitions and care coordination. Nevertheless, while we are 
proposing a 90 day post discharge period, we seek public comment on an 
alternative 30 day time period for the initial implementation of this 
measure that would be more consistent with the 30 day time period 
currently in use for some outcome measures.
 Medicare Payments Included in the Spending per Beneficiary 
Episode
    In order to calculate the Medicare spending per beneficiary, it is 
necessary to define the Medicare payments included in the spending per 
beneficiary episode. Subject to the adjustments described below, we are 
proposing to include all Medicare Part A and Part B payments made for 
services provided to the beneficiary during the episode, including 
payments made by beneficiaries that we can determine using our claims 
data, such as Part B deductibles and coinsurance amounts. As with the 
90 day post discharge period, we believe that this comprehensive 
inclusion of Medicare Part A and Part B spending emphasizes the 
importance of care coordination in improving patient care. Encouraging 
delivery of coordinated care in an efficient manner over an extended 
time period is an important goal which can best be achieved through the 
inclusion of comprehensive Medicare Part A and Part B spending.
    We also are proposing that transfers, readmissions, and additional 
admissions that began during the 90-day post discharge window of an 
index admission would be included in the episode used for calculating 
the measure.
    We are proposing to exclude from the Medicare spending per 
beneficiary calculation episodes where at any time during the episode 
the beneficiary is not enrolled in both Medicare Part A and Medicare 
Part B, including if the beneficiary is enrolled in a Medicare 
Advantage plan at any time during the episode or becomes deceased. We 
also are proposing to exclude any episodes where the beneficiary is 
covered by the Railroad Retirement Board. We also propose to exclude 
any episodes where Medicare is a secondary payer. The rationale for 
exclusion of these episodes from the calculation of the Medicare 
spending per beneficiary is that we do not have full payment data to 
identify and standardize spending which would otherwise be attributable 
to these episodes.
 Adjusting the Medicare Payments Included in the Spending per 
Beneficiary Episode
    Section 1886(o)(2)(B)(ii) of the Act requires that a Medicare 
spending per beneficiary measure adopted for the Hospital VBP Program 
be ``adjusted for factors such as age, sex, race, severity of

[[Page 25897]]

illness, and other factors that the Secretary determines appropriate.'' 
Consistent with these statutory requirements, we are proposing to 
adjust the proposed Medicare spending per beneficiary measure for age 
and severity of illness. We are proposing to adjust for severity of 
illness based on the hierarchical condition categories (HCCs) for the 
period 90 days prior to the episode and based on the MS-DRG during the 
index admission. Adding the MS-DRG to the use of the HCC improves the 
severity of illness adjustment and better standardizes the data, 
allowing for more valid comparisons of Medicare spending per 
beneficiary amounts across hospitals. Note that we would exclude 
episodes where the beneficiary is not enrolled in both Medicare Part A 
and Medicare Part B, for the 90 days prior to the episode because we 
would not be able to capture all the data necessary for the severity of 
illness adjustment.
    We are not proposing to adjust the Medicare spending per 
beneficiary for sex and race, consistent with our understanding of 
NQF's position strongly discouraging adjusting measures based on these 
factors.
    In addition, we are proposing to exclude geographic payment rate 
differences (for example, based on the wage index and geographic 
practice cost index) in order to standardize the spending per 
beneficiary. Note, we are not proposing to adjust for geographic 
differences in spending that are unrelated to geographic payment rate 
differences. However, we seek comment on whether there are geographic 
factors other than payment rate differences that should be considered 
in the spending per beneficiary measure. We also propose to standardize 
spending by excluding the portion of IPPS payments resulting from the 
payment differentials caused by Hospital-Specific Rates, IME, and DSH. 
Note that we are not proposing to exclude spending for hospitals that 
are paid Hospital-Specific Rates, rather we are proposing to exclude 
the differential additional spending that results from the use of the 
Hospital-Specific Rates. Again, making these adjustments allows for 
more valid comparisons of Medicare spending per beneficiary amounts 
across hospitals. For example, without adjusting for geographic payment 
rate differences, a hospital might have higher or lower spending per 
beneficiary amounts compared to other hospitals based on its wage index 
and not its performance.
 Calculating a Hospital's Medicare Spending per Beneficiary 
Amount
    For each subsection (d) hospital participating in the Hospital IQR 
Program, we are proposing to add together all the adjusted Medicare 
Part A and Part B payments, as defined above, included in all the 
Medicare spending per beneficiary episodes, as defined above, for that 
hospital. We would then divide this sum by the total number of Medicare 
Spending per Beneficiary episodes for that hospital. The resulting 
amount would constitute the hospital's Medicare spending per 
beneficiary amount for the period. The discharge period that we are 
proposing to apply the proposed measure for the FY 2014 Hospital IQR 
Program is May 15, 2012 through February 14, 2013.
 Calculating a Hospital's Medicare Spending per Beneficiary 
Ratio
    We are proposing to calculate a hospital's Medicare spending per 
beneficiary ratio as the hospital's Medicare spending per beneficiary 
amount divided by the median Medicare spending per beneficiary amount 
across all hospitals.
    As noted above, we are also proposing to adopt this proposed 
measure for the Hospital VBP Program FY 2014 measure set. The proposed 
method for scoring and incorporating this Medicare spending per 
beneficiary ratio into the hospital's total performance score for the 
Hospital VBP Program is fully described in section IV.B.3.b.(3)(C) of 
this proposed rule.
(C) Proposed New Web-Based Structural Measure
    Structural measures assess the characteristics and capacity of the 
provider to deliver quality health care. In the FY 2009 IPPS final 
rule, we finalized the ``Participation in a Systematic Database for 
Cardiac Surgery'' measure (73 FR 48609) for the FY 2010 payment 
determination. This measure does not require the hospital to actually 
participate in a cardiac surgery registry, instead, it only requires 
the hospital to report whether or not it participates in a cardiac 
surgery registry. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 
FR 43871 and 43872), we adopted two more structural measures: 
Participation in a Systematic Clinical Database Registry for Stroke 
Care; and Participation in a Systematic Clinical Database Registry for 
Nursing Sensitive Care under the Hospital IQR Program for the FY 2011 
payment determination. Based on public comments, we collect these 
structural measures once annually.
    We are now proposing to include a new structural measure, 
Participation in a Systematic Clinical Database Registry for General 
Surgery, in the Hospital IQR Program beginning with the FY 2014 payment 
determination. The Participation in a Systematic Clinical Database 
Registry for General Surgery measure would require each hospital that 
participates in Hospital IQR Program to indicate whether it is 
participating in a Systematic Clinical Database Registry for General 
Surgery and, if so, to identify the registry. This measure, like two of 
the previously adopted structural measures on registry participation 
(Participation in a Systematic Clinical Database Registry for Stroke 
Care; and Participation in a Systematic Clinical Database Registry for 
Nursing Sensitive Care), is an application of an NQF-endorsed measure 
(NQF 0493) ``Participation by a physician or other clinician 
in a systematic clinical database registry that includes consensus 
endorsed quality measures'' to the inpatient facility.
    We recognize that the NQF has endorsed this measure for the 
physician/clinician setting, but believe that this measure is highly 
relevant to the hospital setting, in that participation in a systematic 
clinical database registry for various topics is quite common in 
hospitals. Therefore, we previously adopted the Stroke and Nursing 
Sensitive Care registry participation measures as applications of the 
measure appropriate to the hospital inpatient setting. We reviewed the 
NQF's consensus endorsed measures, as well as measures endorsed or 
adopted by another consensus organization, and were unable to identify 
any other measures specifically for participation in a systematic 
clinical database registry for general surgery that have been endorsed 
for the hospital inpatient setting. Having given due consideration to 
other measures that have been endorsed or adopted by a consensus 
entity, we are proposing to adopt an application of this non-NQF 
endorsed measure under the Secretary's authority to select non-NQF 
endorsed measures where such measures do not exist for a specified 
topic or medical topic. We are proposing to adopt the measure under the 
exception authority provided in section 1886 (b)(3)(B)(IX)(bb) of the 
Act. Additionally, we believe that, for the same reasons, the 
previously adopted structural measures for Stroke and Nursing Sensitive 
Care registries also meet the requirements under this authority and 
propose to continue collecting them on that basis.
    We are proposing that annual data submission for this proposed 
structural

[[Page 25898]]

measure via a Web-based collection tool would begin in July 2012 with 
respect to the time period January 1, 2012, through June 30, 2012. We 
believe that participation in a registry provides hospitals with 
valuable ongoing quality improvement information and demonstrates a 
commitment to improve. Many registries also collect outcome data and 
provide feedback to hospitals about their performance. We invite public 
comment on this proposal to include this structural measure for the FY 
2014 payment determination.
    In summary, we are proposing to retire 8 measures from the measure 
set for the FY 2014 payment determination that was finalized in the FY 
2011 IPPS/LTCH PPS final rule, and we are proposing to add 4 measures 
to the measure set for the FY 2014 payment determination: 2 HAI 
measures collected through the NHSN, 1 claims-based measure (Medicare 
Spending Per Beneficiary), and 1 structural measure, for a total of 56 
measures for the FY 2014 Hospital IQR payment determination. These 56 
measures are listed below.
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TP05MY11.051

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[GRAPHIC] [TIFF OMITTED] TP05MY11.052

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[GRAPHIC] [TIFF OMITTED] TP05MY11.053

BILLING CODE 4120-01-C
c. Proposed Hospital IQR Program Quality Measures for the FY 2015 
Payment Determination
(1) Proposed Retention of FY 2014 Payment Determination Measures for 
the FY 2015 Payment Determination
    We generally retain the Hospital IQR Program measures from one year 
to the next. Consistent with this approach, we are proposing to retain 
all of the proposed measures for the FY 2014 payment determination, if 
finalized, for the FY 2015 payment determination. We invite public 
comment on this proposal.
(2) Proposed New Hospital IQR Program Measures for the FY 2015 Payment 
Determination
(A) Proposed New CDC/NHSN-Based Healthcare-Associated Infection (HAI) 
Measures for the 2015 Payment Determination
    For the FY 2015 payment determination, we are proposing to adopt 
three additional HAI measures that are currently collected by CDC via 
the NHSN. These measures are: (1) Methicillin-resistant Staphylococcus 
Aureus (MRSA) Bacteremia measure; (2) C. Difficile SIR; and (3) 
Healthcare Personnel (HCP) Influenza Vaccination and the specifications 
for these 3 measures are available at http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. Like the CLIP and the CAUTI measures that we 
are proposing for the FY 2014 payment determination, all three proposed 
HAI measures are high priority HAI measures listed in the HHS Action 
Plan to Prevent HAIs and were listed in previous rulemaking as possible 
quality measures for future payment determinations.
    Our review indicated that there are no measures for MRSA or C. 
Difficile SIR that have been endorsed by the NQF or another consensus 
entity for the hospital inpatient setting. Therefore, we are proposing 
to adopt this non-NQF-endorsed measure under the Secretary's authority 
to select non-NQF endorsed measures where such measures do not exist 
for a specified topic or medical topic. We are proposing to adopt these 
two CDC-developed measures (MRSA and C. Difficile SIR) under the 
exception authority provided in section 1886 (b)(3)(B)(IX)(bb) of the 
Act.
    The HCP Influenza Vaccination measure is NQF-endorsed (NQF 
0431) for the hospital setting. Therefore, this measure meets 
the requirement for measure selection under section 
1886(b)(3)(B)(viii)(IX)(aa) of the Act.
(1) Methicillin-Resistant Staphylococcus Aureus (MRSA) Bacteremia 
Measure
    There are different types of staphylococcus aureus bacteria, 
commonly called ``staph.'' Staph bacteria are normally found on the 
skin or in the nose. The bacteria are generally harmless unless they 
enter the body through a cut or other wound, and even then they usually 
cause only minor skin problems in healthy people. MRSA infection is 
caused by a strain of staph bacteria that has become resistant to the 
antibiotics commonly used to treat ordinary staph infections. Older 
adults with weakened immune systems and patients in hospital or nursing 
home settings are most vulnerable to MRSA infections. Health care-
associated MRSA infections typically are associated with invasive 
procedures or devices, such as surgeries, intravenous tubing, urinary 
catheters, or artificial joints. MRSA infections account for about 60 
percent of skin infections seen in United States emergency departments 
and invasive MRSA infections may cause about 18,000 deaths during a 
hospital stay a year.\13\ Currently, there are 6 States that require 
facilities to report MRSA

[[Page 25902]]

information to NHSN. As stated above, we were unable to identify any 
other measures specifically for MRSA that have been endorsed by the NQF 
for the hospital inpatient setting. We found no other measures that 
have been endorsed or adopted by a consensus entity. Therefore, we are 
proposing to adopt this non-NQF-endorsed and CDC-developed measure 
under the Secretary's authority to select non-NQF endorsed measures 
where such measures do not exist for a specified topic or medical 
topic, under the exception authority provided in section 1886 
(b)(3)(B)(IX)(bb) of the Act. The proposed reporting mechanism for the 
MRSA measure is discussed in greater detail in section IV.A.5.i. of 
this proposed rule. We invite public comment on this proposed HAI 
measure.
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    \13\ Catherine Liu, Arnold Bayer, et al., Clinical practice 
Guidelines by the for the treatment of Methicillin-Resistant 
Staphylococcus Aureus Infections in Adult and Children. Infectious 
Disease Society of America 2011; 52:e18.
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(2) C. Difficile SIR Measure
    Clostridium Difficile (C. difficile) is a bacterium that can cause 
symptoms ranging from diarrhea, pseudo-membranous colitis, and toxic 
megacolon to life-threatening sepsis and even death. Illness from C. 
Difficile most commonly affects older adults in hospitals or in long 
term care facilities where germs spread easily, antibiotic use is 
common and people are especially vulnerable to infection. Illness from 
C. Difficile typically occurs after use of antibiotic medications. C. 
Difficile spreads mainly on hands from person to person, but also on 
commonly touched services such as cart handles, bedrails, bedside 
tables, toilets, sinks, stethoscopes, thermometers, and telephones. In 
recent years, C. Difficile infections have become more frequent, more 
severe and more difficult to treat. Each year, tens of thousands of 
people in the United States get sick from C. Difficile, including some 
otherwise healthy people who are not hospitalized or taking 
antibiotics. Healthcare providers have become more aware of the C. 
Difficile infection and therefore, more testing is being done for 
symptomatic patients. The C. Difficile pathogens may require 
specialized monitoring to evaluate if intensified infection control 
efforts are required to reduce the occurrence of these organisms and 
related infections. Currently, there are 3 States that require 
facilities to report C. Difficile data to NHSN. Our goal for this 
proposed C. Difficile SIR measure is to provide a common mechanism 
(CDC/NHSN) for all hospitals including hospitals participating in the 
Hospital IQR Program to report and analyze these data that will inform 
infection control staff of the impact of targeted prevention efforts. 
The NHSN is listed in the HHS Action Plan to Prevent HAIs as the data 
source for HAI measures. As stated above, we were unable to identify 
any other measures specifically for C. Difficile SIR that have been 
endorsed by the NQF for the hospital inpatient setting. We found no 
other measures that have been endorsed or adopted by a consensus 
entity. Therefore, we are proposing to adopt this non-NQF-endorsed and 
CDC-developed measure under the Secretary's authority to select non-NQF 
endorsed measures where such measures do not exist for a specified 
topic or medical topic, under the exception authority provided in 
section 1886 (b)(3)(B)(IX)(bb) of the Act. We have chosen to leverage 
existing NHSN reporting system to collect HAI measures since we have 
already established a mechanism for reporting to the NHSN.
    The proposed reporting mechanism for these proposed HAI measures is 
discussed in greater detail in section IV.A.5.i. of this proposed rule. 
We invite public comment on these proposed HAI measures.
(3) Healthcare Personnel (HCP) Influenza Vaccination (NQF  
0431)
    For the FY 2015 payment determination, we are proposing to adopt 
one additional HAI measure that is currently collected by CDC via the 
NHSN: Healthcare Personnel (HCP) Influenza Vaccination (NQF  
0431). This measure assesses the percentage of HCP employed at the 
facility that received a prophylactic vaccination for influenza. This 
measure is NQF endorsed, and therefore, the measure meets the selection 
criteria under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act.
    Rates of serious illness and death resulting from influenza and its 
complications are increased in high-risk populations such as persons 
over 50 years or under four years of age, and persons of any age who 
have underlying conditions that put them at an increased risk. HCP can 
acquire influenza from patients and can transmit influenza to patients 
and other HCP. Many HCP provide care for, or are in frequent contact 
with, patients with influenza or patients at high risk for 
complications of influenza. The involvement of HCP in influenza 
transmission has been a long-standing concern.14 15 16
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    \14\ Maltezou HC, Drancourt M., Nosocomial influenza in 
children. Journal of Hospital Infection 2003; 55:83-91.
    \15\ Hurley JC, Flockhart S., An influenza outbreak in a 
regional residential facility. Journal of Infection Prevention 2010; 
11:58-61.
    \16\ Salgado CD, Farr BM, Hall KK, Hayden FG., Influenza in the 
acute hospital setting. The Lancet Infectious Diseases 2002; 2:145-
155.
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    Vaccination is an effective preventive measure against influenza, 
and can prevent many illnesses, deaths, and losses in productivity.\17\ 
HCP are considered a high priority for expanding influenza vaccine use. 
Achieving and sustaining high influenza vaccination coverage among HCP 
is intended to help protect HCP and their patients and reduce disease 
burden and healthcare costs. Results of several studies indicate that 
higher vaccination coverage among HCP is associated with lower 
incidence of nosocomial influenza.18 19 20 Such findings 
have led some to call for mandatory influenza vaccination of 
HCP.21 22 23 24 25
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    \17\ Wilde JA, McMillan JA, Serwint J, Butta J, O'Riordan MA, 
Steinhoff MC., Effectiveness of influenza vaccine in health care 
professionals: a randomized trial. The Journal of the American 
Medical Association 1999; 281:908-913.
    \18\ Salgado CD, Giannetta ET, Hayden FG, Farr BM., Preventing 
influenza by improving the vaccine acceptance rate of clinicians. 
Infection Control and Hospital Epidemiology 2004; 25: 923-928.
    \19\ Potter J, Stott DJ, Roberts MA, et al., Influenza 
vaccination of health-care workers in long-term-care hospitals 
reduces the mortality of elderly patients. Journal of Infectious 
Diseases 1997; 175:1-6.
    \20\ Hayward AC, Harling R, Wetten S, et al., Effectiveness of 
an influenza vaccine programme for care home staff to prevent death, 
morbidity, and health service use among residents: cluster 
randomised controlled trial. British Medical Journal 2006; 333:1241-
1246.
    \21\ Talbot TR, Bradley SF, Cosgrove SE, et al., SHEA position 
paper: Influenza vaccination of healthcare workers and vaccine 
allocation for healthcare workers during vaccine shortages. 
Infection Control and Hospital Epidemiology 2005; 26:882-890.
    \22\ American College of Physicians (ACP), ACP policy on 
influenza vaccination of health care workers. http://www.acponline.org/running_practice/quality_improvement/projects/adult_immunization/flu_hcw.pdf.
    \23\ Greene LR, Cain TA, Dolan SA et al., APIC position paper: 
influenza immunization of healthcare personnel. Association of 
Professionals in Infection Control (APIC). November 2008. http://www.apic.org/Content/NavigationMenu/PracticeGuidance/Topics/Influenza/APIC_Position_Paper_Influenza_11_7_08final_revised.pdf
    \24\ National Patient Safety Foundation (NPSF), Mandatory flu 
vaccinations for healthcare workers. Press Release, November 18, 
2009. http://www.npsf.org/pr/pressrel/2009-11-18.php.
    \25\ Infectious Diseases Society of America (IDSA), IDSA policy 
on mandatory immunization of health care workers against seasonal 
and 2009 H1N1 influenza. Infectious Diseases Society of America 
(IDSA). September 30, 2009. http://www.idsociety.org/HCWimmunization/.
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    Until recently, vaccination coverage among HCP has been well below 
the national Healthy People 2010 target of 60 percent,\26\ but 
preliminary data suggest 62 percent of HCP reported receiving seasonal 
influenza vaccine in

[[Page 25903]]

2009-2010.\27\ Only 37 percent reported receiving the 2009 pandemic A/
H1N1 vaccine.\28\
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    \26\ Walker FJ, Singleton JA, Lu P, Wooten KG, Strikas RA., 
Influenza vaccination of healthcare workers in the United States, 
1989-2002. Infection Control and Hospital Epidemiology 2006; 27:257-
265.
    \27\ http://www.cdc.gov/mmwr/preview/mmwrhtml/rr55e209a1.htm. 
Influenza Vaccination of Health-Care Personnel: Recommendations of 
the Healthcare Infection Control Practices Advisory Committee 
(HICPAC) and the Advisory Committee on Immunization Practices.
    \28\ Centers for Disease Control and Prevention., Interim 
results: Influenza A (H1N1) 2009 and Monovalent Seasonal Influenza 
Vaccination Coverage Among Health-Care Personnel--United States 
August 2009-January 2010. Morbidity and Mortality Weekly Report 
(MMWR); 59:357-362. Available at: http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5912a1.htm.
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    HCP refers to all personnel working in healthcare settings who have 
the potential for exposure to patients and/or to infectious materials, 
including body substances, contaminated medical supplies and equipment, 
contaminated environmental surfaces, or contaminated air.\29\ HCP may 
include (but are not limited to) physicians, nurses, nursing 
assistants, therapists, technicians, emergency medical service 
personnel, dental personnel, pharmacists, laboratory personnel, autopsy 
personnel, students and trainees, contractual staff not employed by the 
healthcare facility, and persons (for example, clerical, dietary, 
house-keeping, laundry, security, maintenance, billing, and volunteers) 
not directly involved in patient care but potentially exposed to 
infectious agents that can be transmitted to and from HCP and patients. 
Settings in which HCP may work include, but are not limited to, acute 
care hospitals, long-term care facilities, skilled nursing facilities, 
rehabilitation centers, physicians' offices, urgent care centers, 
outpatient clinics, home health agencies, and emergency medical 
services.
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    \29\ Adapted from: Pearson ML., Bridges CB., Harper SA.,: 
Influenza vaccination of health-care personnel: Recommendations of 
the Healthcare Infection Control Practices Advisory Committee 
(HICPAC) and the Advisory Committee on Immunization Practices 
(ACIP). Morbidity and Mortality Weekly Report (MMWR) 2006; 55:1-16. 
Available at: http://www.cdc.gov/mmwr/preview/mmwrhtml/rr5502a1.htm.
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    Currently, four States have ``offer'' laws for influenza 
vaccination of HCP, meaning that vaccine must be offered to HCP by 
healthcare facilities; and three States (Alabama, California, and New 
Hampshire) have ``ensure'' laws for influenza vaccination of HCP, 
meaning that vaccination of non-immune HCP is mandatory in the absence 
of a specified exemption or refusal; and, additionally, numerous 
hospitals and other healthcare facilities have established policies 
requiring mandatory influenza vaccination of their HCP.\30\
---------------------------------------------------------------------------

    \30\ For additional information regarding healthcare facilities' 
influenza vaccine policies, please see: http://www.immunize.org/honor%2Droll/.
---------------------------------------------------------------------------

    Currently, no State requires that hospitals report this measure to 
NHSN. However, approximately 13 hospitals (including long term acute 
care and rehabilitation), outpatient hemodialysis centers, long term 
care facilities, and ambulatory surgical centers are currently 
reporting HCP immunization data to NHSN. In September 2009, CDC 
released the Healthcare Personnel Safety (HPS) Component of NHSN, which 
complements Patient Safety and Biovigilance components available in 
NHSN. The HPS Component replaced CDC's National Surveillance System for 
Health Care Workers (NaSH) and is comprised of two modules: the Blood/
Body Fluid Exposure Module and the Influenza Vaccination and Management 
and Exposure Module.\31\ Currently, participation in either module is 
voluntary. The current Influenza Vaccination and Management and 
Exposure Module may soon offer options for healthcare facilities to 
submit vaccination summary data. NHSN plans to partner with vendor-
based surveillance systems to permit periodic data extractions into 
NHSN.
---------------------------------------------------------------------------

    \31\ Available at: http://www.cdc.gov/nhsn/hps.htm.
---------------------------------------------------------------------------

    The modules feature basic, custom, and advanced analysis 
capabilities available in real-time, which allow individual healthcare 
facilities to compile and analyze their own data, as well as benchmark 
these results to aggregate NHSN estimates. The HPS Component can assist 
participating facilities in developing surveillance and analysis 
capabilities to permit the timely recognition of HCP safety problems 
and prompt interventions with appropriate measures. Influenza 
vaccination data submitted to CDC will ultimately capture regional 
trends on the yearly uptake of the vaccine, prophylaxis and treatment 
for healthcare personnel, as well as the elements within yearly 
influenza campaigns that succeed or require improvement. At the State 
and national levels, the HPS Component will aid in monitoring rates and 
trends.
    We are proposing to adopt the Healthcare Provider Influenza 
Vaccination measure that is currently collected by the CDC via the NHSN 
because of its importance in preventing influenza not only among 
healthcare workers but also patients that they attend.. As stated 
earlier, this measure assesses the percent of Healthcare Personnel 
employed at the facility that received a prophylactic vaccination for 
influenza. Detailed specifications for the proposed measure are 
available at: http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. 
As we also stated above, this measure is NQF-endorsed for the hospital 
setting. The proposed reporting mechanism for this proposed HAI measure 
is discussed in greater detail in section IV.A.5.i. of this proposed 
rule. We invite public comment on this proposed HAI measure.
(B) Proposed New Chart-Abstracted Measures for the FY 2015 Payment 
Determination
    We are proposing to adopt two sets of chart-abstracted measures for 
the FY 2015 payment determination: the Stroke and Venous 
Thromboembolism (VTE) measure sets. All of these proposed measures have 
either previously been proposed for the Hospital IQR Program, or have 
been listed as being under consideration for future adoption into the 
program. In addition, with one exception (STK-1: VTE Prophylaxis), all 
of the measures in these two measure sets have been electronically 
specified and are among the measures adopted for the EHR Incentive 
Program for eligible hospitals. While we are proposing to adopt these 
for chart-abstracted submission in 2013 for the FY 2015 payment 
determination, we believe that by a future date, such as 2015, 
hospitals will be able to switch to EHR-based submission of these and 
all other chart-abstracted measures submitted for the Hospital IQR 
Program, and, as we discuss in greater detail below, we intend to work 
toward this goal over the next few years.
    The Stroke measure set we are proposing to adopt consists of 8 
measures; and the VTE measure set consists of 6 measures. Both measure 
sets are NQF-endorsed and their specifications are currently available 
in the Specifications Manual, which can be found on QualityNet. We 
believe that both of the proposed measure sets compliment the data 
elements in our current SCIP VTE and AMI measure sets.
(i) Stroke Measure Set
    Stroke is a topic of great relevance to the Medicare population due 
to its impact on morbidity and mortality, and it is an area with great 
potential for quality improvement for hospitals caring for stroke 
patients. Stroke is the third most common cause of death in the United 
States and is one of the top 20 conditions contributing to Medicare 
costs. Approximately 8 to 12 percent of ischemic strokes are fatal,\32\ 
and

[[Page 25904]]

mortality following stroke is influenced by the quality of care 
provided to patients during their initial hospitalization.\33\ In the 
FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43873), we listed 8 
Stroke measures as being under consideration for adoption for the FY 
2012 Hospital IQR payment determination. Numerous commenters encouraged 
us to adopt the listed stroke measures which they see as evidence-based 
measures that accurately measure the care of the stroke patient (74 FR 
43875 through 43876). Commenters believed that the measures are widely 
recognized for their roles in minimizing secondary strokes and other 
complications.
---------------------------------------------------------------------------

    \32\ American Heart Association, Heart Disease and Stroke 
Statistics--2009 Update. American Heart Association, 2009: p. 1-36.
    \33\ Weir, N.U., et al., Variations between countries in outcome 
after stroke in the International Stroke Trial (IST). Stroke, 2001. 
32(6): p. 1370-7.
---------------------------------------------------------------------------

    We are proposing to adopt a stroke measure set with 8 NQF-endorsed 
process-of-care measures for the FY 2015 payment determination. The 
table below lists and describes each of these eight proposed measures.
[GRAPHIC] [TIFF OMITTED] TP05MY11.054

    Because the NQF is the entity that holds a contract with the 
Secretary under section 1890(a) of the Act, measures that are endorsed 
by the NQF meet the requirement for measure selection under section 
1886(b)(3)(B)(viii)(IX)(aa) of the Act. Aside from the consideration of 
NQF-endorsement, we believe that the inclusion of the proposed stroke 
measure set in the Hospital IQR Program would provide a comprehensive 
view of how well stroke care is being managed in a hospital setting. As 
stated earlier, detailed measure specifications for these

[[Page 25905]]

8 proposed measures are available in the Specifications Manual located 
in QualityNet. We invite public comment on the proposed stroke measure 
set.
(ii) VTE Measure Set
    It is widely agreed that VTE is the number one preventable cause of 
hospital death in the United States and the cost of VTE when it occurs 
is very high. A recent study from AHRQ in Health Affairs highlighted 
that when an acute VTE event occurs, it increases the costs of care by 
25 percent. In 2008, the Surgeon General issued a Call to Action to 
Prevent Deep Vein Thrombosis and Pulmonary Embolism. (This document can 
be found at: http://www.surgeongeneral.gov/topics/deepvein/calltoaction/call-to-action-on-dvt-2008.pdf.) VTE prevention with 
pharmacologic agents can impact the cost effectiveness of care. 
Specifically, patients who received anti-coagulant medication during 
hospitalization have less likelihood of recurrence of VTEs upon 
discharge to home. Parenteral anticoagulation is the first line of 
therapy because of its rapid onset of action. Because the oral 
anticoagulant medication has a very slow onset of action, it cannot be 
used as mono-therapy for acute VTE. A minimum of five days of 
parenteral anticoagulation is recommended as ``overlap therapy'' while 
oral anticoagulant medication is being initiated. More thrombotic 
complications and higher costs are associated with treatment in 
patients demonstrating a subtherapeutic aPTT. Unfractionated Heparin 
(UFH) Dosages/Platelet Count Monitoring by Protocol (or Nomogram) has 
significantly advanced the use of UFH with the demonstrated ability to 
achieve therapeutic aPTTs more rapidly than with standard UFH dosing. 
When this occurs, patients can be discharged sooner. However, 
anticoagulation therapy poses risks to patients and often leads to 
adverse drug events due to complex dosing, requisite follow-up 
monitoring and inconsistent patient compliance. The use of standardized 
practices for anticoagulation therapy that includes patient/caregiver 
involvement may reduce the risk of adverse drug events.
    The Hospital IQR Program currently has 2 measures of VTE 
prophylaxis for surgical patients (SCIP-VTE-1: Venous thromboembolism 
(VTE) prophylaxis ordered for surgery patients; and SCIP-VTE-2: VTE 
prophylaxis within 24 hours pre/post surgery) in the SCIP measure set. 
In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43873), we 
listed 5 VTE measures (VTE-1; Venous thromboembolism prophylaxis; VTE-
3: Venous thromboembolism patients with anticoagulation overlap 
therapy; VTE-4: Venous thromboembolism patients receiving 
unfractionated heparin with dosages/platelet count monitoring by 
protocol; VTE-5: Venous thromboembolism discharge instructions; and 
VTE-6: Incidence of potentially-preventable venous Thromboembolism) as 
possible new quality measures for the FY 2012 payment determination. In 
the FY 2011 IPPS/LTCH PPS final rule (75 FR 50213 through 50218), we 
listed 6 VTE measures (VTE-1; Venous thromboembolism prophylaxis; VTE-
2: Intensive care unit venous thromboembolism prophylaxis; VTE-3: 
Venous thromboembolism patients with anticoagulation overlap therapy; 
VTE-4: Venous thromboembolism patients receiving unfractionated heparin 
with dosages/platelet count monitoring by protocol; VTE-5: Venous 
thromboembolism discharge instructions; and VTE-6: Incidence of 
potentially-preventable venous thromboembolism) as measures we were 
considering for possible future adoption into the program.
    We are now proposing to adopt for the FY 2015 Hospital IQR measure 
set 6 VTE measures which are aimed at preventing the incidence of 
potentially preventable VTE. These 6 measures are listed and described 
below.
BILLING CODE 4120-01-P

[[Page 25906]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.055

[[Page 25907]]

    These 6 measures were endorsed in a 2008 NQF project titled: 
National Voluntary Consensus Standards for Prevention and Care of 
Venous Thromboembolism: Additional Performance Measures. Because the 
NQF is the entity that holds a contract with the Secretary under 
section 1890(a) of the Act, measures that are endorsed by the NQF meet 
the requirement for measure selection under section 
1886(b)(3)(B)(viii)(IX)(aa) of the Act. Aside from the consideration of 
NQF-endorsement, we believe that the inclusion of the VTE measure set 
in the Hospital IQR Program would provide a comprehensive view of how 
well VTE care is being managed in a hospital setting. Detailed measure 
specifications for these 6 proposed measures are available in the 
Specifications Manual located on QualityNet. We invite public comment 
on the proposed VTE measure set.
    In summary, for the FY 2015 payment determination, we are proposing 
to retain all of the FY 2014 measures (56 measures if all of the 
measures are finalized), to adopt 3 HAI measures, and 14 chart-
abstracted measures for a total of 73 measures for the FY 2015 payment 
determination. The measures proposed for the Hospital IQR Program for 
the FY 2015 payment determinations are set forth below.

[[Page 25908]]

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[[Page 25909]]

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[[Page 25910]]

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[[Page 25911]]

4. Possible New Quality Measures and Measure Topics for Future Years
    Looking forward, we anticipate that as EHR technology evolves, and 
more infrastructure is put in place, we will have the capacity to 
accept electronic reporting of all of the clinical chart-abstracted 
quality measures that are currently in the Hospital IQR Program or have 
been proposed for adoption into the program. We intend for this future 
progress to significantly reduce the administrative burden on hospitals 
under the Hospital IQR Program. We recognize that considerable work 
needs to be done by measure owners and developers to make this possible 
with respect to the clinical quality measures that we proposed. This 
includes completing electronic specifications for measures, pilot 
testing, reliability and validity testing, and implementing such 
specifications into EHR technology to capture and calculate the 
results, and implementing the systems. We believe that at a future 
date, such as 2015, CMS and hospitals will be able to switch to 
complete EHR-based reporting of all chart-abstracted measures to CMS 
for the Hospital IQR Program, and we intend to work diligently toward 
this goal. We believe this will simplify measure collection and 
submission for the Hospital IQR Program, and will reduce the burden on 
hospitals. We invite public comment and suggestions on this topic.
    In future rules, it is our intention to propose to adopt outcome 
measures for stroke and joint replacement surgery which we have 
developed and anticipate submitting for NQF review. In addition, we 
intend to propose additional HAI measures as they gain NQF endorsement. 
We also invite public comment on the following quality measures and 
topics set out below that we are considering for the future. We seek to 
limit the number of chart-abstracted measures and topics in the near 
future, in order to facilitate the transition to EHR-based reporting.

[[Page 25912]]

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[[Page 25913]]

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[[Page 25914]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.061

BILLING CODE 4120-01-C
5. Form, Manner, and Timing of Quality Data Submission
a. Background
    Sections 1886(b)(3)(B)(viii)(I) and (II) of the Act state that the 
applicable percentage increase, for FY 2007 and each subsequent fiscal 
year, shall be reduced by 2.0 percentage points (or, beginning with FY 
2015, by one-quarter of such applicable percentage increase (determined 
without regard to sections 1886(b)(3)(B)(ix), (xi), or (xii) of the 
Act) for any subsection (d) hospital that does not submit quality data 
in a form and manner, and at a time, specified by the Secretary. The 
data submission requirements, Specifications Manual, and submission 
deadlines are posted on the QualityNet Web site at: http://www.QualityNet.org/. CMS requires that hospitals submit data in 
accordance with the specifications for the appropriate discharge 
periods. Hospitals submit quality data through the secure portion of 
the QualityNet Web site (formerly known as QualityNet Exchange) 
(https://www.QualityNet.org). This Web site meets or exceeds all 
current Health Insurance Portability and Accountability Act 
requirements for security of protected health information.
    In order to participate in the Hospital IQR Program, hospitals must 
meet specific procedural requirements. Hospitals choosing to 
participate in the Hospital IQR Program must also meet specific data 
collection, submission, and validation requirements.
b. Procedural Requirements for FY 2012 Payment Determinations and 
Subsequent Years
    The proposed Hospital IQR Program procedural requirements are, for 
the most part, the same as the procedures adopted in the FY 2011 IPPS/
LTCH PPS final rule for the Hospital IQR Program. Hospitals must comply 
with the following procedural requirements to participate--
     Register with QualityNet, before participating hospitals 
initially begin

[[Page 25915]]

reporting data, regardless of the method used for submitting data.
     Identify a QualityNet Administrator who follows the 
registration process located on the QualityNet Web site (http://www.QualityNet.org).
     Complete a Notice of Participation. New subsection (d) 
hospitals and existing hospitals that wish to participate in the 
Hospital IQR Program for the first time must complete an online Notice 
of Participation (formerly known as ``Reporting Hospital Quality Data 
for Annual Payment Update Notice of Participation,'' also referred to 
as IPledge) that includes the name and address of each hospital campus 
that shares the same CMS Certification Number (CCN). We revise the 
Notice of Participation periodically as needed and provide appropriate 
notification of any revisions to hospitals and QIOs through the routine 
Hospital IQR Program communication channels, which include memo and e-
mail notification and QualityNet Web site articles and postings.
     Any hospital that receives a new CCN on or after October 
15, 2009 (including new subsection (d) hospitals and hospitals that 
have merged) that wishes to participate in the Hospital IQR Program and 
has not otherwise submitted a Notice of Participation using the new CCN 
must submit a completed Notice of Participation no later than 180 days 
from the date identified as the open date (that is, the Medicare 
acceptance date) on the approved CMS Online System Certification and 
Reporting (OSCAR) system to participate in the Hospital IQR Program. We 
are proposing regulation text to codify this requirement.
     We will accept Hospital IQR Program withdrawal forms for 
the FY 2013 payment determination from hospitals any time from October 
1, 2011 until August 15, 2012. The August 15, 2012 deadline will give 
us sufficient time to update the FY 2013 payment to hospitals starting 
on October 1, 2012. If a hospital withdraws from the program for the FY 
2013 payment determination, it will receive a reduction of 2.0 
percentage points to the FY 2013 applicable percentage increase. Once a 
hospital has submitted a Notice of Participation, it is considered to 
be an active Hospital IQR Program participant until such time as the 
hospital submits a withdrawal form to CMS.
     We will determine if a hospital has complied with our data 
submission requirements by looking at whether the hospital has properly 
submitted data to the appropriate data warehouses for HCAHPS, CDC/NHSN, 
chart-abstracted measures, and structural measure quality measure data 
during the four calendar year quarters of FY 2012.
    The Hospital IQR Program procedural requirements have remained 
relatively unchanged for the past several years and we are proposing to 
codify them at 42 CFR 412.140. We invite public comment on this 
proposal.
c. Proposed Procedural Requirements for FY 2013 and Subsequent Years
    We are proposing that hospitals that have an open date (as noted on 
the approved CMS OSCAR system) before March 31, 2009 that did not 
participate in the Hospital IQR Program in FY 2011 or FY 2012 but that 
wish to participate in the Hospital IQR Program for the FY 2013 payment 
determination must submit a completed Notice of Participation to CMS on 
or before December 31, 2011. These hospitals, unlike hospitals that 
receive a new CCN, do not need to get their operations up and running. 
Therefore, we believe this is a reasonable deadline that will enable 
these hospitals to decide whether they want to participate in the 
Hospital IQR Program while also enabling us to collect enough data from 
them to make an accurate FY 2013 payment determination. We are 
proposing regulation text that provides that hospitals that would like 
to participate in the Hospital IQR program for the first time, or that 
previously withdrew from the program and would like to participate 
again, must submit to CMS a completed Notice of Participation Form by 
December 31 of the fiscal year preceding the fiscal year in which they 
would like to participate.
d. Proposed Data Submission Requirements for Chart-Abstracted Measures
    We are proposing to reduce the quarterly submission deadline for 
chart-abstracted quality measures from 4\1/2\ months to 104 days. In 
other words, for FY 2014 payment determinations, the quarterly deadline 
for the quality measures under the topic that require chart abstraction 
(AMI, HF, PN, SCIP, Emergency Department Throughput (EDT), and Global 
Immunization (GIM) will be 104 days following the last discharge date 
in the calendar quarter. We are proposing to reduce the data submission 
deadline in order to allow for a correction period, which we will 
propose in future rulemaking. We also believe that this proposed change 
will encourage hospitals to utilize quality measure information in a 
more rapid manner to facilitate quality improvement. We also want to 
provide hospitals sufficient notice of any proposed changes to our 
submission deadline, since we recognize the advance time needed by 
hospitals to modify their recordkeeping and abstraction practices to 
comply with this proposed requirement. We also are proposing to change 
the aggregate population and sampling deadline from 4 months to 3 
months to align with the corresponding proposal to change the data 
submission deadline from 135 to 104 days.
    We will continue to require hospitals to submit aggregate 
population and sample size counts to CMS on a quarterly basis for 
Medicare and non-Medicare discharges for the topic areas for which 
chart-abstracted data must be submitted (currently AMI, HF, PN, and 
SCIP) (75 FR 50221). Starting with the FY 2014 payment determination, 
we are proposing to change the submission deadline for hospitals to 
submit aggregate population and sample size count data for the measures 
requiring chart abstraction from four months to three months following 
the last discharge date in the calendar quarter. We are proposing this 
three-month deadline for submission of the aggregate population and 
sample size counts data to provide CMS with information necessary to 
notify hospitals about their data completeness status. Specifically, we 
currently provide a Provider Participation Report the day after the 
submitted file is processed, which includes a calculation of the number 
of hospital submitted cases by topic, hospital self-reported aggregate 
population and sample size count, and Medicare FFS claims by clinical 
topic and SCIP surgical category. We expect that hospitals will use 
this report after submission to assess their patient-level data 
completeness and will submit additional patient-level cases before the 
proposed quarterly patient-level deadline. We are proposing to provide 
hospitals with the same 14-day period after the proposed aggregate 
population and sample size count deadline to submit the required 
patient-level records.
e. Proposed Sampling and Case Thresholds Beginning With the FY 2015 
Payment Determination
    We are proposing to continue the requirement for hospital 
submission of population and sampling data for the FY 2015 payment 
determination and future years. Hospitals must submit to CMS quarterly 
aggregate population and sample size counts for Medicare and non-
Medicare discharges for the topic areas for which chart-abstracted data 
must be submitted (AMI, HF, PN, SCIP, EDT and GIM). Hospitals are 
required to

[[Page 25916]]

submit their aggregate population and sample size count for each topic 
area.
    In accordance with the policy we adopted in the FY 2011 IPPS/LTCH 
PPS final rule, hospitals that have not treated patients in a specific 
topic area must still submit quarterly population and sample size 
counts for all Hospital IQR chart-abstracted data topics. For example, 
if a hospital has not treated AMI patients, the hospital is still 
required to submit a zero for its quarterly aggregate population and 
sample count for that topic in order to meet the requirement. We view 
it as vital for hospitals to determine accurately their aggregate 
population and appropriate sampling size data in order for CMS to 
assess hospitals' data reporting completeness for their total 
population of cases, Medicare and non-Medicare.
    In order to reduce the burden on hospitals that treat a low number 
of patients in a Hospital IQR Program topic area, a hospital that has 
five or fewer discharges (Medicare and non-Medicare combined) in a 
topic area during a quarter in which data must be submitted would not 
be required to submit patient-level data for that topic area for the 
quarter. The hospital must still submit its aggregate population and 
sample size counts for Medicare and non-Medicare discharges for the 
topic areas each quarter. Hospitals meeting the five or fewer patient 
discharge exception may voluntarily submit these data.
    We strongly recommend that hospitals review the QIO Clinical 
Warehouse Feedback Reports and the Hospital IQR Program Provider 
Participation Reports that are available after patient-level data are 
submitted to the QIO Clinical Warehouse. We generally update these 
reports on a daily basis to provide accurate information to hospitals 
about their submissions. These reports enable hospitals to ensure that 
their data were submitted on time and accepted into the QIO Clinical 
Warehouse.
f. Proposed HCAHPS Requirements for the FY 2013, FY 2014, and FY 2015 
Payment Determinations
    Beginning with discharges occurring in third quarter CY 2011, we 
are proposing to move the HCAHPS data submission deadline forward by 
one week in order to allow for a review and correction period, which we 
will propose in future rulemaking. Currently, hospitals have about 14 
weeks after the end of a calendar quarter to submit HCAHPS data for 
that quarter to the QIO Clinical Warehouse. If this proposal is 
adopted, hospitals will have about 13 weeks after the end of a calendar 
quarter to submit HCAHPS data for that quarter to the QIO Clinical 
Warehouse.
    Other than this proposed change, we are not proposing any other 
changes to the HCAHPS requirements for the FY 2013 and FY 2014 Hospital 
IQR Program payment determinations, which were adopted in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50220). For FY 2015 Hospital IQR 
payment determinations, we are proposing to continue the HCAHPS 
requirements as follows. Under these requirements, a hospital must 
continuously collect and submit HCAHPS data in accordance with the 
current HCAHPS Quality Assurance Guidelines and the quarterly data 
submission deadlines, both of which are posted at http://www.hcahpsonline.org. In order for a hospital to participate in the 
collection of HCAHPS data, a hospital must either: (1) Contract with an 
approved HCAHPS survey vendor that will conduct the survey and submit 
data on the hospital's behalf to the QIO Clinical Warehouse; or (2) 
self-administer the survey without using a survey vendor provided that 
the hospital attends HCAHPS training and meets Minimum Survey 
Requirements as specified on the HCAHPS Web site at: http://www.hcahpsonline.org. A current list of approved HCAHPS survey vendors 
can be found on the HCAHPS Web site. For the FY 2015 Hospital IQR 
Program, we are proposing that the HCAHPS data will be based on 
discharges from January 1, 2013 through December 31, 2013.
    Every hospital choosing to contract with a survey vendor must 
provide the sample frame of HCAHPS-eligible discharges to its survey 
vendor with sufficient time to allow the survey vendor to begin 
contacting each sampled patient within 6 weeks of discharge from the 
hospital. (We refer readers to the Quality Assurance Guidelines located 
at http://www.hcahpsonline.org for details about HCAHPS survey 
administration.) Hospitals are strongly encouraged to submit their 
entire patient discharge list, excluding patients who had requested 
``no publicity'' status or who are excluded because of State 
regulations, in a timely manner to their survey vendor to allow 
adequate time for sample creation, sampling, and survey administration. 
We wish to emphasize that hospitals must also provide the 
administrative data that is required for HCAHPS in a timely manner to 
their survey vendor. This includes the patient MS-DRG at discharge, or 
alternative information that can be used to determine the patient's 
service line, in accordance with the survey protocols in the most 
recent HCAHPS Quality Assurance Guidelines.
    We note that the HCAHPS Quality Assurance Guidelines require that 
hospitals maintain complete discharge lists that indicate which 
patients were eligible for the HCAHPS survey, which patients were not 
eligible, which patients were excluded, and the reason(s) for 
ineligibility and exclusion. (We refer readers to the Quality Assurance 
Guidelines located at http://www.hcahpsonline.org for details about 
HCAHPS eligibility and sample frame creation.) In addition, the 
hospital must authorize the survey vendor to submit data via My 
QualityNet, the secure part of the QualityNet Web site, on the 
hospital's behalf.
    Hospitals must submit at least 300 completed HCAHPS surveys in a 
rolling four-quarter period unless the hospital is too small to obtain 
300 completed surveys. We wish to emphasize that the absence of a 
sufficient number of HCAHPS eligible discharges is the only acceptable 
reason for submitting fewer than 300 completed HCAHPS surveys in a 
rolling four quarter period. If a hospital obtains fewer than 100 
completed surveys, the hospital's HCAHPS scores will be accompanied by 
a footnote on the Hospital Compare Web site alerting the Web site users 
that the scores should be reviewed with caution, as the number of 
surveys may be too low to reliably assess hospital performance.
    After the survey vendor submits the data to the QIO Clinical 
Warehouse, we strongly recommend that hospitals employing a survey 
vendor promptly review the two HCAHPS Feedback Reports (the Provider 
Survey Status Summary Report and the Data Submission Detail Report) 
that are available. These reports enable a hospital to ensure that its 
survey vendor has submitted the data on time and the data has been 
accepted into the QIO Clinical Warehouse.
    In order to ensure compliance with HCAHPS survey and administration 
protocols, hospitals and survey vendors must participate in all 
oversight activities. As part of the oversight process, during the 
onsite visits or conference calls, the HCAHPS Project Team will review 
the hospital's or survey vendor's survey systems and assess protocols 
based upon the most recent HCAHPS Quality Assurance Guidelines. All 
materials relevant to survey administration will be subject to review. 
The systems and program review includes, but is not limited to: (a) 
Survey management and data systems; (b) printing and mailing materials 
and facilities; (c) telephone

[[Page 25917]]

and Interactive Voice Response (IVR) materials and facilities; (d) data 
receipt, entry and storage facilities; and, (e) written documentation 
of survey processes. As needed, hospitals and survey vendors will be 
subject to follow-up site visits or conference calls. We wish to point 
out that the HCAHPS Quality Assurance Guidelines state that hospitals 
should refrain from activities that explicitly influence how patients 
respond on the HCAHPS survey. If we determine that a hospital is not 
compliant with HCAHPS program requirements, we may determine that the 
hospital is not submitting HCAHPS data that meet the requirements of 
the Hospital IQR Program.
    We continue to strongly recommend that each new hospital 
participate in an HCAHPS dry run, if feasible, prior to beginning to 
collect HCAHPS data on an ongoing basis to meet Hospital IQR Program 
requirements. New hospitals can conduct a dry run in the last month of 
a calendar quarter. The dry run will give newly participating hospitals 
the opportunity to gain first-hand experience collecting and 
transmitting HCAHPS data without the public reporting of results. Using 
the official survey instrument and the approved modes of administration 
and data collection protocols, hospitals/survey vendors will collect 
HCAHPS dry-run data and submit the data to My QualityNet, the secure 
portion of QualityNet.
    We again are encouraging hospitals to regularly check the HCAHPS 
Web site at http://www.hcahpsonline.org for program updates and 
information.
    We proposed that HCAHPS scores become part of the Hospital VBP 
Program in FY 2013. As HCAHPS scores become incorporated in hospital 
payment, we believe that a neutral third-party should administer the 
survey for hospitals whose annual payment updates will be affected by 
their HCAHPS scores. It is our belief that an experienced survey vendor 
will be best able to ensure reliable results. Therefore, we are 
considering whether to allow only non-subsection (d) hospitals to self-
administer the HCAHPS survey. We invite public comment that will inform 
our future policy on this issue.
g. Proposed Procedures for Claims-Based Measures
    CMS is proposing to adopt a new claims-based measure for FY 2014, 
the Medicare Spending per Beneficiary Measure, which is included in the 
chart below.
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[[Page 25918]]

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BILLING CODE 4120-01-C

[[Page 25919]]

    We are not proposing to change the procedures and time periods we 
adopted in the FY 2011 IPPS/LTCH PPS final rule for the FY 2012, FY 
2013 and FY 2014 payment determinations. For the FY 2014 payment 
determination, we are proposing to use up to 3 years of Medicare FFS 
claims data to calculate the measures, as appropriate for the measure.
    Hospitals are encouraged to regularly check the QualityNet Web 
site, http://www.QualityNet.org, for program updates and information.
h. Proposed Data Submission Requirements for Structural Measures
    Structural measures assess the characteristics and capacity of the 
provider to deliver quality healthcare. We are proposing to add one 
additional structural measure for the FY 2014 payment determination, 
Participation in a Systematic Clinical Database Registry for General 
Surgery, and to align the submission deadline for all structural 
measures with the submission deadline for the fourth quarter of the 
chart-abstracted measures. We are proposing to update the period of 
data collection that hospitals will submit the required registry 
participation information once annually for the structural measures via 
a Web-based collection tool between April 1, 2012 and May 15, 2012 with 
respect to the time period of January 1, 2011 through December 31, 
2011. This proposal will give CMS a more complete picture of registry 
participation as well as synchronize data submissions for structural 
and chart-abstracted measures. These measures do not require the 
hospital to participate in a registry.
    Below is the list of structural measures we have adopted or are 
proposing to adopt for the FY 2014 payment determination:
[GRAPHIC] [TIFF OMITTED] TP05MY11.063

i. Proposed Data Submission and Reporting Requirements for Healthcare-
Associated Infection (HAI) Measures Reported via NHSN
    As discussed above, we are proposing to adopt 2 new HAI measures 
for the FY 2014 payment determination and 3 HAI measures for FY 2015 
payment determination. For FY 2014, the two proposed measures are 
Central Line Insertion Practices Adherence Percentage and Catheter 
Associated Urinary Tract Infection. For FY 2015, the three proposed 
measures are: Healthcare Provider Influenza Vaccination, MRSA 
Bacterimia and C. Difficile. Below is the list of HAI measures we are 
proposing to adopt for the FY 2014 and FY 2015 payment determinations:
[GRAPHIC] [TIFF OMITTED] TP05MY11.064

[[Page 25920]]

    We are proposing to update the current data submission and 
reporting requirements for these proposed measures. Specifically, we 
are proposing to utilize the data submission and reporting standard 
procedures that have been set forth by CDC for NHSN participation in 
general and for submission of these measures to NHSN. We refer readers 
to the CDC's NHSN Web site (http://www.cdc.gov/nhsn) for detailed data 
submission and reporting procedures. We believe that these procedures 
are feasible because they are already widely used by over 4,000 
hospitals reporting HAI data using the NHSN. Our proposal seeks to 
reduce hospital burden by aligning CMS data submission and reporting 
procedures with NHSN procedures currently utilized by hospitals, 
including hospitals complying with 28 State HAI reporting requirements. 
The existing data collection and submission timeframes for the HAI 
measures for the FY 2014 payment determination, which we are proposing 
to use for the HAI measures we have proposed above, are shown below. 
Hospitals must submit their quarterly data to NHSN for Hospital IQR 
Program purposes on or around the dates shown in the table below 
(updates to this will be posted on the QualityNet Web site).
[GRAPHIC] [TIFF OMITTED] TP05MY11.065

    Hospitals would have until the Hospital IQR Program final 
submission deadline to submit their quarterly data to NHSN. After the 
final Hospital IQR Program submission deadline has occurred for each CY 
2012 quarter, CMS will obtain the hospital-specific calculations that 
have been generated by the NHSN for the Hospital IQR Program.
    We invite public comment on this proposal.
6. Proposed Chart Validation Requirements for Chart-Abstracted Measures
a. Proposed Changes to the Chart Validation Requirements and Methods 
for the FY 2012 Payment Determination and Subsequent Years
    We are proposing several changes to the chart validation 
requirements and methods we adopted in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50225 through 50229) for the FY 2012 payment determination 
and subsequent years. In previous years, charts were requested by the 
CMS CDAC contractor and hospitals were given 45 days from the date of 
the request to submit the requested records. If any record(s) were not 
received by the 45-day requirement, the CMS CDAC contractor assigned a 
``zero'' validation score to each measure in a missing record. We are 
proposing to change the time period given to hospitals to submit 
medical records to the CDAC contractor to 30 calendar days, and we are 
proposing to codify this proposal at 42 CFR 412.140(d)(1). This 
proposed change in submission timeframe will align the current process 
with the requirements in 42 CFR 476.78(b)(2), which currently allow 
only 30 days for chart submission in the context of reviews by QIOs. We 
are proposing this deadline modification to reduce the time we need to 
complete validation, and provide hospitals with feedback on their 
abstraction accuracy. We believe that this linkage between Hospital IQR 
Program validation discharge quarters and the same fiscal year's 
Hospital VBP Program proposed performance period would improve the 
reliability and accuracy of the Hospital VBP Program's chart-abstracted 
measures. Hospitals that are subject to Hospital IQR payment reduction 
due to not passing our validation requirement would be excluded from 
receiving a Hospital VBP performance score and corresponding incentive 
payment under section 1886(o)(1)(C)(ii)(I) of the Act. Thus, CMS would 
ensure that the data submitted on chart-abstracted measures we adopt 
for the Hospital VBP Program is accurate by virtue of validating it 
under the validation procedures we have adopted for the Hospital IQR 
Program.
b. Proposed Supplements to the Chart Validation Process for the FY 2014 
Payment Determination and Subsequent Years
    We are proposing to continue to use the supplements to the chart 
validation requirements and methods we adopted in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50227 through 50229) for FY 2014 payment 
determinations and future years with several proposed modifications.
    We are proposing to add hospitals to our validation sample if they 
were open under their current CCNs in FY 2012 but not selected for 
validation in the three previous annual Hospital IQR Program validation 
samples. We are proposing this addition to supplement

[[Page 25921]]

our validation approach to ensure that all eligible Hospital IQR 
Program hospitals are selected for validation at least once every 4 
years. We are proposing this addition starting in FY 2015 because FY 
2015 would be the fourth year that CMS would have used the random 
validation approach (which begins in FY 2012 as adopted in the FY 2011 
IPPS/LTCH PPS final rule). We invite public comment on this proposal.
    We believe that this proposed Hospital IQR Program validation 
process meets the requirements set forth in section 
1886(b)(3)(B)(viii)(XI) of the Act. This section states that ``the 
Secretary shall establish a process to validate measures specified 
under this clause as appropriate. Such process shall include the 
auditing of a number of randomly selected hospitals sufficient to 
ensure validity of the reporting program under this clause as a whole 
and shall provide a hospital with an opportunity to appeal the 
validation of measures reported by such hospital.''
    Starting with the FY 2012 payment determination and continuing in 
subsequent fiscal years, the chart validation process audits 800 
randomly selected hospitals for the discharge quarters. This sample 
size is sufficient to validate more than 22 percent of subsection (d) 
hospitals in an applicable fiscal year and ensure accuracy of the 
Hospital IQR Program quality data.
    For FY 2014 payment determination, we are proposing to validate 24 
chart-abstracted measures including 19 currently validated measures, 
and 5 proposed additional measures. The FY 2014 proposed validation 
reflects the 5 measures we are proposing to add (2 EDT measures, 
Central Line Associated Blood Stream Infection, Global Influenza 
Immunization, and Global Pneumonia Immunization measures) and the 8 
measures we are proposing to retire (AMI-1, AMI-3, AMI-4, AMI-5, HF-4, 
PN-4, PN-5c, and SCIP Infection 6).
    Validation of the HCAHPS measure is conducted through our oversight 
activities. We provide oversight of all HCAHPS survey vendors and 
hospitals self-administering the survey in order to ensure that the 
data collection protocols are followed. We also provide oversight and 
validation through our review of Quality Assurance Plans, site visits, 
conference calls and detailed data analyses each quarter to ensure 
there are no anomalies found in the data. In particular, we use site 
visits to review all data collection activities, including data reviews 
to track a discharged patient from sampling to survey administration to 
data submission.
    We are proposing, starting with FY 2014 payment determinations, a 
modest increase to the current Hospital IQR Program validation sample 
of SCIP, AMI, HF, and PN cases. Specifically, we are proposing to add 
three charts per selected hospital per quarter to the validation 
sample. This additional quarterly sample would enable us to validate 
the CLABSI measure that we added to the Hospital IQR Program measure 
set beginning with the FY 2014 payment determination. CLABSI is a 
relatively rare event compared to SCIP, AMI, HF, and PN cases. In 2009, 
about 18,000 CLABSIs occurred in ICU patients in the United States, and 
these infections were a major contributor to prolonged hospital stays 
and inpatient mortality. We are proposing a process to validate the 
CLABSI measure that takes into account the relative infrequency of this 
event and the case-finding methodology for it, specifically the 
requirements for a positive blood culture result and the presence of a 
central venous catheter in the patient at the time of, or within 48 
hours before, onset of the infection. We recognize that the current 
validation process and sample size for AMI, HF, PN, and SCIP measures 
is not likely to be sufficiently reliable to detect systematic 
underreporting of CLABSI. Unlike the current AMI, HF, PN, and SCIP 
chart abstracted process of care measures, CLABSI is a rarely occurring 
infection among acute care inpatient discharges. We estimate that 
between 0.1 percent to 0.2 percent of all acute care inpatient patient 
discharges nationwide involve patients who are infected with a CLABSI. 
We believe that our current Hospital IQR AMI, HF, PN, and SCIP sample 
sizes and sample methods would not reliably validate CLABSI measure 
rates at the hospital level because of the relatively rare occurrence 
of these events. We also seek to target validation of the CLABSI 
measure to minimize hospital burden in complying with our sample size 
proposals, for which hospitals must find, photocopy, and return 
requested medical records to CMS. If CMS did not utilize this targeted 
validation approach for the CLABSI measure, hospitals would have to 
submit 200 to 300 additional randomly selected cases in order to 
effectively validate this measure, given its rare occurrence. We 
believe that our proposed CLABSI validation process addresses these 
limitations through the use of a targeted incremental validation sample 
comprised of three charts of possible CLABSI events, and will reliably 
validate the Hospital IQR Program CLABSI measure while not overly 
burdening hospitals with medical record requests.
    Specifically, we are proposing to identify sampled hospitals' three 
quarterly potential CLABSI charts using a two-step selection process 
that would target intensive care unit patients with bloodstream 
infection (positive blood culture results) and a Central Venous 
Catheter (CVC) provided by sampled hospitals to CMS. In the first step 
of this process, a CMS contractor would require the 800 randomly 
sampled hospitals to provide a quarterly list of all blood cultures 
positive for infection status taken from intensive care units 
conducting CLABSI surveillance during the discharge quarter. We are 
aware that this list will include both reported CLABSI events and many 
non-CLABSI events, including patients with and without CVCs. In 
clinical terms, our intent in reviewing these positive blood culture 
lists is to identify the information needed to determine whether the 
blood culture isolate is a likely pathogen found at least once, or a 
common skin commensal (CSC) found in two or more positive blood 
cultures drawn on separate occasions. CSC's are microorganisms that are 
commonly found on the skin and often indicate contamination of the 
blood culture media rather than infection by the microorganism when it 
is identified in a single blood culture test. Two sets of blood 
cultures are needed to differentiate true infection from contamination. 
The list of CSCs is comprised of the following organisms: diphtheroids 
(Corynebacterium spp.); Bacillus spp. (not B. anthracis); 
Priopionibacterium spp.; coagulase negative staphylococci including S. 
epidermidis; viridans group streptococci; Aerococcus spp.; and 
Micrococcus spp. This list of CSCs is also found at the NHSN Web site,  
http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf. We would 
also require hospitals to self-identify intensive care unit patients 
with a CVC that are on this blood culture list. Using all of this 
information, we would be able to identify intensive care unit patients 
with a bloodstream infection and with a CVC (that is, candidate CLABSI 
events) for subsequent sampling.
    In the second step of this process, we would randomly sample these 
candidate CLABSI events (ICU patients with a CVC and where a pathogen 
was recovered at least once or the same CSC was cultured from 2 or more 
blood cultures drawn on separate occasions). Specifically, the CMS CDAC 
would require hospitals to submit up to 3 medical records each quarter 
meeting

[[Page 25922]]

these criteria, randomly selected by CMS from among eligible charts. 
This number of medical records is sufficient to detect unreported 
CLABSI events based on our sample size analysis and experience from 
State health department validation efforts. This proposed process 
utilizes the validation experience from at least ten current State 
health department validation initiatives. In addition, we are proposing 
to randomly validate CLABSI data by abstracting all necessary quality 
data from the 12 quarterly medical records in our AMI, HF, PN, and SCIP 
targets already collected for IQR validation as well as the 3 
additional records we later propose to collect for ED throughput/
Immunization. Our intent in validating all currently requested 
quarterly medical records for CLABSI is to assess reliability of CLABSI 
measure rates from a random sample of patients independent from the 
proposed 3 record sample selected using blood culture lists and CVC 
presence to target underreporting of CLABSI events to the CDC's NHSN. 
In our proposed 12 record random sample of CLABSI events, we will not 
use blood culture list and CVC presence in our sampling, since this 
sample is already drawn from the AMI, HF, PN, and SCIP hospital 
reported data reported to CMS. By combining a random and targeted 
sampling approach using two independent sources to validate CLABSI 
data, we believe that we are adequately assessing the accuracy and 
reliability of the CLABSI measure in accordance with section 
1886(b)(3)(B)(viii)(XI) of the Act.
    We are proposing to determine the CLABSI validation score using a 
process that begins with the CMS contractor validation coordinator 
comparing the CDAC's CLABSI infection status to the hospital's event 
data reported to NHSN for the applicable quarter. For each medical 
record reviewed, a hospital would receive a match only if the CMS 
contractor validation coordinator determines equivalency between the 
CMS contractor's determination of infection status and the infection 
status reported to NHSN. For example, if one of the CMS-requested 
validation medical records revealed CLABSI and the event was not 
reported to the NHSN, then the hospital would receive a zero score for 
the CLABSI measure for that validated record. If the CMS contractor 
discovered that a second record in the CMS validation sample indicated 
no CLABSI event, but a CLABSI was reported to the NHSN for the record, 
the hospital would also receive a zero score for the CLABSI measure for 
that validation record. Thus, Hospitals would only receive a 100% 
CLABSI validation score for individual records if their CMS validation 
records' CLABSI status was consistent with the information reported, or 
not reported, to NHSN. In the above example, if the CMS quarterly 
validation process identified that 13 out of 15 total sampled records 
accurately reported the presence of a CLABSI or did not report a CLABSI 
where none was present, then the hospital's CLABSI validation score 
would be \13/15\, or about 87 percent.
    Starting with FY 2014 payment determination, we are also proposing 
to add a sixth quarterly sample, which would enable us to validate the 
EDT measures and the Immunization for Influenza and Immunization for 
Pneumonia global measures that we added to the Hospital IQR Program 
measure set. We are proposing to modify the current process (75 FR 
50225-75 FR 50229) for these measures in two ways. First, we are 
proposing to select 3 additional records each quarter from the records 
submitted by the 800 annually sampled hospitals. These records would 
only include principal diagnoses and surgical procedures not already 
included in the AMI, HF, PN, and SCIP populations eligible for 
validation sampling in these four topic areas. Second, we would 
abstract EDT and the Immunization for Influenza and Immunization for 
Pneumonia global measure data from the 15 quarterly AMI, HF, PN, SCIP 
and CLABSI records already submitted by hospitals for IQR validation. 
We would validate 18 records per quarter for these measures. With the 
addition of this sample of three records, we would ensure that all 
hospitals that reported chart-abstracted Hospital IQR data in all 
principal procedure and diagnosis codes would be eligible for sample 
selection for these global measures, thus, starting in FY 2014, we 
would be validating a total of 18 records per quarter per validated 
hospital in 6 strata (1) SCIP, (2) AMI, (3) HF, (4) PN, (5) CLABSI, and 
(6) EDT/immunization measures.
7. Proposed QIO Regulation Changes for Provider Medical Record 
Deadlines Possibly Including Serious Reportable Events
    Our Hospital IQR validation requirement has utilized 42 CFR 476.78 
authority and deadlines to require participating hospitals to return 
requested medical record information in a timely manner. Our State QIOs 
use this information to educate hospitals on medical record abstraction 
accuracy, and identify potential opportunities for quality improvement 
through medical record review. It is our goal to improve the alignment 
of QIO work in the Hospital IQR Program, quality improvement 
assistance, beneficiary (or beneficiary representative) requested QIO 
quality of care reviews, and QIO medical necessity reviews to improve 
the following three aims: (1) Improve individual care; (2) improve 
health for populations; and (3) lower cost through improvement. QIOs 
serve a critical role in advancing these three aims through their work 
with Medicare providers and beneficiaries to advance quality care and 
health.
    Moreover, because we developed our validation process based on the 
requirements of the QIO program regulations, we are also proposing 
corresponding changes to 42 CFR 476.78(b), along with minor editorial 
revisions. This section includes requirements related to the submission 
of medical information as well as other information associated with the 
prospective payment system. Specifically, we are proposing to add a new 
Sec.  478.78(b)(2)(ii) that would require the submission of medical 
information within 21 days in those situations in which a ``serious 
reportable event'' or other circumstance has been identified during the 
course of a QIO review. For purposes of this subsection, we are 
proposing to define the term ``serious reportable event'' to be 
consistent with the NQF's definition of a serious reportable event in 
its report ``Serious Reportable Events in Healthcare 2006 Update.'' 
These events include the following:
Surgical Events
     Surgery performed on the wrong body part
     Surgery performed on the wrong patient
     Wrong surgical procedure performed on a patient
     Unintended retention of a foreign object in a patient 
after surgery or other procedure
     Intraoperative or immediately postoperative death in an 
ASA Class I patient
Product or Device Events
     Patient death or serious disability associated with the 
use of contaminated drugs, devices or biologics provided by the 
healthcare facility
     Patient death or serious disability associated with the 
use or function of a device in patient care in which the device is used 
or functions other than as intended
     Patient death or serious disability associated with 
intravascular air embolism that occurs while being cared for in a 
healthcare facility

[[Page 25923]]

Patient Protection Events
     Infant discharged to the wrong person
     Patient death or serious disability associated with 
patient leaving the facility without permission
     Patient suicide, or attempted suicide, resulting in 
serious disability while being cared for in a healthcare facility
Care Management Events
     Patient death or serious disability associated with a 
medication error (for example, errors involving the wrong drug, wrong 
dose, wrong patient, wrong time, wrong rate, wrong preparation or wrong 
route of administration)
     Patient death or serious disability associated with a 
hemolytic reaction (abnormal breakdown of red blood cells) due to the 
administration of ABO/HLA--incompatible blood or blood products
     Maternal death or serious disability associated with labor 
or delivery in a low-risk pregnancy while being cared for in a 
healthcare facility
     Patient death or serious disability associated with 
hypoglycemia, the onset of which occurs while the patient is being 
cared for in a healthcare facility
     Death or serious disability associated with failure to 
identify and treat hyperbilirubinemia (condition where there is a high 
amount of bilirubin in the blood) in newborns
     Stage 3 or 4 pressure ulcers acquired after admission to a 
healthcare facility
     Patient death or serious disability due to spinal 
manipulative therapy
     Artificial insemination with the wrong donor sperm or 
wrong egg
Environmental Events
     Patient death or serious disability associated with an 
electric shock while being cared for in a healthcare facility
     Any incident in which a line designated for oxygen or 
other gas to be delivered to a patient contains the wrong gas or is 
contaminated by toxic substances
     Patient death or serious disability associated with a burn 
incurred from any source while being cared for in a healthcare facility
     Patient death or serious disability associated with a fall 
while being cared for in a healthcare facility
     Patient death or serious disability associated with the 
use of restraints or bedrails while being cared for in a healthcare 
facility
Criminal Events
     Any instance of care ordered by or provided by someone 
impersonating a physician, nurse, pharmacist, or other licensed 
healthcare provider
     Abduction of a patient of any age
     Sexual assault on a patient within or on the grounds of a 
healthcare facility
     Death or significant injury of a patient or staff member 
resulting from a physical assault (that is, battery) that occurs within 
or on the grounds of a healthcare facility
    This proposed 21 day medical record deadline would be used when, 
for example, in the QIO's judgment, delays in receiving medical 
information could negatively undermine its efforts to evaluate the 
quality of care provided or the facility's adherence to payment 
policies. It also would enable QIOs to better utilize, and respond to, 
information about adverse events gained from the quality reporting 
program, in a timely fashion so that QIOs can have an improved and more 
immediate impact on the quality of health care.
    We also are proposing a technical correction to 42 CFR 476.78(a) to 
correct a cross reference.
    We invite public comment on our proposal to improve patient care 
through QIO access to more rapid provider information about ``serious 
reportable events'' and our proposed technical correction to 42 CFR 
476.78(a).
8. Proposed Data Accuracy and Completeness Acknowledgement Requirements 
for the FY 2012 Payment Determination and Subsequent Years
    We are proposing to require hospitals to continue to electronically 
acknowledge their data accuracy and completeness once annually. 
However, we are proposing to change the submission deadline to be used 
for the FY 2012 Hospital IQR Program payment determination and 
subsequent years. This proposal will allow us to align the submission 
deadline with the final quarter of the chart-abstracted measures. 
Hospitals will continue to submit the required electronic 
acknowledgment attesting that the data provided to meet the FY 2012 
Hospital IQR Program data submission requirements is accurate and 
complete to the best of the hospital's knowledge at the time of data 
submission. We are proposing to make the submission deadline for the 
Data Accuracy and Completeness Acknowledgement May 15, 2012 with 
respect to the time period of January 1, 2011 through December 31, 
2011. We invite public comment on this proposal.
9. Proposed Public Display Requirements for the FY 2014 Payment 
Determination and Subsequent Years
    We are proposing to continue, for the FY 2014 payment determination 
and subsequent years, the approach we adopted in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50230) for public display requirements for the FY 
2012 payment determination and subsequent years.
    The Hospital IQR Program quality measures are typically reported on 
the Hospital Compare Web site http://www.hospitalcompare.hhs.gov, but 
on occasion are reported on other CMS Web sites. We require that 
hospitals sign a Notice of Participation form when they first register 
to participate in the Hospital IQR Program. Once a hospital has 
submitted a form, the hospital is considered to be an active Hospital 
IQR Program participant until such time as the hospital submits a 
withdrawal form to CMS (72 FR 47360). Hospitals signing this form agree 
that they will allow us to publicly report the quality measures 
included in the Hospital IQR Program.
    We will continue to display quality information for public viewing 
as required by section 1886(b)(3)(B)(viii)(VII) of the Act. Before we 
display this information, hospitals will be permitted to review their 
information as recorded in the QIO Clinical Warehouse.
    We invite public comment on this proposal.
10. Proposed Reconsideration and Appeal Procedures for the FY 2012 
Payment Determination
    We are proposing to continue, for the FY 2012 payment determination 
and subsequent years, the general approach we adopted in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50230) for reconsideration and appeal 
procedures for the FY 2011 payment determination. We also are proposing 
to codify the requirements under this process at 42 CFR 412.140(e). We 
discuss each of the regulatory provisions being proposed, as well as 
specific changes, below.
    We are proposing that the general deadline for submitting a request 
for reconsideration in connection with the FY 2012 payment 
determination will be 30 days from the date of receipt of the payment 
determination notification. Historically, most reconsideration requests 
are based on the failure to meet established data submission deadlines. 
While we want to ensure that hospitals have an opportunity to request 
reconsiderations when warranted, we also need to balance this goal with 
our need to complete the reconsideration

[[Page 25924]]

process in a timely manner and with the hospitals' desire to obtain 
final decisions on their requests in a timely manner. Therefore, we are 
proposing to reduce the reconsideration and appeal period from a 
deadline of November 1st 2012 to 30 days after hospital receipt of the 
payment determination notification. Notifications will be sent via a 
trackable mail option such as Certified U.S. Mail or Registered Mail. 
We include this change in the proposed Sec.  412.140(e)(1).
    As discussed more fully below, we are proposing that all hospitals 
submit a request for reconsideration and receive a decision on that 
request before they can file an appeal with the Provider Reimbursement 
Review Board (PRRB). For the FY 2012 payment determination, we are 
proposing to continue utilizing many of the same procedures that we 
utilized for the FY 2011 requests for reconsideration. We are, however, 
clarifying that a hospital must submit all documentation and evidence 
that supports its request for reconsideration at the time that it 
submits its request. This includes copies of any communications, such 
as e-mails that the hospital believes demonstrate its compliance with 
the program requirements, as well as all paper medical records that 
support the hospital's rationale for seeking reconsideration. The 
information that must be included when a hospital submits a 
reconsideration request has been listed in proposed Sec.  
412.140(e)(2). Under these proposed procedures, the hospital must:

--Submit to CMS, via QualityNet, a Reconsideration Request form 
(available on the QualityNet Web site) containing the following 
information:
--Hospital CMS Certification number (CCN).
--Hospital Name.
--CMS-identified reason for failure (as provided in the CMS 
notification of failure letter to the hospital).
--Hospital basis for requesting reconsideration. This must identify the 
hospital's specific reason(s) for believing it met the Hospital IQR 
Program requirements and should receive the full update to the 
standardized amount.
--CEO contact information, including name, e-mail address, telephone 
number, and mailing address (must include the physical address, not 
just the post office box). We note that to the extent a hospital can 
submit a request for reconsideration on-line, the burden on our staff 
would be reduced and, as a result, we can more quickly review the 
request.
--QualityNet System Administrator contact information, including name, 
e-mail address, telephone number, and mailing address (must include the 
physical address, not just the post office box).
--Paper medical record requirement for reconsideration requests 
involving validation. We are proposing that if a hospital asks us to 
reconsider an adverse Hospital IQR Program payment decision made 
because the hospital failed the validation requirement, the hospital 
must submit paper copies of all the medical records that it submitted 
to the CDAC contractor each quarter for purposes of the validation. 
Hospitals must submit this documentation to a CMS contractor. The 
contractor will be a QIO support contractor, which has authority to 
review patient level information under 42 CFR part 480. We will post 
the address where hospitals can ship the paper charts on the QualityNet 
Web site after we issue the FY 2012 IPPS/LTCH PPS final rule.

    Hospitals submitting a Hospital IQR Program validation 
reconsideration request will have all data elements to be reconsidered 
reviewed by CMS, and not their State QIO. (The State QIO is available 
to conduct a quarterly validation appeal if requested to do so by a 
hospital.)
    Hospitals must provide a written justification for each appealed 
data element classified during the validation process as a mismatch. We 
will review the data elements that were labeled as mismatched, as well 
as the written justifications provided by the hospitals, and make a 
decision on the reconsideration request.
    As we mentioned above, hospitals that submit a reconsideration 
request to CMS must receive a decision on that request prior to 
submitting a PRRB appeal. We believe that the reconsideration process 
is less costly for both CMS and hospitals, and that it decreases the 
number of PRRB appeals by resolving issues earlier in the 
reconsideration and appeals process. We have proposed language at Sec.  
412.140(e)(3) stating that a hospital that receives an adverse decision 
on its reconsideration request may appeal that decision to the PRRB.
    Following receipt of a request for reconsideration, we will--
     Provide an e-mail acknowledgement, using the contact 
information provided in the reconsideration request, to the CEO and the 
QualityNet Administrator that the request has been received.
     Provide written notification to the hospital CEO, using 
the contact information provided in the reconsideration request, 
regarding our decision. We expect the process to take approximately 90 
days from the receipt of the reconsideration request.
    We are proposing to continue for the FY 2012 Hospital IQR 
reconsideration and future years the scope of review when a hospital 
requests reconsideration because it failed our validation requirements, 
which we adopted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43892). The scope of this review will be as follows:
    1. Hospital requests reconsideration for CDAC contractor-abstracted 
data elements classified as mismatches affecting validation scores. 
Hospitals must timely submit a copy of the entire requested medical 
record to the CDAC contractor during the quarterly validation process 
for the requested case to be eligible to be reconsidered on the basis 
of mismatched data elements. Only hospitals that fail to meet the 
passing threshold for the quarterly validation would receive an 
opportunity to appeal the validation results to their State QIO.
    2. Hospital requests reconsideration for medical record copies 
submitted during the quarterly validation process and classified as 
invalid record selections. Invalid record selections are defined as 
medical records submitted by hospitals during the quarterly validation 
process that do not match the patient's episode of care information as 
determined by the CDAC contractor (in other words, the contractor 
determines that the hospital returned a medical record that is 
different from that which was requested). If the CDAC contractor 
determines that the hospital has submitted an invalid record selection 
case, it awards a zero validation score for the case because the 
hospital did not submit the entire copy of the medical record for that 
requested case. During the reconsideration process, our review of 
invalid record selections will initially be limited to determining 
whether the record submitted to the CDAC contractor was actually an 
entire copy of the requested medical record. If we determine during 
reconsideration that the hospital did submit the entire copy of the 
requested medical record, then we would abstract data elements from the 
medical record submitted by the hospital.
    3. Hospital requests reconsideration for medical records not 
submitted to the CDAC contractor within the proposed 30 calendar day 
deadline. Our review will initially be limited to determining whether 
the CDAC contractor received the requested record within the proposed 
30 calendar days, and whether

[[Page 25925]]

the hospital received the initial medical record request. If we 
determine during reconsideration that the CDAC contractor did receive a 
paper copy of the requested medical record within the proposed 30 
calendar days, then we would abstract data elements from the medical 
record submitted by the hospital. If we determine that the hospital 
received a request for medical records and did not submit the requested 
records within the proposed 30 day period, CMS will not accept these 
records as part of the reconsideration. CMS will not abstract data from 
charts not received timely by the CMS contractor. Please note that this 
proposed language is also designed to address those instances where the 
hospital's request is based on ``invalid record selections,'' which we 
have defined as medical records submitted during the quarterly 
validation process that do not match the patient's episode of care 
information as determined by the CMS contractor as described above in 
situation 2, above ``Hospital requests reconsideration for medical 
record copies submitted during the quarterly validation process and 
classified as invalid record selections.''
    In sum, we are proposing to continue to initially limit the scope 
of our reconsideration reviews involving validation to information 
already submitted by the hospital during the quarterly validation 
process, and we will not abstract medical records that were not 
submitted to the CMS contractor during the quarterly validation 
process. We would expand the scope of our review only if we find during 
the initial review that the hospital correctly and timely submitted the 
requested medical records. In that case, we would abstract data 
elements from the medical record submitted by the hospital as part of 
our review of its reconsideration request.
    If a hospital is dissatisfied with the result of a Hospital IQR 
Program reconsideration decision, the hospital may file an appeal under 
42 CFR Part 405, Subpart R (a PRRB appeal). We invite public comment on 
the extent to which these proposed procedures will be less costly for 
hospitals, and whether they will lead to fewer PRRB appeals.
11. Proposed Hospital IQR Program Disaster Waivers
    In our experience, there have been times when hospitals have been 
unable to submit required quality data due to extraordinary 
circumstances that are not within their control. It is our goal to not 
penalize hospitals for such circumstances or unduly increase their 
burden during these times. Therefore, we are proposing to continue, for 
the FY 2014 and subsequent years payment determinations, the process we 
adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50225), for 
hospitals to request and for CMS to grant waivers with respect to the 
reporting of required quality data when there are extraordinary 
circumstances beyond the control of the hospital. Under the process, in 
the event of extraordinary circumstances, such as a natural disaster, 
not within the control of the hospital, for the hospital to receive 
consideration for an extension or waiver of the requirement to submit 
quality data for one or more quarters, a hospital would submit to CMS a 
request form that would be made available on the QualityNet Web site. 
The following information should be noted on the form:
     Hospital CCN;
     Hospital Name;
     CEO and any other designated personnel contact 
information, including name, e-mail address, telephone number, and 
mailing address (must include a physical address, a post office box 
address is not acceptable);
     Hospital's reason for requesting an extension or waiver;
     Evidence of the impact of the extraordinary circumstances, 
including but not limited to photographs, newspaper and other media 
articles; and
     A date when the hospital will again be able to submit 
Hospital IQR Program data, and a justification for the proposed date.
    The request form must be signed by the hospital's CEO. We are 
proposing that a request form must be submitted within 30, rather than 
45, days of the date that the extraordinary circumstance occurred. The 
QIO in the hospital's state will forward the request form to CMS. 
Following receipt of the request form, CMS will: (1) provide a written 
acknowledgement using the contact information provided in the request, 
to the CEO and any additional designated hospital personnel, notifying 
them that the hospital's request has been received; and (2) provide a 
formal response to the CEO and any additional designated hospital 
personnel using the contact information provided in the request 
notifying them of our decision.
    This proposal does not preclude CMS from granting waivers or 
extensions to hospitals that have not requested them when we determine 
that an extraordinary circumstance, such as an act of nature (for 
example, hurricane), affects an entire region or locale. If CMS makes 
the determination to grant a waiver or extension to hospitals in a 
region or locale, CMS proposes to communicate this decision through 
routine communication channels to hospitals, vendors and QIOs, 
including but not limited to issuing memos, e-mails and notices on the 
QualityNet Web site. We are proposing to include an overview of this 
process in proposed 42 CFR 412.140(c)(2). We invite public comment on 
this proposal.
12. Electronic Health Records (EHRs)
a. Background
    Starting with the FY 2006 IPPS final rule, we have encouraged 
hospitals to take steps toward the adoption of EHRs (also referred to 
in previous rulemaking documents as electronic medical records) that 
will allow for reporting of clinical quality data from the EHRs 
directly to a CMS data repository (70 FR 47420 through 47421). We 
sought to prepare for future EHR submission of quality measures by 
sponsoring the creation of electronic specifications for quality 
measures under consideration for the Hospital IQR Program.
b. HITECH Act EHR Provisions
    The HITECH Act (Title IV of Division B of the ARRA, together with 
Title XIII of Division A of the ARRA) authorizes payment incentives 
under Medicare for the adoption and use of certified EHR technology 
beginning in FY 2011. Hospitals are eligible for these payment 
incentives if they meet requirements for meaningful use of certified 
EHR technology, which include reporting on quality measures using 
certified EHR technology. With respect to the selection of quality 
measures for this purpose, under section 1886(n)(3)(A)(iii) of the Act, 
as added by section 4102 of the HITECH Act, the Secretary shall select 
measures, including clinical quality measures, that hospitals must 
provide to CMS in order to be eligible for the EHR incentive payments. 
With respect to the clinical quality measures, section 1886(n)(3)(B)(i) 
of the Act requires the Secretary to give preference to those clinical 
quality measures that have been selected for the Hospital IQR Program 
under section 1886(b)(3)(B)(viii) of the Act or that have been endorsed 
by the entity with a contract with the Secretary under section 1890(a) 
of the Act. All measures must be proposed for public comment prior to 
their selection, except in the case of measures previously selected for 
the Hospital IQR Program under section 1886(b)(3)(B)(viii) of the Act. 
The final rule for the Medicare and Medicaid EHR Incentive Programs 
includes 15 clinical quality measures for eligible hospitals and 
critical access hospitals (75 FR 44418), 2 of which were previously

[[Page 25926]]

selected for the Hospital IQR Program under section 1886(b)(3)(B)(viii) 
of the Act. The remainder of the measures for these incentive programs 
are being proposed for the Hospital IQR Program for the FY 2015 payment 
determination.
    We continue to believe there are important synergies with respect 
to the two programs. We believe the financial incentives under the 
HITECH Act for the adoption and meaningful use of certified EHR 
technology by hospitals will encourage the adoption and use of 
certified EHRs for the reporting of clinical quality measures under the 
Hospital IQR Program. Through the EHR Incentive Programs we expect that 
the submission of quality data through EHRs will provide a foundation 
for establishing the capacity of hospitals to send, and for CMS to 
receive, quality measures via hospital EHRs for Hospital IQR Program 
measures in the future.
    The HITECH Act requires that the Secretary seek to avoid redundant 
and duplicative reporting, with specific reference to the Hospital IQR 
Program for eligible hospitals. To the extent that quality measures are 
included in both the Hospital IQR Program and the EHR Incentive 
Programs, this would mean that Hospital IQR Program would need to 
transition to use of certified EHR technology rather than manual chart 
abstraction. We are considering what the most practical approach to 
effect such a transition might be. One option is to select a date after 
which chart-abstracted data would no longer be used in the Hospital IQR 
Program. This would require sufficient advance notice to hospitals for 
hospitals to report the data via certified EHR technology. At that 
point, we believe that it is likely that nearly all IPPS hospitals will 
have implemented certified EHR technology as incentivized by the HITECH 
Act. Another option would be to allow hospitals to submit the same 
measure for the Hospital IQR Program based on either chart-abstraction 
or EHR-based reporting. This would require extensive testing to ensure 
equivalence given that the data for the Hospital IQR Program supports 
both the public reporting of such information and the Hospital VBP 
Program. We are concerned that this option would not be feasible. We 
invite public comment on the approach of selecting a date such as 
calendar year 2015 after which chart-abstracted data would no longer be 
accepted for the Hospital IQR Program.
    Ultimately, we do not anticipate having two different sets of 
clinical quality measures for the EHR Incentive Program and the 
Hospital IQR Program. Rather, we anticipate a single set of hospital 
clinical quality measures, most of which we anticipate would be 
electronically specified. We envision a single reporting infrastructure 
for electronic submission in the future, and will strive to align the 
hospital quality initiative programs to seek to avoid redundant and 
duplicative reporting of quality measures for hospitals. We note that 
some important Hospital IQR Program quality measures such as HCAHPS 
experience of care measures are based on survey data and do not lend 
themselves to EHR reporting. Similarly, certain outcome quality 
measures, such as the current Hospital IQR Program readmission 
measures, are based on claims rather than clinical data. Thus, not all 
Hospital IRP quality measures will necessarily be capable of being 
submitted through EHRs. As a consequence, not all Hospital IQR Program 
measures would necessarily be appropriate for inclusion in the EHR 
Incentive Programs.
    We again note that the provisions in this FY 2012 IPPS/LTCH PPS 
proposed rule do not implicate or implement any HITECH statutory 
provisions. Those provisions are the subject of separate rulemaking and 
public comment.

B. Hospital Value-Based Purchasing (VBP) Program

1. Background
    Section 1886(o) of the Act requires the Secretary to establish a 
Hospital Inpatient VBP Program under which value-based incentive 
payments are made in a fiscal year to hospitals meeting performance 
standards established for a performance period for such fiscal year. 
Both the performance standards and the performance period for a fiscal 
year are to be established by the Secretary.
    Section 1886(o)(1)(B) of the Act directs the Secretary to begin 
making value-based incentive payments under the Hospital Inpatient VBP 
Program to hospitals for discharges occurring on or after October 1, 
2012. These incentive payments will be funded for FY 2013 through a 
reduction to the FY 2013 base operating MS-DRG payment for each 
discharge of 1 percent, as required by section 1886(o)(7)(B)(i) of the 
Act.
    Section 1886(o)(1)(C) of the Act provides that the Hospital 
Inpatient VBP Program applies to subsection (d) hospitals (as defined 
in section 1886(d)(1)(B) of the Act), but excludes from the definition 
of the term ``hospital,'' with respect to a fiscal year: (1) A hospital 
that is subject to the payment reduction under section 
1886(b)(3)(B)(viii)(I) of the Act (the Hospital IQR Program) for such 
fiscal year; (2) a hospital for which, during the performance period 
for the fiscal year, the Secretary cited deficiencies that pose 
immediate jeopardy to the health or safety of patients; and (3) a 
hospital for which there are not a minimum number (as determined by the 
Secretary) of measures for the performance period for the fiscal year 
involved, or for which there are not a minimum number (as determined by 
the Secretary) of cases for the measures that apply to the hospital for 
the performance period for such fiscal year.
2. Overview of the Hospital Inpatient VBP Program Proposed Rule
    On January 7, 2011, we issued the Hospital Inpatient VBP Program 
proposed rule to implement section 1886(o) of the Act (76 FR 2454 
through 2491). This proposed rule was developed based on extensive 
research we conducted on hospital value-based purchasing, including 
research that formed the basis of a 2007 report we submitted to 
Congress, entitled ``Report to Congress: Plan to Implement a Medicare 
Hospital Value-Based Purchasing Program'' (November 21, 2007). This 
report is available on the CMS Web site at: http://www.cms.gov/AcuteInpatientPPS/downloads/HospitalVBPPlanRTCFINALSUBMITTED2007.pdf. 
The report takes into account input from both stakeholders and other 
interested parties.
    As described more fully in the Hospital Inpatient VBP Program 
proposed rule (76 FR 2458 through 2463), we proposed to initially adopt 
for the FY 2013 Hospital Inpatient VBP Program 18 measures that we have 
already adopted for the Hospital IQR Program, categorized into two 
domains. We proposed to group 17 of the proposed measures, which are 
clinical process of care measures, into a Clinical Process of Care 
domain, and proposed to place 1 measure, the Hospital Consumer 
Assessment of Healthcare Providers and Systems (HCAHPS) survey, into a 
Patient Experience of Care domain. We also proposed to use a 3-quarter 
performance period from July 1, 2011 through March 31, 2012 for these 
proposed measures for purposes of the FY 2013 Hospital Inpatient VBP 
Program and to determine whether hospitals meet the proposed 
performance standards for these measures by comparing their performance 
during the proposed performance period to their performance during a 
proposed 9-month (3-quarter) baseline period from July 1, 2009 through 
March 31, 2010.
    We proposed to implement a methodology for assessing the total

[[Page 25927]]

performance of each hospital based on performance standards, under 
which we will score each hospital based on achievement and improvement 
ranges for each applicable measure. In addition, we proposed for FY 
2013 to calculate a total performance score for each hospital by 
combining the greater of the hospital's achievement or improvement 
points for each measure to determine a score for each domain, 
multiplying each domain score by a proposed weight (clinical process of 
care: 70 percent, patient experience of care: 30 percent), and adding 
together the weighted domain scores. We proposed to convert each 
hospital's total performance score into a value-based incentive payment 
utilizing a linear exchange function. We refer readers to the Hospital 
Inpatient VBP Program proposed rule for greater detail on all of these 
proposals.
3. Proposed FY 2014 Hospital Inpatient VBP Program Measures
    a. Background
    Section 1886(o)(2)(A) of the Act requires the Secretary to select 
for the Hospital Inpatient VBP Program measures, other than readmission 
measures, from the measures specified under section 1886(b)(3)(B)(viii) 
of the Act for the Hospital IQR Program. Section 1886(o)(2)(B)(i) of 
the Act requires the Secretary, with respect to value-based incentive 
payments made for discharges occurring during FY 2013, to ensure that 
the selected measures cover at least the following specified conditions 
or topics: Acute Myocardial Infarction (AMI); Heart Failure (HF); 
Pneumonia (PN); Surgeries, as measured by the Surgical Care Improvement 
Project (SCIP); Healthcare-Associated Infections (HAIs), as measured by 
the prevention metrics and targets established in the HHS Action Plan 
to Prevent HAIs (available at: http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html) (or any successor plan); and HCAHPS. Section 
1886(o)(2)(B)(ii) of the Act requires the Secretary, with respect to 
value-based incentive payments made for discharges occurring during FY 
2014 or a subsequent year, to ensure that Hospital Inpatient VBP 
Program measures include efficiency measures, including measures of 
Medicare spending per beneficiary.
    Section 1886(o)(2)(C)(i) of the Act provides that the Secretary may 
not select a measure with respect to a performance period for a fiscal 
year unless the measure has been specified under the Hospital IQR 
Program and included on the Hospital Compare Web site for at least one 
year prior to the beginning of the performance period. Section 
1886(o)(2)(C)(ii) of the Act provides that a measure selected under 
section 1886(o)(2)(A) of the Act shall not apply to a hospital if the 
hospital does not furnish services appropriate to the measure.
    b. Proposed Efficiency Measure--Medicare Spending per Beneficiary 
Measure--for the FY 2014 Hospital Inpatient VBP Program
(1) Introduction
    Section 1886(o)(2)(B)(ii) of the Act requires the Secretary to 
ensure that, for Hospital Inpatient VBP discharges occurring during FY 
2014 or a subsequent year, the measures selected ``include efficiency 
measures, including measures of `Medicare spending per beneficiary'. * 
* *'' Therefore, for the FY 2014 Hospital Inpatient VBP Program, we are 
proposing to adopt a Medicare spending per beneficiary measure. This 
measure also is proposed for inclusion in the Hospital IQR Program in 
this proposed rule and is described in detail above in section 
IV.A.3.b.(2)(B)(v). The proposed approach to scoring this measure and 
including it in the Hospital Inpatient VBP Program is described below.
(2) Scoring the Medicare Spending Per Beneficiary Measure
    Section 1886(o)(5)(B)(ii) of the Act requires that the hospital 
performance score be determined using the higher of its achievement or 
improvement score for each measure. Therefore, we are proposing to 
calculate each hospital's achievement score and improvement score on 
the proposed Medicare spending per beneficiary measure, in order to 
determine which score will be used to calculate the total performance 
score for the hospital.
    We are proposing this scoring methodology because it is generally 
similar to the methodology proposed for scoring the Clinical Process of 
Care and Outcome Measures in the Hospital Inpatient VBP Program 
proposed rule (76 FR 2465 through 2471).
(A) Scoring Based on Achievement
    We are proposing to calculate a Medicare per beneficiary spending 
ratio of the Medicare spending per beneficiary amount for each hospital 
to the median Medicare spending per beneficiary amount across all 
hospitals during the performance period. We are proposing that a 
hospital would earn between 1 and 10 achievement points on the Medicare 
spending per beneficiary measure if its individual Medicare spending 
per beneficiary ratio during the performance period falls at or between 
the achievement threshold and the achievement benchmark for the 
measure. We are proposing to set the achievement threshold at the 
median Medicare spending per beneficiary ratio across all hospitals 
during the performance period. We are proposing to set the benchmark at 
the mean of the lowest decile of Medicare spending per beneficiary 
ratios during the performance period. A hospital whose individual 
Medicare spending per beneficiary ratio falls below the achievement 
threshold would score 0 achievement points on the measure, and a 
hospital whose individual Medicare spending per beneficiary ratio falls 
at or above the achievement benchmark would score the maximum of 10 
achievement points on the measure. A hospital whose individual Medicare 
spending per beneficiary ratio falls at or above the achievement 
threshold, but below the benchmark, would score between 1-9 points 
according to the following formula:

[9 * ((Hospital's performance period score - achievement threshold)/
(benchmark - achievement threshold))] + .5
(B) Scoring Based on Improvement
    We are proposing that a hospital would earn between 1 and 9 
improvement points on the proposed Medicare spending per beneficiary 
measure if its individual Medicare spending per beneficiary ratio 
during the performance period falls within the improvement range. We 
are proposing to set the threshold for improvement at the hospital's 
own Medicare spending per beneficiary ratio, as calculated during the 
baseline period. We are proposing a baseline period of May 15, 2010 
through February 14, 2011 for the Medicare spending per beneficiary 
measure and discuss this proposal in section IV.B.3.b.(4) of the 
preamble of this proposed rule. We are proposing that the improvement 
benchmark would be equal to the achievement benchmark for the 
performance period, which is the mean of the lowest decile of Medicare 
spending per beneficiary ratios across all hospitals. A hospital whose 
Medicare spending per beneficiary ratio is equal to or lower than its 
baseline period Medicare spending per beneficiary ratio would score 0 
improvement points on the measure. If a hospital's score on the measure 
during the performance period was greater than its baseline period 
score but below the benchmark (within the improvement range), the 
hospital would receive a score of 0-9 according to the following 
formula:

[[Page 25928]]

[10 * ((Hospital performance period score - Hospital baseline period 
score)/(Benchmark - Hospital baseline period score))] - .5
(C) Example of Scoring the Medicare Spending per Beneficiary Measure
    If Hospital A had the following spending per beneficiary amounts 
during the baseline and performance period:

Baseline = $10,105
Performance = $9,125;

and the median spending per beneficiary amounts across all hospitals 
for the baseline and performance periods were:

Median Baseline = $11,672
Median Performance = $12,467;

then the Medicare spending per beneficiary ratios for Hospital A in the 
baseline and performance periods would be:

Baseline Ratio = 0.866
Performance Ratio = 0.732.

    With an achievement threshold of 1.0 and an achievement benchmark 
of 0.712, we would then calculate attainment and improvement points for 
Hospital A as follows:

Attainment Points = 9 * (1.0 - 0.732)/(1.0 - 0.712) + 0.5 = 8.868
Improvement Points = 10 * (0.866 - 0.732)/(0.866 - 0.712) - 0.5 = 8.185

    These points are rounded to yield 9 attainment points and 8 
improvement points.
    Because section 1886(o)(5)(B)(ii) of the Act, as added by section 
3001 of the Affordable Care Act, requires that the hospital performance 
score will be determined using the higher of attainment or improvement 
score for each measure, the hospital in this example would receive 9 
points on the Medicare spending per beneficiary measure.
(D) Incorporation of Medicare Spending per Beneficiary Measure Score 
Into the Overall Hospital Total Performance Score
    We are proposing to incorporate the Medicare spending per 
beneficiary measure score into the FY 2014 Hospital Inpatient VBP 
Program as part of a new domain: The ``Efficiency'' domain. The 
Medicare spending per beneficiary measure score would be the Efficiency 
domain score for purposes of the FY 2014 Hospital Inpatient VBP 
Program. Consistent with the domain scoring method proposed in the 
Hospital Inpatient VBP Program proposed rule (76 FR 2454 through 2491), 
we are proposing to determine the total earned points for the 
Efficiency domain in general by adding the points earned for each 
domain measure and dividing by the total possible points, then 
multiplying that number by 100 percent. However, because we are 
proposing to adopt only one measure for the Efficiency domain for the 
FY 2014 Hospital Inpatient VBP Program, the total points earned for the 
domain would be the points earned on the Medicare spending per 
beneficiary measure. We are proposing that the total possible points 
that a hospital could earn for the Efficiency domain for FY 2014 would 
be 10, which is equal to the total possible points that the hospital 
could earn for the Medicare spending per beneficiary measure. We are 
proposing that the Efficiency domain percentage score would be 
calculated for FY 2014 as follows: Efficiency domain score = Total 
points earned on the Medicare spending per beneficiary measure divided 
by 10, then multiplied by 100 percent.
    Once the Efficiency domain score has been determined, we are 
proposing to assign it a weight for use in the calculation of the total 
performance score. We intend to propose FY 2014 domain weighting, any 
additional FY 2014 measures, and other FY 2014 proposals for the 
Hospital Inpatient VBP Program in the CY 2012 Hospital Outpatient 
Prospective Payment System proposed rule.
4. Proposed Efficiency Domain (Medicare Spending per Beneficiary 
Measure) Performance Period and Baseline Period
    Section 1886(o)(2)(C)(i) of the Act prohibits the Secretary from 
selecting a measure for the Hospital Inpatient VBP Program with respect 
to a performance period unless it has been specified under the Hospital 
IQR Program and included on the Hospital Compare Web site for at least 
1 year prior to the beginning of such performance period. Section 
1886(o)(8) of the Act requires that hospitals be notified of the 
calculation of their value-based incentive payment no later than 60 
days prior to the fiscal year involved. In order to comply with these 
statutory requirements for the FY 2014 Hospital Inpatient VBP Program, 
we are proposing to adopt a 9-month period of performance from May 15, 
2012 through February 14, 2013 for the proposed Medicare spending per 
beneficiary measure. If the measure is adopted, this would allow for a 
1-year display period on Hospital Compare, a 60-day notification 
period, and would allow the time needed for administrative processes. 
We note that this would mean that only IPPS discharges occurring from 
May 15, 2012 through 90 days prior to February 14, 2013 would count as 
index stays for purposes of creating the Medicare spending per 
beneficiary episodes. The Medicare spending per beneficiary episode is 
described in section IV.A.3.b.(2).(B).(v) of this proposed rule.
    For the purposes of calculating improvement points on the proposed 
Medicare spending per beneficiary measure, it is necessary to establish 
the baseline period to which the performance period score will be 
compared. For purposes of the FY 2014 Hospital Inpatient VBP Program, 
we are proposing to adopt a baseline period of May 15, 2010 through 90 
days prior to February 14, 2011 for this proposed measure. The proposed 
baseline period is consistent with the baseline period that has been 
proposed for the FY 2013 clinical process of care and patient 
experience of care measures in the Hospital Inpatient VBP Program 
proposed rule (76 FR 2454 through 2491) because it precedes the 
performance period by 2 years.
    We invite public comment on all of our proposals related to the 
Efficiency Domain and Medicare spending per beneficiary measure.
5. Proposal to Simultaneously Specify Additional Measures for the 
Hospital Inpatient VBP Program and Adoption Into the Hospital IQR 
Program
    We are proposing to simultaneously specify additional measures for 
the Hospital Inpatient VBP Program and adoption into the Hospital IQR 
Program, as appropriate for usage in both programs. Our rationale is to 
improve patient safety and quality of care in an expedited manner that 
is compliant with applicable statutory guidance. We are currently 
utilizing this approach in this rule by proposing to add the Medicare 
Spending per Beneficiary measure to both Hospital Inpatient VBP and 
Hospital IQR Programs. We will provide all associated regulatory impact 
and policy rationale in future proposals for both programs. We believe 
that this proposal notifies stakeholders through rulemaking and welcome 
comments on this proposal.

C. Hospital Readmissions Reduction Program

1. Background
a. Overview
    CMS is committed to promoting high quality health care and 
improving patient health outcomes. Readmission to a hospital may be an 
adverse event for patients and many times imposes a

[[Page 25929]]

financial burden on the health care system. Successful efforts to 
reduce preventable readmission rates will improve quality of care while 
simultaneously decreasing costs. Hospitals can work with their 
communities to lower readmission rates and improve patient care in a 
number of ways, such as ensuring patients are clinically ready to be 
discharged, reducing infection risk, reconciling medications, improving 
communication with community providers responsible for post-discharge 
patient care, improving care transitions, and ensuring that patients 
understand their care plans upon discharge.
    Many studies have demonstrated the effectiveness of these types of 
in-hospital and post-discharge interventions in reducing the risk of 
readmission, confirming that hospitals and their partners have the 
ability to lower readmission rates.34 35 36 These types of 
efforts taken during and after a hospitalization have been shown to be 
effective in reducing readmission rates in geriatric populations 
generally, 37 38 as well as for multiple specific 
conditions. Moreover, such interventions can be cost saving. For 
example, in the case of heart failure, improved hospital \39\ and post-
discharge care,40 41 including pre-discharge 
planning,42 43 home-based follow-up, and patient 
education,44 45 have been shown to lower heart failure 
readmission rates, suggesting that heart failure readmission rates 
might be reduced if proven interventions were more widely adopted. 
Financial incentives to reduce readmissions will in turn promote 
improvement in care transitions and care coordination, as these are 
important means of reducing preventable readmissions.\46\
---------------------------------------------------------------------------

    \34\ Gwadry-Sridhar FH, Flintoft V, Lee DS, Lee H, Guyatt GH: A 
systematic review and meta-analysis of studies comparing readmission 
rates and mortality rates in patients with heart failure. Arch 
Intern Med. 2004;164(21):2315-2320.
    \35\ McAlister FA, Lawson FM, Teo KK, Armstrong PW.: A 
systematic review of randomized trials of disease management 
programs in heart failure. AmJMed. 2001;110(5):378-384.
    \36\ Krumholz HM, Amatruda J, Smith GL, et al.: Randomized trial 
of an education and support intervention to prevent readmission of 
patients with heart failure. J Am Coll Cardiol. 2002;39(1):83-89.
    \37\ Coleman EA, Parry C, Chalmers S, Min SJ.: The care 
transitions intervention: results of a randomized controlled trial. 
Arch Intern Med. 2006;166:1822-8.
    \38\ Naylor MD, Brooten D, Campbell R, Jacobsen BS, Mezey MD, 
Pauly MV, Schwartz JS.: Comprehensive discharge planning and home 
follow-up of hospitalized elders: a randomized clinical trial. JAMA. 
1999;281:613-20.
    \39\ Gwadry-Sridhar FH, Flintoft V, Lee DS, Lee H, Guyatt GH.: A 
systematic review and meta-analysis of studies comparing readmission 
rates and mortality rates in patients with heart failure. Arch 
Intern Med. 2004;164(21):2315-2320.
    \40\ Lappe JM, Muhlestein JB, Lappe[acute] DL, et al.: 
Improvements in 1-year cardiovascular clinical outcomes associated 
with a hospital-based discharge medication program. Ann Intern Med. 
2004;141(6):446-453.
    \41\ Phillips CO, Wright SM, Kern DE, Singa RM, Shepperd S, 
Rubin HR.: Comprehensive discharge planning with postdischarge 
support for older patients with congestive heart failure: a 
metaanalysis [published correction appears in JAMA. 
2004;292(9):1022]. JAMA. 2004;291(11): 1358-1367.
    \42\ Rich MW, Beckham V, Wittenberg C, Leven CL, Freedland KE, 
Carney RM.: A multi disciplinary intervention to prevent the 
readmission of elderly patients with congestive heart failure. N 
Engl J Med. 1995;333(18):1190-1195.
    \43\ Schneider JK, Hornberger S, Booker J, Davis A, Kralicek R.: 
A medication discharge planning program: measuring the effect on 
readmissions. Clin Nurs Res. 1993;2(1):41-53.
    \44\ Koelling TM, Johnson ML, Cody RJ, Aaronson KD.: Discharge 
education improves clinical outcomes in patients with chronic heart 
failure. Circulation. 2005;111(2):179-185.
    \45\ Krumholz HM, Amatruda J, Smith GL, et al.: Randomized trial 
of an education and support intervention to prevent readmission of 
patients with heart failure. J Am Coll Cardiol. 2002;39(1):83-89.
    \46\ Coleman EA.: 2005. Background Paper on Transitional Care 
Performance Measurement. Appendix I. In: Institute of Medicine, 
Performance Measurement: Accelerating Improvement. Washington, DC: 
National Academy Press.
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    In its 2007 ``Report to Congress: Promoting Better Efficiency in 
Medicare,'' \47\ MedPAC noted the potential benefit to patients of 
lowering readmissions and suggested payment strategies that would 
incentivize hospitals to reduce these rates. MedPAC identified 7 
conditions and procedures that accounted for almost 30 percent of 
potentially preventable readmissions: heart failure; chronic 
obstructive pulmonary disease; pneumonia; acute myocardial infarction; 
coronary artery bypass graft surgery; percutaneous transluminal 
coronary angioplasty; and other vascular procedures. To promote quality 
of care, CMS developed hospital quality of care measures that compare 
patient outcomes across different hospitals. These measures, including 
hospital risk-standardized readmission measures for Acute Myocardial 
Infarction (AMI), Heart Failure (HF) and Pneumonia (PN), were 
originally developed for public reporting as a part of the Hospital IQR 
Program. We adopted the HF readmission measure for the Hospital IQR 
Program in the FY 2009 IPPS final rule for the FY 2010 payment 
determination (73 FR 48606) and the AMI and PN readmission measures in 
the CY 2009 OPPS/ASC final rule with comment period for the FY 2010 
payment determination (73 FR 68781). Details about the methodology used 
for these measures may be found online at: http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
---------------------------------------------------------------------------

    \47\ Medicare Payment Advisory Commission (MedPAC). Report to 
Congress: Promoting Greater Efficiency in Medicare; 2007. Available 
at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed 
January 10, 2011.
---------------------------------------------------------------------------

    As described above, readmission rates are important markers of 
quality of care, particularly of the care of a patient in transition 
from an acute care setting to a non-acute care setting, and improving 
readmissions can positively influence patient outcomes and the cost of 
care. The above hospital risk-standardized readmission measures are 
endorsed by the National Quality Forum (NQF) and have been publicly 
reported on Hospital Compare Web site since 2009 (http://www.hospitalcompare.hhs.gov) to encourage quality improvement and lower 
readmission rates. As discussed in detail below, we are now proposing 
that the readmission measures for these three conditions be used for 
the Hospital Readmission Reduction Program under section 1886(q) of the 
Act, as added by Section 3025 of the Affordable Care Act.
b. Statutory Basis for the Hospital Readmission Reduction Program
    Section 3025 of the Affordable Care Act, as amended by section 
10309 of the Affordable Care Act, added a new subsection (q) to section 
1886 of the Act. Section 1886(q) of the Act establishes the 
``Readmission Reduction Program'' effective for discharges from an 
``applicable hospital'' beginning on or after October 1, 2012, under 
which payments to those hospitals under section 1886(d) of the Act will 
be reduced to account for certain excess readmissions.
    In this year's IPPS rulemaking, we address: (i) Those aspects of 
the program that relate to the conditions and readmissions to which the 
program will apply for the first program year beginning October 1, 
2012; (ii) the readmission measures and related methodology used for 
those measures, as well as the calculation of the readmission rates; 
and (iii) public reporting of the readmission data. Specific 
information regarding the payment adjustment required under section 
1886(q) of the Act will be proposed in next year's IPPS/LTCH PPS 
proposed rule. Although we are not proposing specific policies 
regarding the payment adjustment under the Hospital Readmissions 
Reduction Program in this proposed rule, we believe that it is still 
important to set forth the general framework of the Hospital 
Readmissions Reduction Program, including the payment adjustment 
provisions, in

[[Page 25930]]

order for the public to understand how the proposed measures outlined 
in this rulemaking will affect certain hospital payments beginning in 
FY 2013.
    Section 1886(q)(1) of the Act sets forth the methodology by which 
payments to ``applicable hospitals'' will be adjusted to account for 
excess readmissions. Pursuant to section 1886(q)(1) of the Act, 
payments for discharges from an ``applicable hospital'' will be an 
amount equal to the product of the ``base operating DRG payment 
amount'' and the adjustment factor for the hospital for the fiscal 
year. That is, the ``base operating DRG payments'' are reduced by an 
adjustment factor that accounts for excess readmissions. Section 
1886(q)(1) of the Act requires the Secretary to make payments for a 
discharge in an amount equal to the product of ``the base operating DRG 
payment amount'' and ``the adjustment factor'' for the hospital in a 
given fiscal year. Section 1886(q)(2) of the Act defines the base 
operating DRG payment amount as ``the payment amount that would 
otherwise be made under subsection (d) (determined without regard to 
subsection (o) [the Hospital VBP Program]) for a discharge if this 
subsection did not apply; reduced by * * * any portion of such payment 
amount that is attributable to payments under paragraphs (5)(A), 
(5)(B), (5)(F), and (12) of subsection (d).'' Paragraphs (5)(A), 
(5)(B), (5)(F), and (12) of subsection(d) refer to outlier payments, 
IME payments, DSH payments, and payments for low volume hospitals, 
respectively.
    Furthermore, section 1886(q)(2)(B) of the Act specifies special 
rules for defining ``the payment amount that would otherwise be made 
under subsection (d)'' for certain hospitals. Specifically, section 
1886(q)(2)(B) of Act states that ``[i]n the case of a Medicare-
dependent, small rural hospital (with respect to discharges occurring 
during fiscal years 2012 and 2013) or a sole community hospital * * * 
the payment amount that would otherwise be made under subsection (d) 
shall be determined without regard to subparagraphs (I) and (L) of 
subsection (b)(3) and subparagraphs (D) and (G) of subsection (d)(5).'' 
We intend to propose regulations to implement the statutory provisions 
related to the definition of ``base operating DRG payment amount'' in 
the FY 2013 IPPS/LTCH PPS proposed rule.
    Section 1886(q)(3)(A) of the Act defines the ``adjustment factor'' 
for an applicable hospital for a fiscal year as equal to the greater of 
``(i) the ratio described in subparagraph (B) for the hospital for the 
applicable period (as defined in paragraph (5)(D)) for such fiscal 
year; or (ii) the floor adjustment factor specified in subparagraph 
(C).'' Section 1886(q)(3)(B) of the Act in turn describes the ratio 
used to calculate the adjustment factor. It states that the ratio is 
``equal to 1 minus the ratio of--(i) the aggregate payments for excess 
readmissions * * *; and (ii) the aggregate payments for all discharges. 
* * *'' Section 1886(q)(3)(C) of the Act describes the floor adjustment 
factor, which is set at 0.99 for FY 2013, 0.98 for FY 2014, and 0.97 
for FY 2015 and subsequent fiscal years.
    Section 1886(q)(4) of the Act sets forth the definitions of 
``aggregate payments for excess readmissions'' and ``aggregate payments 
for all discharges'' for an applicable hospital for the applicable 
period. The term ``aggregate payments for excess readmissions'' is 
defined in section 1886(q)(4)(A) of the Act as ``the sum, for 
applicable conditions * * * of the product, for each applicable 
condition, of (i) the base operating DRG payment amount for such 
hospital for such applicable period for such condition; (ii) the number 
of admissions for such condition for such hospital for such applicable 
period; and (iii) the ``Excess Readmission Ratio* * * for such hospital 
for such applicable period minus 1.'' The ``Excess Readmission Ratio'' 
is a hospital-specific ratio hospital-specific ratio based on each 
applicable condition. Specifically, section 1886(q)(4)(C) of the Act 
defines the Excess Readmission Ratio as the ratio of ``risk-adjusted 
readmissions based on actual readmissions'' for an applicable hospital 
for each applicable condition, to the ``risk-adjusted expected 
readmissions'' for the applicable hospital for the applicable 
condition.
    Section 1886(q)(5) of the Act provides definitions of ``applicable 
condition,'' ``expansion of applicable conditions,'' ``applicable 
hospital,'' ``applicable period,'' and ``readmission.'' The term 
``applicable condition,'' which we address in detail in this proposed 
rule, is defined as a ``condition or procedure selected by the 
Secretary among conditions and procedures for which: (i) readmissions * 
* * represent conditions or procedures that are high volume or high 
expenditures * * * and (ii) measures of such readmissions * * * have 
been endorsed by the entity with a contract under section 1890(a) * * * 
and such endorsed measures have exclusions for readmissions that are 
unrelated to the prior discharge (such as a planned readmission or 
transfer to another applicable hospital).'' The term ``expansion of the 
applicable condition'' refers to the Secretary's authority, beginning 
with fiscal year 2015, ``to the extent practicable, [to] expand the 
applicable conditions beyond the 3 conditions for which measures have 
been endorsed * * * to the additional 4 conditions that have been 
identified by the Medicare Payment Advisory Commission in its report to 
Congress in June 2007 and to other conditions and procedures as 
determined appropriate by the Secretary.''
    Section 1886(q)(5)(C) of the Act defines ``applicable hospital,'' 
that is, a hospital subject to the readmission reduction program, as a 
``subsection (d) hospital or a hospital that is paid under section 
1814(b)(3) [of the Act], as the case may be.'' The term ``applicable 
period,'' as defined by section 1886(q)(5)(D) of the Act, ``means, with 
respect to a fiscal year, such period as the Secretary shall specify.'' 
As explained in this proposed rule, the ``applicable period'' is the 
period from which data are collected in order to calculate various 
ratios and adjustments under the Hospital Readmissions Reduction 
Program.
    Section 1886(q)(6) of the Act sets forth the reporting requirements 
for hospital-specific readmission rates. Section 1886(q)(7) of the Act 
limits administrative and judicial review of certain determinations 
made pursuant to section 1886(q) of the Act. Finally, section 
1886(q)(8) of the Act requires the Secretary to collect data on 
readmission rates for all hospital inpatients for ``specified 
hospitals'' in order to calculate the hospital-specific readmission 
rates for all hospital inpatients and to publicly report these 
readmission rates.
2. Implementation of the Hospital Readmissions Reduction Program
a. Overview
    We intend to implement the requirements of the Hospital 
Readmissions Reduction Program in the FY 2012, FY 2013, and future 
IPPS/LTCH PPS rulemaking cycles.
b. Proposed Provisions in the FY 2012 IPPS/LTCH PPS Rulemaking
    As explained above, the adjustment factor set forth in section 
1886(q) of the Act does not apply to discharges until FY 2013. 
Therefore, we are able to implement the Hospital Readmission Reduction 
Program over two years. We are first addressing issues such as the 
selection of readmission measures and the calculation of the excess 
readmission ratio, which will then be used, in part, to calculate the 
readmission payment adjustment factor. Specifically, in the FY 2012 
IPPS

[[Page 25931]]

rulemaking, we are addressing portions of section 1886(q) of the Act 
related to the following provisions:
     Selection of applicable conditions;
     Definition of ``readmission;''
     Measures for the applicable conditions chosen for 
readmission;
     Methodology for calculating the Excess Readmission Ratio;
     Public reporting of the readmission data; and
     Definition of ``applicable period.''
    With respect to the topics of ``measures for readmission'' for the 
applicable conditions, and ``methodology for calculating the Excess 
Readmission Ratio,'' we will specifically address the following:
     Index hospitalizations;
     Risk Adjustment;
     Risk Standardized Readmission Rate;
     Data sources; and
     Exclusion of Certain Readmissions.
c. Proposed Provisions To Be Included in the FY 2013 IPPS/LTCH PPS 
Proposed Rule
    In the FY 2013 IPPS rulemaking, we will address the provisions in 
section 1886(q) of the Act that are related to the payment adjustment, 
as well as the rest of the provisions in section 1886(q) of the Act 
that are not addressed in the FY 2012 IPPS/LTCH PPS rulemaking. 
Specifically, in the FY 2013 IPPS/LTCH proposed rule, we plan to 
address section 1886(q) of the Act related to the following provisions:
     Base operating DRG payment amount, including policies for 
SCHs and MDHs;
     Adjustment factor (both the ratio and floor adjustment 
factor);
     Aggregate payments for excess readmissions;
     Applicable hospital; and
    We believe it is appropriate to first address the readmission 
measures and the calculation of the excess readmission ratio that will 
then be used, in part, to calculate the readmission payment adjustment 
factor and the application of the readmission payment adjustment factor 
to inpatient hospital payments. We believe the 2-year rulemaking 
schedule provides adequate time and opportunities for careful 
consideration of the various aspects of this program by both CMS and 
stakeholders prior to implementation of the Hospital Readmission 
Reduction Program in FY 2013.
d. Proposed Expansion of the Applicable Conditions To Be Included in 
the Future Rulemaking
    Pursuant to section 1886(q)(5)(B) of the Act, the Secretary 
``shall, to the extent practicable,'' expand the list of applicable 
conditions beyond the 3 conditions for which measures have been 
endorsed and add 4 conditions that have been identified by MedPAC for 
the Hospital Readmission Reduction Program. We plan to implement this 
section of the Act in later rulemaking.
3. Proposed Provisions for the Hospital Readmission Reduction Program
a. Proposed Applicable Conditions for the FY 2013 Hospital Readmission 
Reduction Program
    Section 1886(q) of the Act sets forth payment adjustments for 
applicable hospitals to account for excess readmissions, for applicable 
conditions, that are high volume or high expenditure, in the hospital. 
These payment adjustments are determined based on the occurrence of 
readmissions for ``applicable conditions.'' When selecting ``applicable 
conditions,'' the Secretary must select among conditions and procedures 
for which (1) readmissions are ``high volume or high expenditure; and 
(2) ``measures of such readmissions'' have been endorsed by the entity 
with a contract under section 1890(a) of the Act (currently NQF) and 
such endorsed measures have exclusions for readmissions that are 
unrelated to the prior discharge. Consistent with these requirements, 
we are proposing to include AMI, HF and PN as ``applicable conditions'' 
for the Hospital Readmissions Reduction Program in FY 2013 and 
subsequent fiscal years. As set forth below, we believe these 
conditions meet the criteria for ``applicable conditions'' under 
section 1886(q)(5)(A) of the Act. We also note that in the 2007 Report 
to Congress that we referred to earlier in the overview section, MedPAC 
listed three conditions: AMI, HF, and PN, as priorities for hospital-
specific public reporting of readmission rates.\48\
---------------------------------------------------------------------------

    \48\ Medicare Payment Advisory Commission (MedPAC). Report to 
Congress: Promoting Greater Efficiency in Medicare; 2007. Available 
at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed 
January 10, 2011.
---------------------------------------------------------------------------

    With regards to the first criterion, that readmissions of 
``applicable conditions'' be ``high volume or high expenditure,'' 
MedPAC identified AMI, HF, PN as being among the seven conditions and 
procedures associated with approximately 30 percent of potentially 
preventable readmissions,\49\ based on an 3M analysis conducted for 
MedPAC of 2005 MedPAR (Medicare FFS hospital claims). Of these seven 
conditions and procedures, HF and PN were the highest in terms of 
volume and expenditures.
---------------------------------------------------------------------------

    \49\ Medicare Payment Advisory Commission (MedPAC). Report to 
Congress: Promoting Greater Efficiency in Medicare; 2007. Available 
at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed 
January 10, 2011.
---------------------------------------------------------------------------

    Additionally, in our analysis of the 235 diagnostic categories for 
hospitalization based on 2008 Medicare hospital claims data, HF and PN 
were first and second, respectively, as the most frequent diagnostic 
category for both total admissions and total readmissions. AMI was 
ninth among the 235 conditions in terms of frequency of admission and 
8th in frequency of readmission. We therefore believe that AMI, HF and 
PN consitute high volume and high expenditure conditions particularly 
as relates to hospital admission and readmission.
    With regards to the second criterion, we believe that measures of 
readmissions for these applicable conditions also meet the statutory 
requirements. Section 1886(q)(5)(A)(i) of the Act requires that each 
``applicable condition'' have ``measures of readmissions'' that ``(I) 
have been endorsed by the entity with a contract under section 1890(a); 
and (II) such endorsed measures have exclusions for readmissions that 
are unrelated to the prior discharge.'' As discussed in section 
IV.C.3.c. below, we believe that our proposal to select AMI, HF, and PN 
as ``applicable conditions'' is consistent with this statutory 
requirement. The NQF (the entity with a contract under section 1890(a) 
of the Act) has endorsed ``measures of readmissions'' for each of these 
three conditions, and those NQF-endorsed measures ``have exclusions for 
readmissions that are unrelated to the prior discharge (such as a 
planned readmission or transfer to another applicable hospital).''
    We believe AMI, HF, and PN meet both prongs of the definition of 
``applicable condition.'' Therefore, we are proposing to include AMI, 
HF, and PN as ``applicable conditions'' for the Hospital Readmissions 
Reduction Program for FY 2013 and subsequent fiscal years. We invite 
public comment on this proposal.
b. Proposed Definition of ``Readmission''
    Section 1886(q)(5)(E) of the Act defines ``readmission'' as, ``in 
the case of an individual who is discharged from an applicable 
hospital, the admission of the individual to the same or another 
applicable hospital within a time period specified by the Secretary 
from the date of such discharge.'' The definition further states that 
``[i]nsofar as the discharge relates to an applicable condition for 
which there is an endorsed measure * * * such time period (such as 30 
days) shall be

[[Page 25932]]

consistent with the time period specified for such measure.''
    The three NQF-endorsed readmission measures define a readmission as 
occurring when a patient is discharged from the applicable hospital to 
a non-acute setting (for example, home health, skilled nursing, 
rehabilitation or home) and then is admitted to the same or another 
acute care hospital within a specified time period from the time of 
discharge from the index hospitalization. The time period specified for 
these measures is 30 days. Because the measures as endorsed by NQF are 
calculated based on readmissions occurring within 30 days, we are 
proposing 30 days as the time period specified from the date of 
discharge for the purpose of defining readmission for the purpose of 
the Hospital Readmissions Reduction Program. This is in compliance with 
the statutory requirement that the time period specified by the 
Secretary from the date of discharge for the purpose of defining 
readmission be consistent with the time period specified for the 
endorsed measures. We invite public comment on our proposal to adopt, 
without revision, a proposed definition of readmission with a time 
period of 30 days from the date of discharge from the index hospital as 
set forth in the existing NQF-endorsed measures.
c. Proposed Readmission Measures and Related Methodology
(1) Proposed Readmission Measures for Applicable Conditions
    As explained above, section 1886(q)(5)(A)(ii) of the Act requires 
that each ``applicable condition'' selected by the Secretary have 
``measures of readmissions'' that ``have been endorsed by the entity 
with a contract under section 1890(a)'' and that ``such endorsed 
measures have exclusions for readmissions that are unrelated to the 
prior discharge.'' We are proposing to adopt three NQF-endorsed, 
hospital risk-standardized readmission measures for AMI, HF, and PN 
which are currently included in the Hospital IQR Program. These 
existing measures are:
     Acute Myocardial Infarction 30-day Risk Standardized 
Readmission Measure (NQF 0505);
     Heart Failure 30-day Risk Standardized Readmission Measure 
(NQF0330); and
     Pneumonia 30-day Risk Standardized Readmission Measure 
(NQF0506).
    CMS adopted these measures for the Hospital IQR Program in the FY 
2009 IPPS/LTCH final rule for FY 2010 payment determination (73 FR 
48606) and the CY 2009 OPPS/ASC final rule with comment period (73 FR 
68781). The NQF (the entity with a contract under section 1890(a) of 
the Act) has endorsed each of these ``measures of readmissions'' and, 
as explained in more detail below, those NQF-endorsed measures ``have 
exclusions for readmissions that are unrelated to the prior 
discharge.'' Therefore, we believe these measures meet the statutory 
requirements for selection for the Hospital Readmissions Reduction 
Program, and we are proposing them, without modification, as measures 
for the program.
(2) NQF Endorsement of Measures of Readmissions
    We note that these measures and their underlying methodologies were 
endorsed by NQF. We are proposing to adopt, for purposes of the 
Hospital Readmissions Reduction Program, the measures and related 
methodologies as they are currently endorsed by NQF. This includes the 
currently endorsed 30-day time window, risk-adjustment methodology, and 
exclusions for certain readmissions that comprise the measures. We 
believe that this proposal to adopt, without modification, these 
measures of readmission is consistent with the statutory language, 
which requires the measures of readmissions to be ``endorsed by the 
entity with a contract under section 1890(a).'' If we were to modify 
the endorsed measures, we are concerned that they would no longer be 
considered ``endorsed.'' If the NQF were to later endorse a revised 
measure for one of these conditions, we would then propose through 
notice and comment rulemaking that the revised measure be used 
prospectively for purposes of the Hospital Readmissions Reduction 
Program.
    We welcome public comment on this proposal to use, for each of the 
proposed applicable conditions, existing measures as endorsed by the 
NQF.
(3) Endorsed Measures With Exclusions for Unrelated Readmissions
    Section 1886(q)(5)(A)(i)(ii)(II) of the Act requires that each of 
the readmission measures also has ``exclusions for readmissions that 
are unrelated to the prior discharge (such as a planned readmission or 
transfer to another applicable hospital).'' The three NQF-endorsed 
readmission measures that we are proposing for inclusion in the 
Hospital Readmissions Reduction Program have exclusions that meet this 
statutory requirement. Under each measure, certain unrelated 
readmissions are not taken into account when determining the number of 
readmissions under the measures.
    The AMI 30-day risk standardized readmission measure, as endorsed 
by the NQF and as proposed in this rule, has exclusions for certain 
unrelated readmissions. Because admissions for Percutaneous 
Transluminal Coronary Angioplasty (PTCA) or Coronary Artery Bypass 
Graft (CABG) may be staged or are typically scheduled readmissions for 
patients initially admitted for AMI, the AMI 30-day risk standardized 
readmission measure does not count as readmissions those admissions 
after discharge that include PTCA or CABG procedures, unless the 
principal discharge diagnosis for the readmission is one of the 
following diagnoses that are not consistent with a scheduled 
readmission: heart failure, acute myocardial infarction, unstable 
angina, arrhythmia, and cardiac arrest (that is, readmissions with 
these diagnoses and a PTCA or CABG procedure are counted as 
readmissions). We adopted this approach when first developing this 
measure after consultation with clinical experts, including 
cardiologists, and review of relevant readmissions data.
    During the development of the readmission measures for both HF and 
PN, we similarly asked clinical experts to identify planned 
readmissions for these conditions, that is, those which would not count 
as a readmission, after an admission for HF or PN. Specifically, the 
clinical experts were asked whether there were common follow-up causes 
of readmissions for a scheduled procedure that represented a 
continuation of care after either a HF or PN admission, respectively. 
No such related, planned procedures were identified as occurring 
commonly after the index admissions for HF or PN at the time of the 
development of the IQR measures. Therefore, no similar exclusions exist 
for the HF and PN measures of readmissions as they are currently 
endorsed.
    Under the three NQF-endorsed risk-standardized readmission measures 
that we are proposing in this proposed rule, transfers to other acute 
care facilities are excluded from each of the readmission measures. The 
NQF-endorsed proposed measures consider these multiple contiguous 
hospitalizations to be a single acute episode of care. The measures 
attribute the readmission for transferred patients to the hospital that 
ultimately discharges the patient to a non-acute care setting (for 
example, to home or a skilled nursing facility). Thus, in the case of a 
patient who is transferred between two or more hospitals, if the 
patient is readmitted in the 30 days following the final

[[Page 25933]]

hospitalization, the measures attribute such a readmission to the 
hospital that discharged the patient to a non-acute care setting. We 
believe that the exclusion of transfers to other applicable hospitals 
under the measures is sufficient to meet the requirement set forth in 
section 1886(q)(5)(A)(ii)(II) of the Act that certain ``unrelated'' 
readmissions be excluded from the measures selected for use in the 
program. We invite public comment on our proposal to adopt, without 
revision or modification, the exclusions for unrelated admissions set 
forth in the existing NQF-endorsed measures.
(4) Methodology of Proposed Readmission Measures
    In the following section, we describe the major components of the 
measure methodology of the three NQF-endorsed risk-standardized 
readmission measures for AMI, HF and PN proposed for the implementation 
of the Hospital Readmissions Reduction Program. Additional details 
about each of these measures may be found online at http://www.QualityNet.org > Hospital-Inpatient > Readmission Measures > 
methodologies. This Web page is located at http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    Briefly, as is described in more detail in the sections below, the 
measures are risk-standardized rates of readmission. For each hospital 
qualifying index hospitalizations are identified based on the principal 
discharge diagnosis of the patient and the inclusion/exclusion criteria 
(section IV.C.3.c.(4)(A), Index hospitalization). Each hospitalization 
is evaluated for whether the patient had a readmission to an acute care 
setting in the 30-days following discharge (section IV.C.3.c.(4)(B), 
Readmission). Patient-risk factors, including age, and chronic medical 
conditions are also identified from inpatient and outpatient claims for 
the 12-months prior to the hospitalization for risk-adjustment (section 
IV.C.3.c.(4)(D), Risk-Adjustment). The readmissions, sample size for 
each hospital, and patient risk-factors are then used to calculate a 
risk-standardized readmission ratio for each hospital. For the purposes 
of publicly-reporting the measures, this risk-standardized readmission 
ratio is then multiplied by the national crude rate of readmission for 
the given condition to produce a risk-standardized readmission rate 
(RSRR) (section IV.C.3.c.(5)(B)).
    As stated above, we invite public comment on our selection of the 
three readmission measures, as endorsed by the NQF, and as described in 
more detail below.
(A) Index Hospitalization
    An index hospitalization for each of the readmission measures is 
the hospitalization from which we evaluate the 30 days after discharge 
for possible readmissions. The measures, as endorsed by the NQF, 
evaluate eligible hospitalizations and readmissions of Medicare 
patients discharged from an applicable hospital (as defined by section 
1886(q)(5)(C) of the Act) having a principal discharge diagnosis for 
the measured condition in an applicable period. The NQF endorsed 
measures, as specified, exclude patients under 65 years of age.
    The discharge diagnoses for each applicable condition are based on 
a list of specific ICD-9-CM codes for that condition. These codes are 
listed in the 2010 Measures Maintenance Technical Report: Acute 
Myocardial Infarction, Heart Failure, and Pneumonia 30-Day Risk-
Standardized Readmission Measures. They also are posted on the 
QualityNet Web site: http://www.QualityNet.org > Hospital-Inpatient > 
Readmission Measures > methodologies. See http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    The current NQF-endorsed CMS 30-day risk standardized readmission 
measures exclude the following admissions from the group of index 
hospitalizations:
     Hospitalizations for patients with an in-hospital death 
(because they are not eligible for readmission);
     Hospitalizations for patients without at least 30 days 
post-discharge enrollment in Medicare FFS (because the 30-day 
readmission outcome cannot be assessed in this group);
     Hospitalizations for patients discharged against medical 
advice (because providers did not have the opportunity to deliver full 
care and prepare the patient for discharge).
(B) Readmission
    As explained above, the initial hospitalization assessed for a 
readmission is called the index hospitalization. The proposed measures, 
as endorsed by the NQF, define readmission as a second admission to 
another acute care hospital within 30-days of the index 
hospitalization. Under the proposed measure, as endorsed by the NQF, a 
patient who is readmitted twice within 30 days simply is counted as 
having been readmitted; this patient's readmissions are not counted 
differently than a patient with a single readmission within 30 days of 
discharge.
    With the exception of the exclusions discussed previously 
(transfers and planned readmissions, as discussed in the Exclusions for 
Unrelated Readmissions section above), the proposed measures, as 
currently endorsed by the NQF, include readmissions for all causes, 
without regard to the principal diagnosis of the readmission. There are 
several reasons for this approach. First, from the patient's 
perspective, readmission from any cause is an adverse event. We want 
the measures to be patient-centered measures. Second, although we would 
expect few hospitals to use gaming strategies, we strive to make sure 
that measures do not create incentives for them to do so. Limiting the 
readmissions to particular diagnoses creates an opportunity for 
hospitals to potentially avoid having readmissions counted by changing 
coding practices. Further, do so could create a perverse incentive 
whereby hospitals begin to avoid patients with conditions that are part 
of the readmissions measures. Third, there are not clinically and 
technically sound and accepted strategies for accurately identifying 
readmission that are unrelated to hospital quality based on the 
documented cause of readmission. For example, a patient with HF who 
develops an HAI may ultimately be readmitted for sepsis. It would be 
inappropriate to consider the readmission as unrelated to the care the 
patient received for HF. Finally, we believe it is important that 
hospitals strive to reduce readmissions from all causes, not just those 
that are readmissions measures; while the measures do not presume that 
each readmission is preventable, interventions have generally shown 
reductions in all types of readmissions. The NQF measures are intended 
to provide incentives for hospitals to reduce readmissions and not to 
achieve zero readmissions.
(C) Time Window
    The three proposed measures, as endorsed by the NQF, count 
readmissions within a 30-day period from the date of the initial 
discharge from the index hospitalization. This is the standard time 
period to be considered a readmission. The timeframe of 30 days is a 
clinically meaningful period for hospitals, in collaboration with their 
medical communities, to reduce readmission risk. This time period for 
assessing readmission is an accepted standard in research and 
measurement. We believe

[[Page 25934]]

that during this 30-day time period, hospital and community partners 
can take steps to reduce risk by ensuring patients are clinically ready 
to be discharged, improving communication across providers, reducing 
risks of infections, and educating patients on symptoms to monitor whom 
to contact with questions and where and when to seek follow-up care can 
influence readmission rates.
(D) Risk Adjustment
    Section 1886(q)(4)(C)(i)(I) of the Act requires that the number of 
readmissions used in the Excess Readmission Ratio be risk adjusted. 
This language requires us, when comparing hospitals' readmission rates, 
to account for differences in the severity of illness of the patients 
that hospitals treat. Risk adjustment essentially ``levels the playing 
field'' for comparing hospital performance by taking into account that 
some hospitals' patients are sicker than others on admission and 
therefore have a higher risk of readmission.
    The methodology for calculating the RSRRs under the NQF-endorsed 
measures that we are proposing adjust for key factors that are 
clinically relevant and have strong relationships with the outcome (for 
example, patient demographic factors, patient co-existing medical 
conditions, and indicators of patient frailty). Under the current NQF-
endorsed methodology, these covariates are obtained from Medicare 
claims extending 12 months prior to, and including, the index 
admission. This risk-adjustment approach adjusts for differences in the 
clinical status of the patient at the time of the index admission as 
well as for demographic variables.
    A complete list of the variables used for risk adjustment and the 
clinical and statistical process for selecting the variables for each 
NQF-endorsed measure, as proposed, is available in the publicly-
available technical documentation of the existing measures for AMI, HF, 
and pneumonia. The risk adjustment variables for each condition are 
presented in the 2010 Measures Maintenance Technical Report: Acute 
Myocardial Infarction, Heart Failure, and Pneumonia 30-Day Risk-
Standardized Readmissions Measures that are posted on http://www.QualityNet.org > Hospital-Inpatient > Readmission Measures > 
Resources. The variables used are Condition Categories that group ICD-
9-CM codes into clinically coherent variables. The 2010 Condition 
Category-ICD-9-CM Crosswalk provides a map to the specific ICD-9-CM 
codes in each variable and is also posted on http://www.QualityNet.org 
> Hospital-Inpatient > Readmission Measures > Measure Calculation 
Methodology or readers may use the following Web site address: http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841
(E) Applicable Period
    Section 1886 (q)(5)(D) of the Act authorizes the Secretary to 
specify the ``applicable period'' with respect to a fiscal year. 
Currently, for Hospital IQR Program public reporting purposes, we use 
three years of data (three 12-month increments) to calculate the three 
proposed readmission measures. This provides substantially more data 
than a one or two year time frame and increases the precision of the 
measure in distinguishing performance among hospitals. This is 
advantageous in the display of the three proposed readmission measures 
on Hospital Compare where we categorize hospital performance into one 
of three discrete categories: ``Better than the US national rate,'' 
``No different than the US national rate,'' and ``Worse than the US 
national rate.''
    For the FY 2013 Hospital Readmissions Reduction Program, we are 
proposing to use 3 years of data for discharges from July 1, 2008 
through June 30, 2011 as the applicable period upon which to calculate 
excess readmission ratios for each of the three proposed measures. 
Based on our experience with the IQR program, we believe that this 
timeframe increases the precision of the measures in distinguishing 
performance among hospitals. However, for purposes of the Hospital 
Readmissions Reduction Program, we will not be categorizing hospital 
performance in three categories; rather, we will be using the measures 
to calculate excess readmission ratios for the three conditions. We are 
currently conducting analyses to determine an appropriate data period 
(for example, 1 year, 2 years, 3 years) that will yield reliable excess 
readmission ratios for the three proposed measures. We intend to 
consider both the positive and negative consequences of using longer or 
shorter data periods for this program. Should our analysis or public 
comment indicate that a shorter data period yields excess readmission 
ratios with acceptable reliability, we may consider finalizing a 
shorter time period.
    We invite public comment and suggestions on the topic of an 
appropriate length for the applicable period to consider using for the 
three proposed readmission measures for the FY 2013 payment 
determination.
(F) Data Sources
    As discussed above, the adjustment under section 1886(q) of the Act 
is made to the ``base operating DRG payment amount,'' and components of 
the ratio used to determine a hospital's adjustment factor also use 
that payment amount. Payments under section 1886 of the Act, including 
the ``base operating DRG payment amount, are made for services 
furnished to Medicare's fee-for-service population under part A. 
Therefore, for purposes of implementing the Hospital Readmissions 
Program under section 1886(q) of the Act, we are proposing to use 
Medicare claims data for the Medicare FFS population only. This is the 
same universe of claims used for calculating the endorsed measures for 
the purposes of the IQR program.
    The administrative data sources for the risk adjustment analyses 
are Medicare administrative claims datasets that contain FFS inpatient 
and outpatient (Medicare Parts A and B) claims information in the prior 
12 months and subsequent one month for patients admitted in each of 
these years. We are proposing to use claims from the index 
hospitalization included the measure and from the prior 12 months from 
all of these data sources to gather risk factors. If the patient does 
not have any claims in the 12 months prior to the index hospitalization 
admission, only comorbidities from the included admission are used.
    We welcome public comment on this proposal.
(G) Minimum Number of Discharges for Applicable Conditions
    Section 1886 (q)(4)(C)(II)(ii) of the Act authorizes the Secretary 
to exclude readmissions for an applicable condition for which there are 
``fewer than a minimum number (as determined by the Secretary).'' 
Currently, for public reporting purposes under the IQR program, only 
hospitals with at least 25 discharges for each of the three proposed 
applicable conditions are included in the display of the three proposed 
readmission measures on Hospital Compare. We chose this number of 
discharges for the IQR based on our findings that using fewer cases did 
not provide sufficiently reliable information on hospital performance. 
In general the larger the number of cases, the more reliable is the 
information. We are currently conducting additional analyses to 
determine further evaluate the appropriate minimum number of discharges 
needed to yield reliable excess readmission ratios for the three

[[Page 25935]]

proposed measures. However, based on our experience with the IQR 
program, we are proposing to use the current threshold of 25 discharges 
for each of the three measures for the Hospital Readmissions Reduction 
Program. However, should our analysis or public comment indicate that a 
different minimum number of discharges would be more appropriate for 
this program, we would consider finalizing a different number.
    We invite public comment and suggestions on the topic of 
appropriate minimum number of discharges to consider for the three 
proposed readmission measures.
(H) Reporting Hospital-Specific Readmission Rates
    Section 1886(q)(6)(A) of the Act requires the Secretary to ``make 
information available to the public regarding readmission rates of each 
subsection (d) hospital under the readmission reduction program.'' 
Section 1886(q)(6)(B) of the Act requires the Secretary to ``ensure 
that a subsection (d) hospital has the opportunity to review and submit 
corrections for, the information to be made public with respect to the 
hospital * * * prior to such information being made public.'' Section 
1886(q)(6)(C) of the Act requires the Secretary to post the hospital-
specific readmission information on the Hospital Compare Web site in an 
easily understandable format.
    We currently report information on the three readmission rates we 
are proposing in this proposed rule on the Hospital Compare Web site 
for each subsection (d) hospital. We provide hospitals with an 
opportunity to preview their readmission rates for 30-days prior to 
posting on the Web site. We propose to use a similar process and 
timeframe for the rates calculated for the Hospital Readmissions 
Reduction Program. Through this process hospitals will be able to 
review the information and submit to CMS corrections in advance of the 
information to be made public. We will carefully review all such 
correction submissions and determine the appropriateness of any 
revisions. We will inform the hospital requesting corrections of our 
findings and we will make any appropriate revisions to the information 
to be made available to the public regarding the hospital's readmission 
rates.
    We invite public comment on this proposal.
(I) Readmission Rates for All Patients
    Section 1886(q)(8)(A) of the Act requires the Secretary to 
calculate readmission rates for all patients for a ``specified 
hospital'' for an applicable condition and ``other conditions deemed 
appropriate by the Secretary for an applicable period.'' Section 
1886(q)(8)(D)(ii) of the Act defines ``specified hospital'' as: 
subsection (d) hospitals; hospitals described in clauses (i) through 
(v) of subsection (d)(1)(B) (psychiatric hospitals, rehabilitation 
hospitals, children's hospitals, LTCHs, and cancer hospitals); and, 
``as determined feasible and appropriate by the Secretary, other 
hospitals.'' Such information is to be calculated in the same manner as 
used to calculate readmission rates for hospitals with respect to the 
postings on the CMS Hospital Compare Web site. Section 1886(q)(8)(C) of 
the Act requires specified hospitals, or a State or an appropriate 
entity on behalf of the hospitals, to submit to the Secretary, in a 
form, manner and time specified by the Secretary, data and information 
determined necessary to calculate the all patient readmission rates. 
Section 1886(q)(8)(D) of the Act defines ``all patients'' to mean 
patients who are treated on an inpatient basis and discharged from a 
specified hospital. We are not proposing any specific policies to 
implement section 1886(q)(8) of the Act at this time, but we invite 
public comment and suggestions for issues related to implementation of 
these provisions, such as the mechanisms to collect the all-patient 
data, the collection of patient identifiers to track patient care 
history across multiple settings to conduct risk adjustment for outcome 
measures, what entities could submit all patient data on behalf of 
hospitals, and more generally, the requirement for all patient data 
submission.
(5) Proposed Excess Readmission Ratio
(A) Statutory Background
    Section 1886(q)(4)(C) of the Act requires the Secretary to develop 
a risk-adjusted ``Excess Readmission Ratio.'' The Excess Readmission 
Ratio will be used in the calculation of ``aggregate payments for 
excess readmissions'' as required under section 1886(q)(4)(A)(iii) of 
the Act, which, in turn, is used to determine the adjustment factor 
under section 1886(q)(3). Specifically, section 1886(q)(4)(C)(i) states 
that the term `` `Excess Readmission Ratio' means * * * with respect to 
an applicable condition for a hospital for an applicable period * * * 
the ratio of * * * risk adjusted readmissions based on actual 
readmissions * * * to * * * the risk adjusted expected readmissions.'' 
The statute also requires that the numerator and denominator of the 
ratio, that is, ``risk adjusted readmissions based on actual 
readmissions'' and the ``risk adjusted expected readmissions,'' be 
determined ``consistent with a readmission measure methodology that has 
been endorsed under paragraph (5)(A)(ii)(I).''
(B) Proposed Excess Readmission Ratio Methodology
    We are proposing to use the risk-standardized ratio calculated for 
the NQF-endorsed measures for AMI, HF, and PN as the ``excess 
readmission ratio.'' This risk-standardized ratio (excess readmission 
ratio), as required by statute, is a ratio of ``risk adjusted 
readmission based on actual'' to ``risk adjusted expected 
readmissions.'' Moreover, use of this ratio meets the statutory 
requirement that the numerator and denominator of the ratio be 
determined in a manner that is ``consistent with'' an NQF-endorsed 
readmission measure methodology.
    The proposed ratio is a measure of relative performance. If a 
hospital performs better than an average hospital that admitted similar 
patients (that is, patients with the same risk factors for readmission 
such as age and comorbidities), the ratio will be less than one. If a 
hospital performs worse than average, the ratio will be greater than 
one. Hospitals with a ratio greater than one have excess readmissions 
relative to average quality hospitals with similar types of patients
    As part of the Hospital IQR Program, the risk-standardized ratio to 
the measure result is reported on Hospital Compare Web site. The risk-
standardized ratio is the unique result produced by the measures for 
each hospital for each condition to assess relative hospital 
performance. Hospitals may not be familiar with this ratio, because the 
measure result reported on Hospital Compare for each hospital and each 
condition is this ratio multiplied by a constant (the national raw rate 
of readmission for the condition), and it is currently presented as the 
risk-standardized readmission rate (RSRR). Multiplying by a constant 
transforms the ratio into a rate (the risk-standardized readmission 
rate) that is better understood by consumers. Thus Hospital Compare 
results for CMS readmission measures are computed as follows:

[Hospital risk-standardized ratio] X [national raw readmission rate] 
(i) Numerator and Denominator of the Risk-Standardized Ratio (Excess 
Readmission Ratio)

[[Page 25936]]

    The NQF-endorsed measures, which we are proposing for the Hospital 
Readmissions Reduction Program, calculate this risk-standardized ratio 
(excess readmission ratio) using hierarchical logistic modeling, which 
is a widely accepted statistical method that evaluates relative 
hospital performance based on outcomes such as readmission. The method 
adjusts for variation across hospitals in how sick their patients are 
when admitted to the hospital (and therefore variation in hospitals' 
patients' readmission risk) as well as the variation in the number of 
patients that a hospital treats to reveal difference in quality. The 
detailed methodology for these measures is publicly-available and the 
calculation SAS packs are made available upon request. This is the 
calculation software that permits the measures to be calculated. We 
describe the key details of the methodology here.
    In order to model the extent to which hospitals affect patients' 
risk of readmission, this statistical model first analyzes data on all 
the patients discharged from all hospitals for a given condition that 
indicate for each patient what comorbidities were present when the 
patient was admitted and whether or not the patient was readmitted and 
calculates:
     How much variation in hospital readmission rates overall 
is accounted for by variation across hospitals in patients' individual 
risk factors (such as age and other medical conditions); a risk weight 
(beta-coefficient) is calculated for each patient risk factor at all 
hospitals. The specific approach and variables used in the risk 
adjustment are discussed below.
     How much variation in readmission rates is accounted for 
by hospitals' contribution to readmission risk, after adjusting for 
differences in readmission due to differences in patients' risk 
factors. The model estimates the amount by which a specific hospital 
increases or decreases patients' risk of readmission relative to an 
average hospital based on the hospitals actual readmission relative to 
hospitals with similar patients. The estimated amount each hospital 
contributes (or subtracts) from its patients readmission risk compared 
to hospitals with similar patients is called the ``hospital-specific 
readmission effect.'' It is used only in the numerator to estimate the 
adjusted actual readmissions. The hospital-specific effect will be 
negative for a better than average hospital, positive for a worse than 
average hospital, and close to zero for an average hospital. If there 
are no quality differences resulting in excess readmissions among 
hospitals (if all hospitals had the same readmission rates relative to 
hospitals with similar patients), the hospital-specific effects for all 
hospitals will be zero and the ratio for all hospitals will be one.
(ii) Numerator Calculation--Adjusted Actual Readmissions
    For each hospital, the numerator of the ratio used in the NQF-
endorsed methodology (actual adjusted readmissions) is calculated by 
estimating the probability of readmission for each patient at that 
hospital and summing up over all the hospital's patients to get the 
actual adjusted number of readmissions for that hospital. This 
estimated probability of readmission for each patient is calculated 
using:
     The hospital-specific effect (increase, decrease, or no 
change in probability of readmission relative to the probability of 
readmission at an average hospital);
     The intercept term for the model (the same for all 
hospitals and for both numerator and denominator equations);
     The increase or decrease in the probability of readmission 
contributed by each of the patients' risk factors (risk adjustment 
coefficients multiplied by the patient's risk factors, X)
    Mathematically, the numerator equation can be expressed as:
    [GRAPHIC] [TIFF OMITTED] TP05MY11.066
    
    (iii) Denominator Calculation--Expected Readmissions (at an Average 
Quality Hospital Treating the Same Patients)
    The denominator of the risk-standardized ratio (excess readmission 
ratio) under this NQF-endorsed methodology sums the probability of 
readmission for each patient at an average hospital. This probability 
is calculated using:
     The intercept term for the model (the same for all 
hospitals and for both numerator and denominator equations); and
     The increase or decrease in the probability of readmission 
contributed by each of the patients' risk factors (risk adjustment 
coefficients multiplied by the patient's risk factors, X).
    This can be expressed mathematically as:

[[Page 25937]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.067

    Thus, the ratio compares the total adjusted actual readmissions at 
the hospital to the number that would be expected if the hospital's 
patients were treated at an average hospital with similar patients. 
Hospitals with more adjusted actual readmissions than expected 
readmissions will have a risk-standardized ratio (excess readmission 
ratio) greater than one.
    Because the ratio is risk-adjusted, a hospital may have high crude 
readmission rates (number of 30-day readmissions among patients with 
the applicable condition divided by number of admissions for patients 
with the applicable condition) yet have a risk-standardized ratio 
(excess readmission ratio) less than one. For example, if a hospital 
with a higher than average raw readmission rate cares for very sick 
patients, the ratio may show that the adjusted actual number of 
readmissions (the numerator), which accounts for the case-mix, is 
actually lower than what would be expected for an average hospital 
caring for these patients (denominator) and therefore the Excess 
Readmission Ratio, as proposed, will be less than one, demonstrating 
that this hospital performs better than average, despite having a high 
crude readmission rate, and does not have excess readmissions. 
Similarly, if a hospital has a seemingly low unadjusted readmission 
rate but cares for a very low risk population of patients, it may be 
found to have an adjusted actual number of readmissions that is higher 
than the expected number of readmissions, and therefore a ratio greater 
than one.
    In summary, we are proposing to use the risk-standardized 
readmission ratio of the NQF-endorsed readmission measures as the 
Excess Readmission Ratio. The ratio is a measure of relative 
performance. If a hospital performs better than an average hospital 
that admitted similar patients (that is, patients with the same risk 
factors for readmission such as age and comorbidities), the ratio will 
be less than 1.0. If a hospital performs worse than average, the ratio 
will be greater than 1.0.
    We welcome public comment on our proposal to use this methodology 
for calculating the ``risk adjusted readmissions based on actual 
readmissions'' as well as the ``risk adjusted expected readmissions'' 
used to determine the Excess Readmission Ratio, as set forth in section 
1886(q)(5)(C) of the Act.

D. Rural Referral Centers (RRCs) (Sec.  412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the 
regulations at Sec.  412.96 set forth the criteria that a hospital must 
meet in order to qualify under the IPPS as an RRC. For discharges that 
occurred before October 1, 1994, RRCs received the benefit of payment 
based on the other urban standardized amount rather than the rural 
standardized amount (as discussed in the FY 1993 IPPS final rule (59 FR 
45404 through 45409)). Although the other urban and rural standardized 
amounts are the same for discharges occurring on or after October 1, 
1994, RRCs continue to receive special treatment under both the DSH 
payment adjustment and the criteria for geographic reclassification.
    Section 402 of Public Law 108-173 raised the DSH adjustment for 
RRCs such that they are not subject to the 12-percent cap on DSH 
payments that is applicable to other rural hospitals. RRCs are also not 
subject to the proximity criteria when applying for geographic 
reclassification. In addition, they do not have to meet the requirement 
that a hospital's average hourly wage must exceed, by a certain 
percentage, the average hourly wage of the labor market area where the 
hospital is located.
    Section 4202(b) of Public Law 105-33 states, in part, ``[a]ny 
hospital classified as an RRC by the Secretary * * * for fiscal year 
1991 shall be classified as such an RRC for fiscal year 1998 and each 
subsequent year.'' In the August 29, 1997 IPPS final rule with comment 
period (62 FR 45999), CMS reinstated RRC status for all hospitals that 
lost the status due to triennial review or MGCRB reclassification. 
However, CMS did not reinstate the status of hospitals that lost RRC 
status because they were now urban for all purposes because of the OMB 
designation of their geographic area as urban. Subsequently, in the 
August 1, 2000 IPPS final rule (65 FR 47089), we indicated that we were 
revisiting that decision. Specifically, we stated that we would permit 
hospitals that previously qualified as an RRC and lost their status due 
to OMB redesignation of the county in which they are located from rural 
to urban, to be reinstated as an RRC. Otherwise, a hospital seeking RRC 
status must satisfy all of the other applicable criteria. We use the 
definitions of ``urban'' and ``rural'' specified in Subpart D of 42 CFR 
part 412. One of the criteria under which a hospital may qualify as an 
RRC is to have 275 or more beds available for use (Sec.  
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size 
requirement can qualify as an RRC if the

[[Page 25938]]

hospital meets two mandatory prerequisites (a minimum CMI and a minimum 
number of discharges), and at least one of three optional criteria 
(relating to specialty composition of medical staff, source of 
inpatients, or referral volume). (We refer readers to Sec.  
412.96(c)(1) through (c)(5) and the September 30, 1988 Federal Register 
(53 FR 38513).) With respect to the two mandatory prerequisites, a 
hospital may be classified as an RRC if--
     The hospital's CMI is at least equal to the lower of the 
median CMI for urban hospitals in its census region, excluding 
hospitals with approved teaching programs, or the median CMI for all 
urban hospitals nationally; and
     The hospital's number of discharges is at least 5,000 per 
year, or, if fewer, the median number of discharges for urban hospitals 
in the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year, as specified in section 1886(d)(5)(C)(i) of the 
Act.)
1. Case-Mix Index (CMI)
    Section 412.96(c)(1) provides that CMS establish updated national 
and regional CMI values in each year's annual notice of prospective 
payment rates for purposes of determining RRC status. The methodology 
we used to determine the national and regional CMI values is set forth 
in the regulations at Sec.  412.96(c)(1)(ii). The proposed national 
median CMI value for FY 2012 includes data from all urban hospitals 
nationwide, and the proposed regional values for FY 2012 are the median 
CMI values of urban hospitals within each census region, excluding 
those hospitals with approved teaching programs (that is, those 
hospitals that train residents in an approved GME program as provided 
in Sec.  413.75). These proposed values are based on discharges 
occurring during FY 2010 (October 1, 2009 through September 30, 2010), 
and include bills posted to CMS' records through December 2010.
    We are proposing that, in addition to meeting other criteria, if 
rural hospitals with fewer than 275 beds are to qualify for initial RRC 
status for cost reporting periods beginning on or after October 1, 
2011, they must have a CMI value for FY 2010 that is at least--
     1.5292; or
     The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located.
    The proposed median CMI values by region are set forth in the 
following table:
[GRAPHIC] [TIFF OMITTED] TP05MY11.068

    The preceding numbers will be revised in the FY 2012 IPPS final 
rule to the extent required to reflect the updated FY 2010 MedPAR file, 
which will contain data from additional bills received through March 
2011.
    A hospital seeking to qualify as an RRC should obtain its hospital-
specific CMI value (not transfer-adjusted) from its fiscal intermediary 
or MAC. Data are available on the Provider Statistical and 
Reimbursement (PS&R) System. In keeping with our policy on discharges, 
the CMI values are computed based on all Medicare patient discharges 
subject to the IPPS MS-DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that CMS set forth the national 
and regional numbers of discharges in each year's annual notice of 
prospective payment rates for purposes of determining RRC status. As 
specified in section 1886(d)(5)(C)(ii) of the Act, the national 
standard is set at 5,000 discharges. We are proposing to update the 
regional standards based on discharges for urban hospitals' cost 
reporting periods that began during FY 2009 (that is, October 1, 2008 
through September 30, 2009), which are the latest cost report data 
available at the time this proposed rule was developed.
    Therefore, we are proposing that, in addition to meeting other 
criteria, a hospital, if it is to qualify for initial RRC status for 
cost reporting periods beginning on or after October 1, 2011, must 
have, as the number of discharges for its cost reporting period that 
began during FY 2009, at least--
     5,000 (3,000 for an osteopathic hospital); or
     The median number of discharges for urban hospitals in the 
census region in which the hospital is located, as indicated in the 
following table.

[[Page 25939]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.069

    These numbers will be revised in the FY 2012 final rule based on 
the latest available cost report data.
    We note that the median 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 under this proposed rule.
    We reiterate that, if an osteopathic hospital is to qualify for RRC 
status for cost reporting periods beginning on or after October 1, 
2011, the hospital would be required to have at least 3,000 discharges 
for its cost reporting period that began during FY 2009.

E. Payment Adjustment for Low-Volume Hospitals (Sec.  412.101)

1. Background
    Section 1886(d)(12) of the Act, as added by section 406(a) of 
Public Law 108-173, provides for a payment adjustment to account for 
the higher costs per discharge for low-volume hospitals under the IPPS, 
effective beginning FY 2005. The additional payment adjustment to a 
low-volume hospital provided for under section 1886(d)(12) of the Act 
is ``in addition to any payment calculated under this section.'' 
Therefore, the additional payment adjustment is based on the per 
discharge amount paid to the qualifying hospital under section 1886 of 
the Act. In other words, the low-volume add-on payment amount is based 
on all other per discharge payments made under section 1886 of the Act, 
including capital, DSH, IME, and outliers. For SCHs and MDHs, the low-
volume add-on payment amount is based on either the Federal rate or the 
hospital-specific rate, whichever results in a greater operating IPPS 
payment. Sections 3125 and 10314 of the Affordable Care Act amended the 
definition of a low-volume hospital under section 1886(d)(12)(C) of the 
Act. Sections 3125 and 10314 of the Affordable Care Act also revised 
the methodology for calculating the payment adjustment for low-volume 
hospitals.
    Prior to the amendments made by the Affordable Care Act, section 
1886(d)(12)(C)(i) of the Act defined a low-volume hospital as ``a 
subsection (d) hospital (as defined in paragraph (1)(B)) that the 
Secretary determines is located more than 25 road miles from another 
subsection (d) hospital and that has less than 800 discharges during 
the fiscal year.'' Section 1886(d)(12)(C)(ii) of the Act further 
stipulates that the term ``discharge'' means ``an inpatient acute care 
discharge of an individual regardless of whether the individual is 
entitled to benefits under Part A.'' Therefore, the term ``discharge'' 
refers to total discharges, not merely Medicare discharges. 
Furthermore, under section 406(a) of Public Law 108-173, which 
initially added subparagraph (12) to section 1886(d) of the Act, the 
provision requires the Secretary to determine an applicable percentage 
increase for these low-volume hospitals based on the ``empirical 
relationship'' between ``the standardized cost-per-case for such 
hospitals and the total number of discharges of such hospitals and the 
amount of the additional incremental costs (if any) that are associated 
with such number of discharges.'' The statute thus mandates that the 
Secretary develop an empirically justifiable adjustment based on the 
relationship between costs and discharges for these low-volume 
hospitals. The statute also limits the adjustment to no more than 25 
percent.
    Based on an analysis we conducted for the FY 2005 IPPS final rule 
(69 FR 49099 through 49102), a 25 percent low-volume adjustment to all 
qualifying hospitals with less than 200 discharges was found to be most 
consistent with the statutory requirement to provide relief to low-
volume hospitals where there is empirical evidence that higher 
incremental costs are associated with low numbers of total discharges. 
In the FY 2006 IPPS final rule (70 FR 47432 through 47434), we stated 
that a multivariate analyses supported the existing low-volume 
adjustment implemented in FY 2005. Therefore, the low-volume adjustment 
of an additional 25 percent would continue to be provided for 
qualifying hospitals with less than 200 discharges.
2. Temporary Changes for FYs 2011 and 2012
    Section 1886(d)(12) of the Act was amended by sections 3125 and 
10314 of the Affordable Care Act. The changes made by these sections of 
the Affordable Care Act are effective only for discharges occurring 
during FYs 2011 and 2012. Beginning with FY 2013, the preexisting low-
volume hospital payment adjustment and qualifying criteria, as 
implemented in FY 2005, will resume. Specifically, as discussed above, 
the provisions of the Affordable Care Act revised the definition of a 
low-volume hospital and also revised the methodology for calculating 
the payment adjustment for low-volume hospitals for FYs 2011 and 2012.
    Sections 3125(3) and 10314(1) of the Affordable Care Act amended 
the

[[Page 25940]]

qualifying criteria for low-volume hospitals under section 
1886(d)(12)(C)(i) of the Act to make it easier for hospitals to qualify 
for the low-volume adjustment. Specifically, the revised provision 
specifies that, for FYs 2011 and 2012, a hospital qualifies as a low-
volume hospital if it is ``more than 15 road miles from another 
subsection (d) hospital and has less than 1,600 discharges of 
individuals entitled to, or enrolled for, benefits under Part A during 
the fiscal year.'' In addition, section 1886(d)(12)(D) of the Act, as 
added by section 3125(4) and amended by section 10314 of the Affordable 
Care Act, provides that the payment adjustment (the applicable 
percentage increase) is to be determined ``using a continuous linear 
sliding scale ranging from 25 percent for low-volume hospitals with 200 
or fewer discharges of individuals entitled to, or enrolled for, 
benefits under Part A in the fiscal year to 0 percent for low-volume 
hospitals with greater than 1,600 discharges of such individuals in the 
fiscal year.''
    Section 3125(3)(A) of the Affordable Care Act revised the distance 
requirement of ``25 road miles'' to ``15 road miles'' for FYs 2011 and 
2012 such that a low-volume hospital is required to be only more than 
15 road miles, rather than more than 25 road miles, from another 
subsection (d) hospital for purposes of qualifying for the low-volume 
payment adjustment in FYs 2011 and 2012. The mileage requirement will 
revert back to ``more than 25 road miles'' for fiscal years after FY 
2012.
    Sections 3125(3)(B) and 10314(1) of the Affordable Care Act revised 
the discharge requirement for FYs 2011 and 2012 to less than 1,600 
discharges of individuals entitled to, or enrolled for, benefits under 
Medicare Part A during the fiscal year. Prior to enactment of the 
Affordable Care Act, under section 1886(d)(12) of the Act, as added by 
section 406(a) of Public Law 108-173, the discharge requirement to 
qualify as a low-volume hospital is less than 800 total discharges 
annually, which includes discharges of both Medicare and non-Medicare 
patients. This discharge requirement will apply also for fiscal years 
after FY 2012.
    Section 3125(4) of the Affordable Care Act added section 
1886(d)(12)(D) to the Act, and section 10314(2) of the Affordable Care 
Act further modified that section of the Act. Section 1886(d)(12)(D) of 
the Act, as modified, revises the methodology for calculating the 
payment adjustment under section 1886(d)(12)(A) of the Act for low-
volume hospitals for discharges occurring in FYs 2011 and 2012. For FY 
2010 and prior fiscal years, and beginning again in FY 2013, sections 
1886(d)(12)(A) and (B) of the Act require the Secretary to determine an 
applicable percentage increase for low-volume hospitals based on the 
``empirical relationship'' between ``the standardized cost-per-case for 
such hospitals and the total number of discharges of such hospitals and 
the amount of the additional incremental costs (if any) that are 
associated with such number of discharges.'' The statute thus requires 
the Secretary to develop an empirically justifiable adjustment based on 
the relationship between costs and discharges for these low-volume 
hospitals. The statute also limits the adjustment to no more than 25 
percent. Based on analyses we conducted for the FY 2005 IPPS final rule 
(69 FR 49099 through 49102) and the FY 2006 IPPS final rule (70 FR 
47432 through 47434), a 25 percent low-volume adjustment to all 
qualifying hospitals with less than 200 discharges was found to be most 
consistent with the statutory requirement to provide relief to low-
volume hospitals where there is empirical evidence that higher 
incremental costs are associated with low numbers of total discharges. 
However, section 1886(d)(12)(D) of the Act, as added by the Affordable 
Care Act, provides that, for discharges occurring in FYs 2011 and 2012, 
the Secretary shall determine the applicable percentage increase using 
a continuous linear sliding scale ranging from an additional 25 percent 
payment adjustment for hospitals with 200 or fewer Medicare discharges 
to a 0 percent additional payment adjustment for hospitals with more 
than 1,600 Medicare discharges.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 
50275), we revised our regulations at 42 CFR 412.101 to reflect the 
changes to the payment adjustment for low-volume hospitals provided for 
by the provisions of the Affordable Care Act. We also clarified the 
existing regulations to indicate that a hospital must continue to 
qualify as a low-volume hospital in order to receive the payment 
adjustment in that year; that is, it is not based on a one-time 
qualification. Furthermore, we established a procedure for a hospital 
to request low-volume hospital status.
    Specifically, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 
and 50414), we revised our regulations at Sec.  412.101(b)(2)(ii) to 
provide that, to qualify for the low-volume payment adjustment in FYs 
2011 and 2012, a hospital must be located more than 15 road miles from 
the nearest subsection (d) hospital. We also defined, at Sec.  
412.101(a), the term ``road miles'' to mean ``miles'' as defined at 
Sec.  412.92(c)(i). This change in the qualifying criteria from 25 to 
15 road miles is applicable only for FYs 2011 and 2012, but the 
definition of ``road miles'' continues to apply even after the distance 
requirement reverts to 25 road miles beginning in FY 2013.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50239 
and 50414), we revised our regulations at Sec.  412.101(b)(2)(ii) to 
provide that, to qualify for the low-volume adjustment in FYs 2011 and 
2012, a hospital must have fewer than 1,600 ``Medicare discharges'' 
during the fiscal year based on the hospital's Medicare discharges from 
the most recently available MedPAR data as determined by CMS. We also 
revised the regulations to specify at Sec.  412.101(a) that the term 
``Medicare discharges'' means a ``discharge of inpatients entitled to 
Medicare Part A, including discharges associated with individuals whose 
inpatient benefits are exhausted or whose stay was not covered by 
Medicare and also discharges of individuals enrolled in a MA 
organization under Medicare Part C.''
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50240 through 
50241), we adopted a continuous linear sliding scale equation to 
determine the low-volume payment adjustment for FYs 2011 and 2012 for 
eligible low-volume hospitals with Medicare discharges of more than 200 
and less than 1,600 (that is, from 201 to 1,599 Medicare discharges). 
Consistent with the statute, for FYs 2011 and 2012 for eligible low-
volume hospitals with 200 or fewer Medicare discharges, we established 
a low-volume payment adjustment of 25 percent.
    Under the regulations at Sec.  412.101(c)(2), for FYs 2011 and 
2012, the low-volume adjustment is determined as follows:
     Low-volume hospitals with 200 or fewer Medicare discharges 
will receive a low-volume adjustment of an additional 25 percent for 
each discharge.
     Low-volume hospitals with Medicare discharges of more than 
200 and fewer than 1,600 will receive for each discharge a low-volume 
adjustment of an additional percent calculated using the formula: [(4/
14) - (Medicare discharges/5600)]. For additional information on the 
mathematical interpretation of this formula, we refer readers to the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50241).

[[Page 25941]]

    While we revised the qualifying criteria and the payment adjustment 
for low-volume hospitals for FYs 2011 and 2012, consistent with the 
amendments made by the Affordable Care Act, we also noted in the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50240), that we did not modify the 
process for requesting and obtaining the low-volume hospital payment 
adjustment. In general, in order to qualify for the low-volume hospital 
payment adjustment, a hospital must provide to its fiscal intermediary 
or MAC sufficient evidence to document that it meets the discharge and 
distance requirements. The fiscal intermediary or MAC will determine, 
based on the most recent data available, if the hospital qualifies as a 
low-volume hospital, so that the hospital will know in advance whether 
or not it will receive a payment adjustment and, if so, the applicable 
add-on percentage. The fiscal intermediary or MAC and CMS may review 
available data, in addition to the data the hospital submits with its 
request for low-volume hospital status, in order to determine whether 
or not the hospital meets the qualifying criteria.
3. Proposed Discharge Data Source to Identify Qualifying Low-Volume 
Hospitals and Calculate the Payment Adjustment (Percentage Increase) 
for FY 2012
    As described above, for FYs 2005 through 2010 and FY 2013 and 
subsequent years, since the discharge determination is made based on 
the hospital's number of total discharges, the hospital's most recently 
submitted cost report is used to determine if the hospital meets the 
criteria to receive the low-volume payment adjustment in the current 
year (Sec.  412.101(b)(2)(i)). For FYs 2011 and 2012, the hospital's 
Medicare discharges from the most recently available MedPAR data, as 
determined by CMS, are used to determine if the hospital meets the 
discharge criteria to receive the low-volume payment adjustment in the 
current year (Sec.  412.101(b)(2)(ii)). As also described above, the 
applicable low-volume percentage increase is determined using a 
continuous linear sliding scale equation that results in a low-volume 
adjustment ranging from an additional 25 percent for hospitals with 200 
or fewer Medicare discharges to a 0 percent additional payment 
adjustment for hospitals with 1,600 or more Medicare discharges.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50241), we 
established that, for FY 2011, the low-volume payment adjustment would 
be determined using Medicare discharge data for FY 2009 from the March 
2010 update of the MedPAR files, as these were the most recent 
available data. We also stated that we expected to use Medicare claims 
data from FY 2010 to determine the low-volume payment adjustment for FY 
2012, as these would be the most recent available data at that time.
    In this proposed rule, we are proposing that, for FY 2012, 
qualifying low-volume hospitals and their payment adjustment would be 
determined using Medicare discharge data from the most recent update of 
the FY 2010 MedPAR file, that is, the December 2010 update, as these 
data are the most recent data available. Furthermore, we are proposing 
that if more recent FY 2010 Medicare discharge data are available (such 
as data from the March 2011 update of the MedPAR files), we would use 
such data in the final rule. Table 14, which is listed in section VI. 
of the Addendum to this proposed rule and available via the Internet, 
lists the ``subsection (d)'' hospitals with fewer than 1,600 Medicare 
discharges based on the December 2010 update of the FY 2010 MedPAR 
files and their proposed FY 2012 low-volume payment adjustment. 
Eligibility for the proposed low-volume payment adjustment for FY 2012 
is also dependent upon meeting (if the hospital is qualifying for the 
low-volume payment adjustment for the first time in FY 2012), or 
continuing to meet (if the hospital qualified in FY 2011) the mileage 
criteria specified at Sec.  412.101(b)(2)(ii).
    We note that the list of hospitals with fewer than 1,600 Medicare 
discharges in Table 14 does not reflect whether or not the hospital 
meets the mileage criterion; that is, the hospital also must be located 
more than 15 road miles from any other IPPS hospital in order to 
qualify for a low-volume hospital payment adjustment in FY 2012.
    In order to receive a low-volume hospital adjustment payment under 
Sec.  412.101, a hospital must notify and provide documentation to its 
fiscal intermediary or MAC that it meets the mileage criterion. The use 
of a Web-based mapping tool, such as MapQuest, as part of documenting 
that the hospital meets the mileage criterion for low-volume hospitals, 
is acceptable. The fiscal intermediary or MAC will determine if the 
information submitted by the hospital, such as the name and street 
address of the nearest hospitals, location on a map, and distance (in 
road miles, as defined in the regulations at Sec.  412.101(a)) from the 
hospital requesting low-volume hospital status, is sufficient to 
document that it meets the mileage criterion. If not, the fiscal 
intermediary or MAC will follow up with the hospital to obtain 
additional necessary information to determine whether or not the 
hospital meets the low-volume mileage criterion. The fiscal 
intermediary or MAC will refer to the hospital's Medicare discharge 
data determined by CMS (as proposed for FY 2012 as shown in Table 14, 
which is listed in section VI. of the Addendum to this proposed rule 
and available via the Internet), to determine whether or not the 
hospital meets the discharge criterion, and the amount of the payment 
adjustment, once it is determined that both the mileage and discharge 
criteria are met. The Medicare discharge data shown in Table 14, as 
well as the Medicare discharge data for all ``subsection (d)'' 
hospitals with claims in the December 2010 update of the FY 2010 MedPAR 
files, also will be available on the CMS Web site for hospitals to 
check their Medicare discharges to help them to decide whether or not 
to apply for low-volume hospital status.
    Similar to the policy we established in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 20574 through 20575), we are proposing that, for FY 
2012, a hospital make its request for low-volume hospital status in 
writing to its fiscal intermediary or MAC by September 1, 2011, so that 
the applicable low-volume percentage add-on would be applied to 
payments for its discharges beginning on or after October 1, 2011. For 
FY 2012, we are proposing that a hospital which qualified for the low-
volume payment adjustment in FY 2011 may continue to receive a low-
volume payment adjustment in FY 2012, without reapplying, if it 
continues to meet the Medicare discharge criterion, based on the latest 
available FY 2010 MedPAR data (as proposed above) and the distance 
criterion. However, the hospital would be required to verify in writing 
to its fiscal intermediary or MAC that it continues to be more than 15 
miles from any other ``subsection (d)'' hospital no later than 
September 30, 2011. Further, similar to the policy we established for 
FY 2011 (Transmittal 2060, Change Request 7134; October 1, 2010), we 
are proposing that, for requests for low-volume hospital status for FY 
2012 received after September 1, 2011, if the hospital meets the 
criteria to qualify as a low-volume hospital, the fiscal intermediary 
or MAC would apply the applicable low-volume adjustment in determining 
payments to the hospital's FY 2012 discharges prospectively within 30 
days of the date of the fiscal intermediary's or MAC's low-volume 
status determination.

[[Page 25942]]

F. Indirect Medical Education (IME) Adjustment (Sec.  412.105)

1. Background
    Section 1886(d)(5)(B) of the Act provides for an additional payment 
amount under the IPPS for hospitals that have residents in an approved 
graduate medical education (GME) program in order to reflect the higher 
indirect patient care costs of teaching hospitals relative to 
nonteaching hospitals. The regulations regarding the calculation of 
this additional payment, known as the indirect medical education (IME) 
adjustment, are located at Sec.  412.105.
    Public Law 105-33 (BBA 1987) established a limit on the number of 
allopathic and osteopathic residents that a hospital may include in its 
full-time equivalent (FTE) resident count for direct GME and IME 
payment purposes. Under section 1886(h)(4)(F) of the Act, for cost 
reporting periods beginning on or after October 1, 1997, a hospital's 
unweighted FTE count of residents for purposes of direct GME may not 
exceed the hospital's unweighted FTE count for its most recent cost 
reporting period ending on or before December 31, 1996. Under section 
1886(d)(5)(B)(v) of the Act, a similar limit on the FTE resident count 
for IME purposes is effective for discharges occurring on or after 
October 1, 1997. Changes to the policies regarding counting residents 
for both IME and direct GME payment purposes as a result of the 
implementation of sections 5503 through 5506 of the Affordable Care Act 
were issued in a final rule published in the Federal Register on 
November 24, 2010 (75 FR 72133).
2. IME Adjustment Factor for FY 2012
    The IME adjustment to the MS-DRG payment is based in part on the 
applicable IME adjustment factor. The IME adjustment factor is 
calculated by using a hospital's ratio of residents to beds, which is 
represented as r, and a formula multiplier, which is represented as c, 
in the following equation: c x [{1 + r{time}  .405- 1]. The 
formula is traditionally described in terms of a certain percentage 
increase in payment for every 10-percent increase in the resident-to-
bed ratio.
    Section 502(a) of Public Law 108-173 modified the formula 
multiplier (c) to be used in the calculation of the IME adjustment. 
Prior to the enactment of Public Law 108-173, the formula multiplier 
was fixed at 1.35 for discharges occurring during FY 2003 and 
thereafter. In the FY 2005 IPPS final rule, we announced the schedule 
of formula multipliers to be used in the calculation of the IME 
adjustment and incorporated the schedule in our regulations at Sec.  
412.105(d)(3)(viii) through (d)(3)(xii). Section 502(a) modified the 
formula multiplier beginning midway through FY 2004 and provided for a 
new schedule of formula multipliers for FYs 2005 and thereafter as 
follows:
     For discharges occurring on or after April 1, 2004, and 
before October 1, 2004, the formula multiplier is 1.47.
     For discharges occurring during FY 2005, the formula 
multiplier is 1.42.
     For discharges occurring during FY 2006, the formula 
multiplier is 1.37.
     For discharges occurring during FY 2007, the formula 
multiplier is 1.32.
     For discharges occurring during FY 2008 and fiscal years 
thereafter, the formula multiplier is 1.35.
    Accordingly, for discharges occurring during FY 2012, the formula 
multiplier is 1.35. We estimate that application of this formula 
multiplier for the FY 2012 IME adjustment will result in an increase in 
IPPS payment of 5.5 percent for every approximately 10-percent increase 
in the hospital's resident-to-bed ratio.

G. Payment Adjustment for Medicare Disproportionate Share Hospitals 
(DSHs) and Indirect Medical Education (IME) (Sec. Sec.  412.105 and 
412.106)

1. Background
    Section 1886(d)(5)(F) of the Act provides for additional Medicare 
payments to subsection (d) hospitals that serve a significantly 
disproportionate number of low-income patients. The Act specifies two 
methods by which a hospital may qualify for the Medicare 
disproportionate share hospital (DSH) adjustment. Under the first 
method, hospitals that are located in an urban area and have 100 or 
more beds may receive a Medicare DSH payment adjustment if the hospital 
can demonstrate that, during its cost reporting period, more than 30 
percent of its net inpatient care revenues are derived from State and 
local government payments for care furnished to needy patients with low 
incomes. This method is commonly referred to as the ``Pickle method.''
    The second method for qualifying for the DSH payment adjustment, 
which is the most common, is based on a complex statutory formula under 
which the DSH payment adjustment is based on the hospital's geographic 
designation, the number of beds in the hospital, and the level of the 
hospital's disproportionate patient percentage (DPP). A hospital's DPP 
is the sum of two fractions: the ``Medicare fraction'' and the 
``Medicaid fraction.'' The Medicare fraction (also known as the ``SSI 
fraction'' or ``SSI ratio'') is computed by dividing the number of the 
hospital's inpatient days that are furnished to patients who were 
entitled to both Medicare Part A (including patients who are enrolled 
in a Medicare Advantage (Part C) plan) and Supplemental Security Income 
(SSI) benefits by the hospital's total number of patient days furnished 
to patients entitled to benefits under Medicare Part A (including 
patients who are enrolled in a Medicare Advantage (Part C) plan). The 
Medicaid fraction is computed by dividing the hospital's number of 
inpatient days furnished to patients who, for such days, were eligible 
for Medicaid, but were not entitled to benefits under Medicare Part A, 
by the hospital's total number of inpatient days in the same period.
    Because the DSH payment adjustment is part of the IPPS, the DSH 
statutory references (under section 1886(d)(5)(F) of the Act) to 
``days'' apply only to hospital acute care inpatient days. Regulations 
located at Sec.  412.106 govern the Medicare DSH payment adjustment and 
specify how the DPP is calculated as well as how beds and patient days 
are counted in determining the Medicare DSH payment adjustment. Under 
Sec.  412.106(a)(1)(i), the number of beds for the Medicare DSH payment 
adjustment is determined in accordance with bed counting rules for the 
IME adjustment under Sec.  412.105(b).
    In section IV.G.2. of this preamble, we are combining our 
discussion of proposed changes to the policies for counting beds in 
relation to the calculations for the IME adjustment at Sec.  412.105(b) 
and the DSH payment adjustment at Sec.  412.106(a)(1)(i) and for 
counting patient days for purposes of the DSH payment adjustment at 
Sec.  412.106(a)(1)(ii).
2. Proposed Policy Change Relating to the Exclusion of Hospice Beds and 
Patient Days From the Medicare DSH Calculation
a. Background
    As discussed in the FY 2004 IPPS final rule (68 FR 45415 through 
45420), when determining a hospital's Medicare DSH payment, our policy 
is to include patient days in hospital units or wards that would be 
directly included in determining the allowable costs of inpatient 
hospital care payable under the IPPS on the Medicare cost report. Under 
this policy, CMS uses the level of care generally provided in such a 
unit or ward as a proxy for determining the level of care provided to a 
particular

[[Page 25943]]

patient on a particular day within that unit. As stated in the FY 2004 
IPPS final rule, our policy is ``not intended to focus on the level or 
type of care provided to individual patients in a unit, but rather on 
the level and type of care provided in the unit as a whole.'' (68 FR 
45417) In the FY 2005 IPPS final rule, we amended this policy to 
specifically exclude observation and swing days from the patient day 
count. In this proposed rule, we are proposing to establish an 
additional exclusion with respect to counting bed days and patient days 
for patients receiving hospice services in an inpatient setting of a 
hospital.
b. Hospice Inpatient Services
    Section 1861(dd)(1) of the Act defines hospice care to include a 
limited set of ``items and services provided to a terminally ill 
individual by, or by others under arrangements made by, a hospice 
program under a written plan (for providing such care to such 
individual) established and periodically reviewed by the individual's 
attending physician and by the medical director.'' Among those items 
and services specified under section 1861(dd)(1)(G) of the Act is 
``short-term inpatient care (including both respite care and procedures 
necessary for pain control and acute and chronic symptom management) in 
an inpatient facility meeting such conditions as the Secretary 
determines to be appropriate to provide such care, but such respite 
care may be provided only on an intermittent, nonroutine, and 
occasional basis and may not be provided consecutively over longer than 
five days.'' Based on these statutory definitions of hospice care, the 
Secretary, through regulation at Sec.  418.302, has grouped hospice 
care services into four categories for payment purposes. Two of these 
payment categories describe hospice services in an inpatient setting: 
inpatient respite care day and general inpatient care day.
    Section 418.302(b)(3) of the regulations defines an inpatient 
respite care day as ``a day on which the individual who has elected 
hospice care receives care in an approved facility on a short-term 
basis for respite.'' Section 40.2.2 of Chapter 9 of the Medicare 
Benefit Policy Manual (https://www.cms.gov/manuals/Downloads/bp102c09.pdf) further describes an inpatient respite care day as a 
short-term inpatient day provided only when necessary to relieve family 
members or other caregivers caring for the individual at home. Under 
the Act, inpatient respite care is limited to 5 consecutive days for a 
given stay. Similarly, the regulations at Sec.  418.302(b)(4) describe 
a general inpatient care day as ``a day on which an individual who has 
elected hospice care receives general inpatient care in an inpatient 
facility for pain control or acute or chronic symptom management which 
cannot be managed in other settings.''
    Section 40.1.5 of Chapter 9 of the Medicare Benefit Policy Manual 
provides that general inpatient care is appropriate when care for pain 
control or acute or chronic symptom management cannot feasibly be 
provided in another setting. This section of the Medicare Benefit 
Policy Manual further states that such care is ``not equivalent to a 
hospital level of care.'' That hospice care is not hospital level care 
is further supported by the provision at Sec.  418.202(e), which 
provides that general inpatient care and inpatient respite care hospice 
services can be ``provided in a participating hospice inpatient unit, 
or a participating hospital or [skilled nursing facility], that 
additionally meets the standards in Sec.  418.202(a) and (e) regarding 
staffing and patient areas * * * [and] must conform to the [hospice 
provider's] written plan of care.''
    Furthermore, hospice services provided in an inpatient hospital 
setting are not payable under the IPPS. Rather, at this time, these 
services are payable under two of the four prospectively determined 
all-inclusive categories of care under the hospice payment system. In 
the FY 2004 IPPS final rule (68 FR 45418), we stated that we believed 
it ``reasonable to interpret the phrase `hospital's patient days,' to 
mean only the hospital's inpatient days at a level of care that would 
be covered under the IPPS as a means to determine an IPPS payment 
adjustment.'' In that rule, we acknowledged that it would be 
``administratively inefficient and impracticable'' to calculate a 
hospital' inpatient days based on a determination of whether a 
particular patient in a particular inpatient bed for a particular stay 
is receiving a level of care that would be covered under the IPPS (68 
FR 45418). Accordingly, we adopted a policy under which we use the 
level of care that is generally provided in particular units or wards 
as a proxy for determining whether the care provided to a particular 
patient is of a type that would be covered under the IPPS. However, we 
have recognized exceptions to this policy for certain categories of 
nonacute care, even if that care is provided in an acute care unit.
    Therefore, we are proposing to revise Sec.  412.106(a)(1)(ii) to 
exclude patient days associated with hospice patients receiving 
inpatient hospice services in an inpatient hospital setting from the 
Medicare and Medicaid fractions of the DPP. We also are proposing to 
amend our cost reporting instructions accordingly. Our proposal to 
exclude hospice inpatient days is analogous to our decision in the FY 
2005 IPPS final rule to exclude observation and swing-bed days from the 
Medicare and Medicaid fractions of the DPP. In that rule, we stated 
that our policies to exclude observation days and swing-bed days from 
the count of patient days ``stem from the fact that although the 
services are provided in beds that would otherwise be available to 
provide an IPPS level of services, these days are not payable under the 
IPPS * * *'' (69 FR 49097). Similarly, our proposal to exclude 
inpatient hospice days stems from the fact that these days are not 
acute care services generally payable under the IPPS.
    We note that, on rare occasions, patients receiving care under a 
third payment category, routine home care, may also receive services in 
an inpatient hospital setting. Unlike inpatient respite care or general 
inpatient services, routine home care services are not intended to be 
provided in a hospital setting. For the same reasons stated above, such 
days should also be excluded from the Medicare and Medicaid fractions 
of the DPP.
    We also are proposing to exclude from the hospital's bed count days 
associated with hospice patients who receive inpatient hospice services 
in the hospital for purposes of both the IME payment adjustment and the 
DSH payment adjustment. The rules for counting hospital beds for the 
purposes of the IME adjustment are codified in the IME regulations at 
Sec.  412.105(b), which is cross-referenced in Sec.  412.106(a)(1)(i) 
for purposes of the DSH payment adjustment. Our bed counting policy is 
to include bed days available for IPPS-level acute care hospital 
services. Inpatient hospice services provided in an acute unit or ward 
are occasional, alternative uses of acute inpatient beds that would 
otherwise be considered available for IPPS-level acute care hospital 
services (as long as other criteria for a bed to be considered as an 
available bed are met under Sec.  412.105(b)). A bed used for inpatient 
hospice services on a given day is not available to be used for IPPS-
level services. Therefore, we are proposing to revise Sec.  
412.105(b)(4) to state that such hospice days are excluded from the 
counts of available beds for purposes of the IME payment adjustment. 
Because the same rules govern the counting of available beds for 
purposes of the DSH payment

[[Page 25944]]

adjustment under Sec.  412.106(a)(1)(i), hospice days will also be 
excluded from the count of available beds for purposes of the DSH 
payment adjustment.
    We note that there is a circumstance in which a hospital will 
provide IPPS-level acute care hospital services to a hospice patient 
for which it would receive payment under the IPPS. This occurs when a 
Medicare beneficiary receiving hospice care under his or her hospice 
benefit requires acute care hospital services to treat a condition 
unrelated to his or her hospice plan of care. For example, an 
individual who has elected the hospice benefit could be treated in the 
inpatient hospital setting for a broken bone that is unrelated to his 
or her terminal illness. Under these circumstances, the patient is 
receiving acute care hospital services of the sort payable under the 
IPPS. As such, consistent with Sec.  412.106(a)(ii), we are not 
proposing to exclude these patient days from the Medicare and Medicaid 
fractions of the DPP or from the count of available beds under Sec.  
412.105(b)(4) and Sec.  412.106(a)(1)(i).
    We further note that hospitals may have hospice units that are 
separate and distinct from their acute care inpatient units. Under 
existing regulations at Sec.  412.105(b)(3) and Sec.  
412.106(a)(ii)(A), services provided in distinct nonacute inpatient 
units are excluded from the patient day and bed day count. Our proposal 
with respect to inpatient hospice services does not change or affect 
this policy.
    In summary, we are proposing to exclude inpatient hospice days from 
the patient day count in Sec.  412.106(a)(1)(ii) (for DSH) and the bed 
day count at Sec.  412.105(b) (for IME) and at Sec.  412.106(a)(1)(i) 
(for DSH).

H. Medicare-Dependent, Small Rural Hospitals (MDHs) (Sec.  412.108)

1. Background
    Under the IPPS, separate special payment protections are provided 
to a Medicare-dependent, small rural hospital (MDH). MDHs are paid 
based on the higher of the Federal rate for their hospital inpatient 
services or a blended rate based in part on the Federal rate and in 
part on the MDH's hospital-specific rate. Section 1886(d)(5)(G)(iv) of 
the Act defines an MDH as a hospital that is located in a rural area, 
has not more than 100 beds, is not an SCH, and has a high percentage of 
Medicare discharges (that is, not less than 60 percent of its inpatient 
days or discharges either in its 1987 cost reporting year or in two of 
its most recent three settled Medicare cost reporting years). The 
regulations at 42 CFR 412.108 set forth the criteria that a hospital 
must meet to be classified as an MDH.
    Although MDHs are paid under an adjusted payment methodology, they 
are still IPPS hospitals paid under section 1886(d) of the Act. Like 
all IPPS hospitals paid under section 1886(d) of the Act, MDHs are paid 
for their discharges based on the DRG weights calculated under section 
1886(d)(4) of the Act.
    Through and including FY 2006, under section 1886(d)(5)(G) of the 
Act, MDHs are paid based on the Federal rate or, if higher, the Federal 
rate plus 50 percent of the amount by which the Federal rate is 
exceeded by the updated hospital-specific rate based on the hospital's 
FY 1982 or FY 1987 costs per discharge, whichever of these hospital-
specific rates is higher. Section 5003(b) of Public Law 109-171 (DRA 
2005) amended section 1886(d)(5)(G) of the Act to provide that, for 
discharges occurring on or after October 1, 2006, MDHs are paid based 
on the Federal rate or, if higher, the Federal rate plus 75 percent of 
the amount by which the Federal rate is exceeded by the updated 
hospital-specific rate based on FY 1982, FY 1987, or FY 2002 costs per 
discharge, whichever of these hospital-specific rates is highest.
    For each cost reporting period, the fiscal intermediary or MAC 
determines which of the payment options will yield the highest 
aggregate payment. Interim payments are automatically made at the 
highest rate using the best data available at the time the fiscal 
intermediary or MAC makes the determination. However, it may not be 
possible for the fiscal intermediary or MAC to determine in advance 
precisely which of the rates will yield the highest aggregate payment 
by year's end. In many instances, it is not possible to accurately 
forecast the outlier payments, the amount of the DSH adjustment or the 
IME adjustment, all of which are applicable only to payments based on 
the Federal rate and not to payments based on the hospital-specific 
rate. The fiscal intermediary or MAC makes a final adjustment at the 
settlement of the cost report after it determines precisely which of 
the payment rates would yield the highest aggregate payment to the 
hospital.
    If a hospital disagrees with the fiscal intermediary's or the MAC's 
determination regarding the final amount of program payment to which it 
is entitled, it has the right to appeal the determination in accordance 
with the procedures set forth in 42 CFR Part 405, Subpart R, which 
govern provider payment determinations and appeals.
2. Extension of the MDH Program
    As we discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50286 and 50287), section 3124 of the Affordable Care Act extended the 
MDH program from the end of FY 2011 (that is, for discharges occurring 
before October 1, 2011) to the end of FY 2012 (that is, for discharges 
occurring before October 1, 2012). Under prior law, as specified in 
section 5003(a) of Public Law 109-171 (DRA 2005), the MDH program was 
to be in effect through the end of FY 2011 only. Section 3124(a) of the 
Affordable Care Act amended sections 1886(d)(5)(G)(i) and 
1886(d)(5)(G)(ii)(II) of the Act to extend the MDH program and payment 
methodology from the end of FY 2011 to the end of FY 2012, by striking 
``October 1, 2011'' and inserting ``October 1, 2012''. Section 3124(b) 
of the Affordable Care Act also made conforming amendments to sections 
1886(b)(3)(D)(i) and 1886(b)(3)(D)(iv) of the Act. Section 3124(b)(2) 
of the Affordable Care Act also amended section 13501(e)(2) of OBRA 
1993 to extend the provision permitting hospitals to decline 
reclassification as an MDH through FY 2012. In the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50287 and 50414), we amended the regulations at 
Sec.  412.108(a)(1) and (c)(2)(iii) to reflect the statutory extension 
of the MDH program through FY 2012. We are not proposing any additional 
changes to this regulatory text for FY 2012.

I. Certified Registered Nurse Anesthetist (CRNA) Services Furnished in 
Rural Hospitals and CAHs (Sec.  412.113)

    Section 2312 of the Deficit Reduction Act of 1984 (Pub. L. 98-369) 
provided for reimbursement to hospitals on a reasonable cost basis for 
the costs that hospitals incur in connection with the services of 
certified registered nurse anesthetists (CRNAs). Section 2312(c) 
provided that pass-through payment of CRNA costs was effective for cost 
reporting periods beginning on or after October 1, 1984, and before 
October 1, 1987. Section 9320 of the Omnibus Budget Reconciliation Act 
of 1986 (Pub. L. 99-509) (which established a fee schedule for the 
services of nurse anesthetists) amended section 2312(c) of Public Law 
98-369 by extending the CRNA pass-through provision through cost 
reporting periods beginning before January 1, 1989. In addition, Public 
Law 99-509 amended section 1861 of the Act to add a new subsection 
(bb), which provides that CRNA services include anesthesia services and 
related care furnished by a CRNA. Section 608 of the Family Support Act 
of 1988 (Pub. L.

[[Page 25945]]

100-485) extended pass-through payments for CRNA services through 1991 
and amended section 9320 of Public Law 99-509 by including language 
referring to eligibility for pass-through payments for CRNA services if 
the facility is ``* * *a hospital located in a rural area (as defined 
for purposes of section 1886(d) of the Social Security Act).'' 
Reasonable cost-based payment for CRNA services was extended 
indefinitely by section 6132 of the Omnibus Budget Reconciliation Act 
of 1989 (Pub. L. 101-239).
    Section 1886(d) of the Act defines ``rural'' as any area outside an 
urban area. This definition of ``rural'' was in effect when Public Law 
100-485 was implemented. In 1999, the Balanced Budget Refinement Act 
(Pub. L. 106-113) amended section 1886(d)(8) of the Act by adding a new 
subparagraph (E), which permits a hospital physically located in an 
urban area to apply for reclassification to be treated as rural. In 
addition, Public Law 106-113 made a corresponding change to section 
1820(c)(2)(B)(i) of the Act, which specifies the rural location 
requirement for CAH designation, by adding the phrase ``or is treated 
as being located in a rural area pursuant to section 1886(d)(8)(E).''
    The regulations implementing pass-through payments for anesthesia 
services and related care furnished by qualified nonphysician 
anesthetists employed by a hospital or CAH, including CRNAs, are 
located at Sec.  412.113(c). In the FY 2011 IPPS/LTCH PPS proposed rule 
(75 FR 24010), we proposed to revise Sec.  412.113(c)(2)(i)(A) to state 
that, effective for cost reporting periods beginning on or after 
October 1, 2010, CAHs and hospitals that have reclassified pursuant to 
section 1886(d)(8)(E) of the Act and Sec.  412.103 of the regulations 
also are rural for purposes of section 1886(d) of the Act and, 
therefore, are eligible to be paid based on reasonable cost for 
anesthesia services and related care furnished by a qualified 
nonphysician anesthetist.
    After consideration of the public comments, in the FY 2011 IPPS/
LTCH PPS final rule (75 FR 50303), we adopted a policy that would allow 
otherwise eligible critical access hospitals (CAHs) or hospitals, that 
have reclassified from urban to rural status under section 
1886(d)(8)(E) of the Act and 42 CFR 412.103, to receive reasonable cost 
payments for anesthesia services and related care furnished by 
qualified nonphysician anesthetists (also referred to in this section 
as CRNA pass-through payments), effective for cost reporting periods 
beginning on or after October 1, 2010. After the issuance of the final 
rule, we received an inquiry from a public commenter who indicated that 
CMS had misunderstood its submitted comment on the FY 2011 IPPS/LTCH 
PPS proposed rule in which the commenter stated that the policy should 
be effective on the basis of a calendar year, not a cost reporting 
period, since as a rule a hospital can only begin receiving CRNA pass-
through payments at the beginning of a calendar year. Our response to 
this public comment in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50303) indicated that it was unnecessary to modify the effective date 
in the final rule because ``if the provision is effective for cost 
reporting periods beginning on or after October 1, 2010, it will also 
be in effect for the calendar year beginning January 1, 2011.'' While 
this statement was accurate, it did not take into account that if a 
hospital's cost reporting period begins on or after January 1, 2011, 
the hospital would be ineligible to receive CRNA pass-through payments 
until the beginning of the next calendar year, on January 1, 2012. 
Under the finalized policy in the FY 2011 IPPS/LTCH PPS final rule, 
hospitals reclassifying from urban to rural areas with cost reporting 
periods beginning between October 1, 2010, and December 31, 2010, would 
be able to first receive CRNA pass-through payments effective January 
1, 2011, while hospitals with cost reporting periods beginning on or 
after January 1, 2011, would not be able to receive CRNA pass-through 
payments until one year later on January 1, 2012.
    In an interim final rule with comment period included in the 
Federal Register on November 24, 2010 (75 FR 72256), we stated that our 
intention in the FY 2011 IPPS/LTCH PPS final rule was not to make the 
provision for CRNA pass-through payment for anesthesia services and 
related care furnished by nonphysician anesthetists effective January 
1, 2011, for some hospitals and CAHs and January 1, 2012, for other 
hospitals and CAHs. We stated our belief that the provision would be 
more equitable if it had a uniform effective date for all eligible 
hospitals and CAHs. While we considered changing the effective date to 
January 1, 2011, for all hospitals and CAHs to begin receiving CRNA 
pass-through payments under this provision, we noted that our 
regulations at 42 CFR 412.113(c)(2)(iii) state that the hospital or CAH 
must demonstrate to its fiscal intermediary prior to the start of the 
calendar year that it meets the requirements for receiving CRNA pass-
through payments. For this reason, we stated our belief that the best 
option was to adopt an effective date of December 2, 2010, for all 
hospitals and CAHs, which we provided for in the interim final rule 
with comment period. With an effective date of December 2, 2010, all 
hospitals and CAHs regardless of their specific fiscal year beginning 
date were provided the opportunity to demonstrate prior to January 1, 
2011, that they met the requirements for receiving CRNA pass-through 
payments beginning January 1, 2011. In the interim final rule with 
comment period, we amended the regulations at Sec.  412.113(c)(2)(i)(A) 
to provide for an effective date of December 2, 2010, for all eligible 
hospitals and CAHs to receive CRNA pass-through payments for anesthesia 
services and related care furnished by qualified nonphysician 
anesthetists.
    We intend to respond to public comments received on the interim 
final rule with comment period and will adopt our final policy in the 
FY 2012 IPPS/LTCH PPS final rule.

J. Additional Payments for Qualifying Hospitals With Lowest per 
Enrollee Medicare Spending

1. Background
    Section 1109 of the Affordable Care Act requires additional 
payments for FYs 2011 and 2012 for ``qualifying hospitals.'' Section 
1109(d) defines a ``qualifying hospital'' as a ``subsection (d) 
hospital * * * that is located in a county that ranks, based upon its 
ranking in age, sex and race adjusted spending for benefits under parts 
A and B * * * per enrollee within the lowest quartile of such counties 
in the United States.'' Therefore, a ``qualifying hospital'' is one 
that meets the following conditions: (1) It is a ``subsection (d) 
hospital'' as defined in section 1886(d)(1)(B) of the Act; and (2) it 
is located in a county that ranks within the lowest quartile of 
counties based upon its spending for benefits under Medicare Part A and 
Part B per enrollee adjusted for age, sex, and race. Section 1109(b) of 
the Affordable Care Act makes available $400 million to qualifying 
hospitals for FY 2011 and FY 2012. Section 1109(c) of the Affordable 
Care Act requires the $400 million to be divided among each qualifying 
hospital in proportion to the ratio of the individual qualifying 
hospital's FY 2009 IPPS operating hospital payments to the sum of total 
FY 2009 IPPS operating hospital payments made to all qualifying 
hospitals.
    Section 1109 is one of several provisions in the Affordable Care 
Act that addresses concerns about how Medicare makes adjustments for 
geographic differences in the cost of

[[Page 25946]]

providing services and geographic variation in the volume and intensity 
of health care spending. Some other provisions in the Affordable Care 
Act that relate to concerns about geographic variation in Medicare 
payments include:
     Section 3102(a), which provides a floor of 1.0 on the 
physician fee schedule work geographic practice cost index (GPCI) 
through the end of CY 2010 (later extended by the Medicare and Medicaid 
Extension Act of 2010 through the end of CY 2011);
     Section 3102(b), as amended by section 1108 of the 
Affordable Care Act, which requires that only one-half of the relative 
cost differences in employee wages and office rents be reflected in the 
practice expense GPCIs in 2010 and 2011;
     Section 10324, which provides for a floor on the wage 
index and the practice expense GPCI in frontier States (defined as 50 
percent or more of the counties in the State having a population 
density of less than six people per square mile).
    These provisions provide temporary adjustments in payments while 
other initiatives are underway to evaluate geographic adjustment 
factors that are used in Medicare's payment systems. For instance, 
section 3101 of the Affordable Care Act requires the Secretary, not 
later than January 1, 2012, to make appropriate adjustments to the 
practice expense GPCI considering alternative data sources such as the 
American Community Survey for the nonphysician employee portion of the 
GPCI. Section 3137 of the Affordable Care Act requires the Secretary to 
submit to Congress a report that includes a plan to reform the hospital 
wage index system under section 1886 of the Act by December 31, 2011. 
In addition to these provisions, the Secretary has contracted with the 
Institute of Medicine (IOM) to study the hospital wage index and the 
physician fee schedule GPCI. The IOM's first report to CMS is due in 
May 2011 and will provide an evaluation and assessment of:
    (1) The empirical validity of the adjustment factors (the hospital 
wage index and physician fee schedule GPCI);
    (2) The methodology used to determine the adjustment factors;
    (3) Measures used for the adjustment factors, taking into account--
     Timeliness of data and frequency of revisions to such 
data;
     Sources of data and the degree to which such data are 
representative of costs; and
     Operational costs of providers who participate in 
Medicare.
    The report will include recommendations for the Secretary to 
consider. We are looking forward to receiving IOM's report and acting 
expeditiously on its recommendations to improve Medicare's payment 
systems and better adjust for geographic differences in the cost of 
hospital labor as well as the cost of operating a physician practice.
2. Methodology for Identifying Qualifying Hospitals and Eligible 
Counties
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50303 through 
50342), we finalized our methodology for distributing the $400 million 
to qualifying hospitals located in the lowest quartile of counties in 
per enrollee Medicare spending. First, we provided our methodology for 
determining the bottom quartile of counties with the lowest Medicare 
Part A and Part B spending adjusted by age, sex, and race for the 
purpose of disbursing the available $400 million. We developed an 
adjustment model by age, sex, and race, as required under the 
provisions of section 1109. We then applied this adjustment to the 
county Medicare Part A and Part B spending data to account for the 
demographics of the Medicare beneficiaries in those counties. After 
those adjustments were applied, we determined the Medicare Part A and 
Part B spending by county per enrollee. As we explained in the final 
rule, our methodology for determining the Medicare Part A and Part B 
spending per enrollee by county adjusted for age, sex, and race is 
similar to the methodology we use to calculate risk adjustment models 
for Medicare Advantage (MA) ratesetting. For more information on the 
methodology we used to calculate the county Medicare per enrollee 
spending rates, we refer readers to the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50303 through 75 FR 50307).
    In addition, in the FY 2011 IPPS/LTCH PPS final rule, we developed 
a methodology to identify the qualifying hospitals located in each of 
the eligible counties. As we stated earlier, section 1109 defines a 
qualifying hospital is a ``subsection (d) hospital'' (as defined for 
purposes of section 1886(d) of the Act) that is ``located in'' an 
eligible county. A subsection (d) hospital is defined in section 
1886(d)(1)(B) of the Act, in part, as a ``hospital located in one of 
the 50 States or the District of Columbia.'' Therefore, we excluded 
Puerto Rico hospitals and CAHs from the provisions of section 1109 
because they do not meet the definition of a ``subsection (d) 
hospital.''
    In the FY 2011 IPPS/LTCH PPS final rule, we identified ``qualifying 
hospitals'' based on their Medicare provider number (now referred to as 
the ``CMS certification number'' (CCN)) because this number is used by 
hospitals to identify themselves on their Medicare cost reports. We 
also provided that, in order to meet the definition of a ``qualifying 
hospital,'' the hospital, as identified by its CCN, must: (1) Have 
existed as a subsection (d) hospital as of April 1, 2010; (2) be 
geographically located in an eligible county; and (3) have received 
IPPS operating payments (in accordance with section 1886(d)) of the 
Act) under its CCN in FY 2009. We used the Online Survey, Certification 
and Reporting (OSCAR) database to determine a hospital's county 
location associated with that CCN. We also specified that the address 
listed for a hospital's CCN must be currently located in a qualifying 
county in order for a hospital to meet the definition of a ``qualifying 
hospital.'' For more information on how we identified the qualifying 
hospitals, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50307 and 50308). We note that we are proposing to clarify the 
application of our definition in section IV.J.4. of this preamble.
3. Determination of Annual Payment Amounts
    The third step in the implementation of section 1109 of the 
Affordable Care Act required that we determine the payment amount that 
each qualifying hospital would receive. Specifically, section 1109(c) 
of the Affordable Care Act required that the payment amount for a 
qualifying hospital be determined ``in proportion to the portion of the 
amount of the aggregate payments under section 1886(d) of the Social 
Security Act to the hospital for fiscal year 2009 bears to the sum of 
all such payments to all qualifying hospitals for such fiscal year.'' 
As specified in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50310 
through 50312), we determined that a qualifying hospital's payment 
amount will be based on the proportion of its IPPS operating payments 
made in FY 2009 under section 1886(d) of the Act relative to the total 
IPPS operating payments made to all qualifying hospitals in FY 2009 
under section 1886(d) of the Act. The FY 2009 IPPS operating payments 
made under section 1886(d) of the Act includes DRG and wage-adjusted 
payments made under the IPPS standardized amount with add-on payments 
for operating DSH, operating IME, operating outliers, and new 
technology (collectively referred to in this preamble as the IPPS 
operating payment amount). We used the March 2010 update of the FY 2009 
MedPAR

[[Page 25947]]

hospital inpatient claims data to determine the IPPS operating payment 
amounts for each qualifying hospital in order to calculate the 
proportion of money that each qualifying hospital would receive under 
this provision. For more information on the methodology we used to 
calculate the payment determinations, we refer readers to the FY 2011 
IPPS/LTCH PPS final rule (75 FR 30310 through 75 FR 50312).
4. Eligible Counties and Qualifying Hospitals
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50312 through 
50342), we published the list of eligible counties, that is, the lowest 
quartile of counties with Medicare Part A and Part B spending per 
enrollee adjusted for age, sex, and race, the qualifying hospitals 
located in those counties, and the qualifying hospitals' payment 
weighting factors, for purposes of making payments under section 1109 
for FY 2011 and FY 2012. We identified 3,142 counties in the United 
States. Therefore, there are 786 eligible counties (rounded from 785.5 
eligible counties). Of those 786 eligible counties, there are only 273 
counties in which qualifying hospitals are located, using the 
methodology that we finalized in the FY 2011 IPPS/LTCH PPS final rule. 
Using CCNs, we identified 416 IPPS hospitals that are currently located 
in those eligible counties and that received IPPS operating payments in 
FY 2009.
    In response to public comments on the FY 2011 IPPS/LTCH PPS 
proposed rule, in the FY 2011 IPPS/LTCH PPS final rule, we corrected 
the list of eligible counties by replacing two counties on our list of 
eligible counties (adding Crooks County, OR and Bottineu County, ND). 
However, we did not identify any qualifying hospitals located in those 
two eligible counties. Therefore, we provided the public an opportunity 
to notify CMS by August 30, 2010, if there were any qualifying IPPS 
hospitals located in either of the two newly added counties. We stated 
that if we added qualifying hospitals in these counties as a result of 
accurate notification from the public, we would publish a revised list 
of qualifying hospitals and their payment weighting factors on the CMS 
Web site after August 30, 2010. We did not receive any public comments 
that there were qualifying hospitals located in Crooks County, OR or 
Bottineu County, ND. Therefore, the list of eligible counties and 
qualifying hospitals that was finalized in Tables 1 and 2 in the FY 
2011 IPPS/LTCH PPS final rule remained valid for distribution of 
payments under section 1109 for FY 2011 and FY 2012.
    In auditing our determination of qualifying hospitals prior to the 
distribution of payments for FY 2011, we found that the following 
providers on the list of qualifying hospitals which we finalized in the 
FY 2011 IPPS/LTCH PPS final rule were not subsection (d) hospitals in 
FY 2011:
[GRAPHIC] [TIFF OMITTED] TP05MY11.070

    Because these providers were not subsection (d) hospitals in FY 
2011, the statute precludes them from being qualifying hospitals 
eligible to receive section 1109 payments for FY 2011. We are proposing 
to clarify in this proposed rule that, in applying our definition of 
qualifying hospitals for making payments under section 1109 of the 
Affordable Care Act, these 11 providers (and other providers that do 
not meet the statutory definition) are not qualifying hospitals and, 
therefore, should be removed from the list of qualifying hospitals. 
Furthermore, we are proposing to clarify that, in order to meet the 
definition of ``qualifying hospital'' under section 1109 for FY 2012, a 
hospital that is on the list of qualifying hospitals in this proposed 
rule must meet the statutory criteria of a ``qualifying hospital'' for 
some portion of FY 2012 (a hospital must be a subsection (d) hospital 
for some part of FY 2012).
    In addition, we note that, prior to the issuance of the FY 2012 
final rule and prior to making section 1109 payments for FY 2012, we 
intend to review providers' status vis-[agrave]-vis the statutory 
definition of qualifying hospital. Accordingly, we note that, in the FY 
2012 final rule and again prior to distribution of section 1109 
payments for FY 2012, we will update the list of qualifying hospitals 
and payment weighting factors based on these findings. In addition to 
the opportunity to submit comments on this proposed rule, we are 
proposing to provide hospitals an opportunity after the FY 2012 IPPS 
rulemaking cycle to notify CMS whether any qualifying hospitals removed 
from the list have been removed in error and to notify CMS if a 
hospital is on the list of qualifying hospitals and will not be a 
qualifying hospital (for example, a subsection (d) hospital) for any or 
all part of FY 2012. The public may submit input on these two topics 
via e-mail to Nisha Bhat, [email protected]. All information, 
including relevant

[[Page 25948]]

documentation, must be received by November 1, 2011.
5. Payment Determinations and Distributions for FY 2011 and FY 2012
    Under section 1109(b) of the Affordable Care Act, the total pool of 
payments available to qualifying hospitals for FY 2011 and FY 2012 is 
$400 million. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50308 
through 50310), we stated that we would distribute $150 million for FY 
2011 and $250 million for FY 2012. We stated that we would distribute 
payments to the qualifying hospitals through an annual one-time payment 
during each of FY 2011 and FY 2012 through their Medicare contractor 
(fiscal intermediary or MAC). We instructed qualifying hospitals to 
report these additional payments on their Medicare hospital cost report 
corresponding to the appropriate cost reporting period that the 
hospitals receive the payments and that hospitals should report these 
payments on the ``Other adjustment'' line on Worksheet E, Part A of the 
Medicare hospital cost report Form 2552. We noted that we require these 
payments to be reported on the cost report for tracking purposes only 
and that these additional payments will not be adjusted or settled by 
the fiscal intermediary or MAC on the cost report.
    At the time of the issuance of this FY 2012 proposed rule, we have 
not yet made the payments to the qualifying hospitals for FY 2011. As 
we stated in the FY 2011 IPPS/LTCH PPS final rule, we will make the FY 
2011 payments during FY 2011 (that is, by September 30, 2011). However, 
in this proposed rule, we are notifying the public that we intend to 
change the method we will use to distribute the payment for FY 2011 and 
FY 2012, in order to ease the reporting burden on hospitals. Rather 
than making a one-time annual payment to the qualifying hospitals 
through their Medicare contractor using the Medicare cost report, we 
plan to make payments to the qualifying hospitals through a one-time 
annual payment made by one Medicare contractor who would directly pay 
all of the qualifying hospitals. We will send each qualifying hospital 
a letter stating the specifics of how the hospital will receive its 
payments. Because these one-time annual payments would be made through 
a special process outside of the scope of normal payments by their 
Medicare contractor, the hospitals' Medicare contractor would no longer 
need to track the payment amounts made to the hospitals under this 
provision. We believe this will simplify and expedite the payment 
process so that one Medicare contractor is responsible for overseeing 
the distribution of payments. In addition, this simplified process will 
ease the administrative burden within CMS to track that payments have 
been properly made to the qualifying hospitals. In addition, the burden 
to hospitals is reduced because hospitals would no longer have to 
report these additional payments on their Medicare hospital cost report 
corresponding to the appropriate cost reporting period for which the 
hospitals receive payments in FY 2011 or FY 2012 (as we instructed in 
the FY 2011 IPPS/LTCH PPS final rule and note above).
    In the FY 2011 IPPS/LTCH PPS final rule, we also stated that we 
would make only one determination of eligible counties and qualifying 
hospitals for FY 2011 and FY 2012, with the caveat that we would accept 
additional public input on the limited issue of whether there are any 
qualifying hospitals in the two newly identified eligible counties. As 
we stated earlier, we did not receive any public input on qualifying 
hospitals for the two newly identified eligible counties. However, as 
we describe above, 11 hospitals that were included on the list of 
qualifying hospitals do not meet the statutory criteria in section 1109 
of the Affordable Care Act. Therefore, we are proposing to revise our 
list of qualifying hospitals and their payment weighting factors 
finalized in the FY 2011 IPPS/LTCH PPS final rule to exclude these 11 
providers. As explained in the FY 2011 IPPS/LTCH PPS final rule, we 
finalized in that rule (to the best of our ability) the list of 
eligible counties and qualifying hospitals once for ease of 
implementation of the section 1109 provision and to allow hospitals to 
plan their budgets accordingly. The proposed revision of our 
determination to exclude these 11 providers will result in changes to 
the payment weighting factors. We are proposing to update the payment 
weighting factors accordingly. Therefore, we are proposing to 
distribute the remaining $250 million in FY 2012 to those qualifying 
hospitals proposed in this proposed rule based on payment weighting 
factors proposed in this proposed rule. In addition, in order to 
distribute the section 1109 payments for FY 2011 in as timely a manner 
as possible, we intend to make preliminary section 1109 payments for FY 
2011 using this proposed list of qualifying providers and payment 
weighting factors using the payment method described above. If 
additional hospitals are deleted from the proposed list of qualifying 
hospitals for FY 2011 because they do not meet the statutory criteria, 
the payment weighting factors would need additional revision. If this 
situation occurs, we are proposing to further amend the payment 
weighting factors for payments to be made in FY 2012 so that each 
qualifying hospital receives its appropriate share of the total $400 
million.
    We refer readers to the CMS Web site at: http://www.cms.gov/AcuteInpatientPPS/TopOfPage for the tables listed below. The tables are 
included collectively as the ``Section 1109 Files'' for the FY 2012 
IPPS/LTCH proposed rule.
     The final list of eligible counties that was published in 
the FY 2011 IPPS/LTCH PPS final rule. We note that we are not updating 
this table.
     The proposed list of qualifying hospitals, location, and 
payment weighting factors (based on the March 2010 update of the FY 
2009 MedPAR); based on the clarifications proposed above.
     The distribution of the $400 million for FY 2011 and FY 
2012 by State based on the proposed list of qualifying hospitals, 
location, and payment weighting factors.
    We note that the Web address for this Web site is effective as of 
the date of publication of this proposed rule and that, in the future, 
these tables may be archived to the Web site at: http://www.cms.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.

K. Proposed Changes in the Inpatient Hospital Update

1. FY 2012 Inpatient Hospital Update
    In accordance with section 1886(b)(3)(B)(i) of the Act, each year 
we update the national standardized amount for inpatient operating 
costs by a factor called the ``applicable percentage increase.'' Prior 
to enactment of the Affordable Care Act, section 1886(b)(3)(B)(i)(XX) 
of the Act set the applicable percentage increase equal to the rate-of-
increase in the hospital market basket for subsection (d) hospitals 
(hereafter referred to as ``IPPS hospitals'') in all areas, subject to 
the hospital submitting quality information under rules established by 
the Secretary in accordance with section 1886(b)(3)(B)(viii) of the 
Act. For hospitals that did not provide these data, the update was 
equal to the market basket percentage increase less an additional 2.0 
percentage points. The update for the hospital-specific rates for SCHs 
and MDHs is set by section 1886(b)(3)(B)(iv) of the Act as discussed 
further below.
    As discussed below in section IV.K.3. of this preamble, section 
1886(b)(3)(B)

[[Page 25949]]

of the Act, as amended by sections 3401(a) and 10319(a) of the 
Affordable Care Act, sets the applicable percentage increase under the 
IPPS for FY 2012 as equal to the rate-of-increase in the hospital 
market basket for IPPS hospitals in all areas (which is currently based 
on the first quarter 2011 forecast of the FY 2006-based IPPS market 
basket), subject to a reduction of 2.0 percentage points if the 
hospital fails to submit quality information under rules established by 
the Secretary in accordance with section 1886(b)(3)(B)(viii) of the 
Act, and then subject to an adjustment based on changes in economy-wide 
productivity (the multifactor productivity (MFP) adjustment), and an 
additional reduction of 0.1 percentage point. Sections 
1886(b)(3)(B)(xi) and (b)(3)(B)(xii) of the Act, as added by section 
3401(a) of the Affordable Care Act, state that application of the MFP 
adjustment and the additional FY 2012 adjustment of 0.1 percentage 
point may result in the applicable percentage increase being less than 
zero.
    In accordance with section 1886(b)(3)(B) of the Act, as amended by 
section 3401(a) of the Affordable Care Act, we are proposing an MFP 
adjustment (the 10-year moving average of MFP for the period ending FY 
2012) of 1.2 percent, which is calculated as described below in section 
IV.K.3. of this preamble, based on IHS Global Insight, Inc.'s (IGI's) 
first quarter 2011 forecast.
    Consistent with current law, and based on IGI's first quarter 2011 
forecast of the FY 2012 market basket increase, we are proposing an 
applicable percentage increase to the FY 2012 operating standardized 
amount of 1.5 percent (that is, the FY 2012 estimate of the market 
basket rate-of-increase of 2.8 percent less an adjustment of 1.2 
percentage points for economy-wide productivity and less 0.1 percentage 
point) for hospitals in all areas, provided the hospital submits 
quality data in accordance with our rules. For hospitals that do not 
submit quality data, we are proposing an applicable percentage increase 
to the operating standardized amount of -0.5 percent (that is, the FY 
2012 estimate of the market basket rate-of-increase of 2.8 percent, 
less 2.0 percentage points for failure to submit quality data, less an 
adjustment of 1.2 percentage points for economy-wide productivity, and 
less an additional adjustment of 0.1 percentage point).
    We are proposing to revise the existing regulations at 42 CFR 
412.64(d) to reflect the current law. Specifically, in accordance with 
section 1886(b)(3)(B) of the Act, as amended by sections 3401(a) and 
10319(a) of the Affordable Care Act, we are proposing to add a new 
paragraph (iv) to Sec.  412.64(d)(1) to set the applicable percentage 
increase to the FY 2012 operating standardized amount as the percentage 
increase in the market basket index, subject to a reduction of 2.0 
percentage points if the hospital fails to submit quality information 
under rules established by the Secretary in accordance with section 
1886(b)(3)(B)(viii) of the Act, and then subject to a multifactor 
productivity adjustment and, lastly, subject to the additional 
reduction of 0.1 percentage point.
    Section 1886(b)(3)(B)(iv) of the Act provides that the applicable 
percentage increase to the hospital-specific rates for SCHs and MDHs 
equals the applicable percentage increase set forth in section 
1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all 
other hospitals subject to the IPPS). Therefore, the update to the 
hospital specific rates for SCHs and MDHs is also subject to section 
1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and 
10319(a) of the Affordable Care Act. Accordingly, we are proposing an 
update to the hospital-specific rates applicable to SCHs and MDHs of 
1.5 percent for hospitals that submit quality data or -0.5 percent for 
hospitals that fail to submit quality data. For FY 2012, the 
regulations in Sec. Sec.  412.73(c)(16), 412.75(d), 412.77(e), 
412.78(e), and 412.79(d) already contain provisions that set the update 
factor for SCHs and MDHs equal to the update factor applied to the 
national standardized amount for all IPPS hospitals. Therefore, we are 
not proposing to make further changes to these five regulatory 
provisions to reflect the FY 2012 update factor for SCHs and MDHs.
2. FY 2012 Puerto Rico Hospital Update
    Puerto Rico hospitals are paid a blended rate for their inpatient 
operating costs based on 75 percent of the national standardized amount 
and 25 percent of the Puerto Rico-specific standardized amount. Section 
1886(d)(9)(C)(i) of the Act is the basis for determining the applicable 
percentage increase applied to the Puerto Rico-specific standardized 
amount. Section 401(c) of Public Law 108-173 amended section 
1886(d)(9)(C)(i) of the Act, which states that, for discharges 
occurring in a fiscal year (beginning with FY 2004), the Secretary 
shall compute an average standardized amount for hospitals located in 
any area of Puerto Rico that is equal to the average standardized 
amount computed under subclause (I) for fiscal year 2003 for hospitals 
in a large urban area (or, beginning with FY 2005, for all hospitals in 
the previous fiscal year) increased by the applicable percentage 
increase under subsection (b)(3)(B) for the fiscal year involved. 
Therefore, the update to the Puerto Rico-specific operating 
standardized amount equals the applicable percentage increase set forth 
in section 1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) 
and 10319(a) of the Affordable Care Act (that is, the same update 
factor as for all other hospitals subject to the IPPS). Accordingly, we 
are proposing an applicable percentage increase to the Puerto Rico-
specific operating standardized amount of 1.5 percent. For FY 2012, 
under the authority of section 1886(d)(9)(C)(i) of the Act, as amended 
by section 401(c) of Public Law 108-173, we are proposing to revise the 
existing regulations at Sec.  412.211(c) to set the update factor for 
the Puerto Rico-specific operating standardized amount equal to the 
update factor applied to the national standardized amount for all IPPS 
hospitals.
3. Productivity Adjustment
    Section 3401(a) of the Affordable Care Act amends section 
1886(b)(3)(B) of the Act to require certain adjustments to the 
``applicable percentage increase'' to the operating IPPS. One such 
change is to require that, in FY 2012 (and in subsequent fiscal years), 
the applicable percentage increase be annually adjusted by changes in 
economy-wide productivity. Section 1886(b)(3)(B)(xi)(II) of the Act, as 
added by section 3401(a) of the Affordable Care Act, defines this 
productivity adjustment as equal to the 10-year moving average of 
changes in annual economy-wide, private nonfarm business multifactor 
productivity (MFP) (as projected by the Secretary for the 10-year 
period ending with the applicable fiscal year, calendar year, cost 
reporting period, or other annual period) (the ``MFP adjustment''). The 
Bureau of Labor Statistics (BLS) is the agency that publishes the 
official measure of private nonfarm business MFP. We refer readers to 
the BLS Web site at: http://www.bls.gov/mfp to obtain the BLS 
historical published MFP data.
    The projection of MFP is currently produced by IHS Global Insight, 
Inc. (IGI), an economic forecasting firm. In order to generate a 
forecast of MFP, IGI replicated the MFP measure calculated by the BLS 
using a series of proxy variables derived from its U.S. macroeconomic 
models. These models take into account a broad range of factors that 
influence the total U.S.

[[Page 25950]]

economy. IGI forecasts the underlying proxy components such as Gross 
Domestic Product (GDP), capital, and labor inputs required to estimate 
MFP and then combines those projections according to the BLS 
methodology. In Table IV.K.1 below, we identify each of the major MFP 
component series employed by the BLS to measure MFP. We also provide 
the corresponding concepts forecasted by IGI and determined by IGI and 
CMS to be the best available proxies for the BLS series.
[GRAPHIC] [TIFF OMITTED] TP05MY11.071

    IGI found that the historical growth rates of the BLS components 
used to calculate MFP and the IGI components identified are consistent 
across all series and, therefore, suitable proxies for calculating MFP. 
We have included below a more detailed description of the methodology 
used by IGI to construct a forecast of MFP, which is aligned closely 
with the methodology employed by the BLS. For more information 
regarding the BLS method for estimating productivity, we refer readers 
to the BLS Web site at: http://www.bls.gov/mfp/mprtech.pdf.
    At the time of the development of this proposed rule, the BLS had 
published a historical time series of private nonfarm business MFP for 
1987 through 2009, with 2009 being a preliminary value. Using this 
historical MFP series and the IGI forecasted series, the IGI had 
developed a forecast of MFP for 2010 through 2021, as described below.
    To create a forecast of BLS' MFP index, the forecasted annual 
growth rates of the ``non-housing, non-government, nonfarm, real GDP,'' 
``hours of all persons in private non-farm establishments adjusted for 
labor composition,'' and ``real effective capital stock'' series 
(ranging from 2010 to 2021) are used to ``grow'' the levels of the 
``real value-added output,'' ``private nonfarm business sector labor 
input,'' and ``aggregate capital input'' series published by the BLS. 
Projections of the ``hours of all persons'' measure are calculated 
using the difference between projections of the BLS index of output per 
hour and real GDP. This difference is then adjusted to account for 
changes in labor composition in the forecast interval.
    Using these three key concepts, MFP is derived by subtracting the 
contribution of labor and capital inputs from output growth. However, 
in order to estimate MFP, we need to understand the relative 
contributions of labor and capital to total output growth. Therefore, 
two additional measures are needed to operationalize the estimation of 
the IGI MFP projection: Labor compensation and capital income. The sum 
of labor compensation and capital income represents total income. The 
BLS calculates labor compensation and capital income (in current dollar 
terms) to derive the nominal values of labor and capital inputs. IGI 
uses the ``nongovernment total compensation'' and ``flow of capital 
services from the total private nonresidential capital stock'' series 
as proxies for the BLS' income measures. These two proxy measures for 
income are divided by total income to obtain the shares of labor 
compensation and capital income to total income. In order to estimate 
labor's contribution and capital's contribution to the growth in total 
output, the growth rates of the proxy variables for labor and capital 
inputs are multiplied by their respective shares of total income. These 
contributions of labor and capital to output growth are subtracted from 
total output growth to calculate the ``change in the growth rates of 
multifactor productivity'':
    MFP = Total output growth--(labor input growth * labor compensation 
share) + (capital input growth * capital income share))
    The change in the growth rates (also referred to as the compound 
growth rates) of the IGI MFP are multiplied by 100 in order to 
calculate the percent change in growth rates (the percent change in 
growth rates are published by the BLS for its historical MFP measure). 
Finally, the growth rates of the IGI MFP are converted to index levels 
based to 2005 to be consistent with the BLS' methodology. For 
benchmarking purposes, the historical growth rates of IGI's proxy 
variables were used to estimate a historical measure of MFP, which was 
compared to the historical MFP estimate published by the BLS. The 
comparison revealed that the growth rates of the components were 
consistent across all series and, therefore, validated the use of the 
proxy variables in generating the IGI MFP projections. The resulting 
MFP index was then interpolated to a quarterly frequency using the 
Bassie method for temporal disaggregation. The Bassie technique 
utilizes an indicator (pattern) series for its calculations. IGI uses 
the index of output per hour (published by the BLS) as an indicator 
when interpolating the MFP index.
    As described in section I. of the Addendum to this proposed rule, 
we are proposing to determine the IPPS market

[[Page 25951]]

basket percentage increase for FY 2012, which is used to determine the 
FY 2012 applicable percentage increase, based on the FY 2006-based IPPS 
market basket. The FY 2006-based IPPS market basket was finalized and 
adopted in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43843). Section 
3401(a) of the Affordable Care Act amended section 1886(b)(3)(B) of the 
Act in part by adding a new clause (xi) which requires that, after 
determining the applicable percentage increase for a fiscal year, 
``such percentage increase shall be reduced by the productivity 
adjustment described in subclause (II)'' (which we refer to as the 
``MFP adjustment''). Section 1886(b)(3)(B)(i)(XX) of the Act 
establishes the applicable percentage increase for FY 2007 and each 
subsequent fiscal year as equal to the rate-of-increase (that is, the 
percentage increase) in the hospital market basket for IPPS hospitals, 
subject to the hospital submitting quality data under rules established 
by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the 
Act and to other statutory adjustments, including the productivity 
adjustment.
    We are proposing that the MFP adjustment be subtracted from the FY 
2012 operating applicable percentage increase. We are proposing that 
the end of the 10-year moving average of changes in the MFP should 
coincide with the end of the appropriate FY update period. Because the 
applicable percentage increase is reduced by the MFP adjustment, we 
believe it is appropriate for the numbers associated with both 
components of the calculation (the underlying market basket percentage 
increase used to determine the applicable percentage increase and the 
productivity adjustment) to line up so that changes in market 
conditions are aligned. Therefore, for the FY 2012 update, the MFP 
adjustment is calculated as the 10-year moving average of changes in 
MFP for the period ending September 30, 2012. We are proposing to round 
the final annual adjustment to the one-tenth of one percentage point 
level up or down as applicable according to conventional rounding rules 
(that is, if the number we are rounding is followed by 5, 6, 7, 8, or 
9, we would round the number up; if the number we are rounding is 
followed by 0, 1, 2, 3, or 4, we would round the number down).
    In accordance with section 1886(b)(3)(B) of the Act, as amended by 
section 3401(a) of the Affordable Care Act, we are proposing to base 
the FY 2012 market basket update used to determine the applicable 
percentage increase for the IPPS on the first quarter 2011 forecast of 
the FY 2006-based IPPS market basket, which is estimated to be 2.8 
percent. This percentage increase, subject to the hospital submitting 
quality data under rules established by the Secretary in accordance 
with section 1886(b)(3)(B)(viii) of the Act, is then reduced by the 
proposed MFP adjustment (the 10-year moving average of MFP for the 
period ending FY 2012) of 1.2 percent, which is calculated as described 
above and based on IGI's first quarter 2011 forecast. We are proposing 
that if more recent data are subsequently available (for example, a 
more recent estimate of the market basket and MFP adjustment), we would 
use such data, if appropriate, to determine the FY 2012 market basket 
update and MFP adjustment in the final rule. Following application of 
the productivity adjustment, the applicable percentage increase is then 
reduced by 0.1 percentage point, as required by section 
1886(b)(3)(B)(xii) of the Act, as added and amended by sections 3401 
and 10319(a) of the Affordable Care Act (as discussed in section I. of 
the Addendum to this proposed rule).

L. Additional Payments to Hospitals With High Percentage of End-Stage 
Renal Disease (ESRD) Discharges (Sec.  412.104)

    Under existing regulations at Sec.  412.104(a), we provide 
additional Medicare payments to a hospital for inpatient services 
provided to Medicare beneficiaries with end-stage renal disease (ESRD) 
who receive dialysis during a hospital stay if the hospital's ESRD 
Medicare beneficiary discharges, excluding certain MS-DRGs noted below, 
where the beneficiary receives dialysis during the inpatient stay, are 
10 percent or more of its total Medicare discharges. These additional 
payments are intended to lessen the impact of the added costs for 
hospitals that deliver inpatient dialysis services to a high 
concentration of ESRD Medicare beneficiaries. The regulation provides 
that discharges classified into MS-DRG 652 (Renal Failure), MS-DRG 682 
(Renal Failure with MCC), MS-DRG 683 (Renal Failure with CC), MS-DRG 
684 (Renal Failure without CC/MCC), and MS-DRG 685 (Admit for Renal 
Dialysis) are excluded from the calculation of ESRD Medicare 
beneficiary discharges for purposes of determining a hospital's 
eligibility for these additional payments. We excluded these MS-DRGs 
because they include payment for the cost of inpatient dialysis 
treatments.
    The current Medicare cost reporting instructions in the Provider 
Reimbursement Manual, Part II (PRM-II), at section 3630.1, require 
hospitals to enter as the denominator of the calculation on Line 5 
``total Medicare discharges as reported on Worksheet S-3, Part I,'' 
excluding discharges for the dialysis MS-DRGs. As drafted, this 
instruction includes only discharges for beneficiaries enrolled in 
original fee-for-service Medicare in the denominator of the 
calculation. We are proposing to clarify that our policy is that the 
term ``Medicare discharges'' used in Sec.  412.104(a) refers to 
discharges of all beneficiaries entitled to Medicare Part A. Discharges 
associated with individuals entitled to Medicare Part A include 
discharges of individuals receiving benefits under original Medicare, 
discharges of individuals whose inpatient benefits are exhausted or 
whose stay was not covered by Medicare, and discharges for individuals 
enrolled in Medicare Advantage Plans, cost contracts under section 1876 
of the Act (health maintenance organizations (HMOs)) and competitive 
medical plans (CMPs). Consistent with this proposed clarification, 
these discharges would be included in the denominator of the 
calculation for the purpose of determining eligibility for the ESRD 
additional payment to hospitals. Similarly, for the numerator of this 
calculation, all discharges of ESRD beneficiaries who are entitled to 
Medicare Part A and who receive inpatient dialysis, subject to the 
exclusions of certain discharges classified into MS-DRGs 652, 682, 683, 
684, and 685, would be included in the determination of eligibility for 
the additional payment to hospitals. We intend to revise the 
instructions under section 3630.1 of the Provider Reimbursement Manual 
to reflect this clarification.

M. Proposal for Changes to the Reporting Requirements for Pension Costs 
for Medicare Cost-Finding Purposes

1. Background
    Currently, certain pension costs may be allowable costs under 
Medicare to the extent such costs are related to the reasonable and 
necessary cost of providing patient care and represent costs actually 
incurred. Reasonable cost reimbursement is addressed in section 
1861(v)(1)(A) of the Act. Section 1861(v)(1)(A) of the Act defines 
``reasonable cost,'' in part, as the cost actually incurred, excluding 
costs found to be unnecessary in the efficient delivery of needed 
health services. Section 1861(v)(1)(A) of the Act does not specifically 
address the determination of reasonable costs, but

[[Page 25952]]

authorizes the Secretary to promulgate regulations and principles to be 
applied in determining reasonable costs.
    We have issued regulations implementing this provision of the Act, 
including 42 CFR 413.9(a), which provide that the determination of 
reasonable cost ``must be based on the reasonable cost of services 
covered under Medicare and related to the care of beneficiaries.'' In 
addition, Sec.  413.9(c) requires that the provision for payment of 
reasonable cost of services is intended to meet the actual costs 
incurred in providing services. Therefore, in accordance with the 
statute, the regulations include two principles that help guide the 
determination of which expenses may be considered allowable reasonable 
costs that can be paid under Medicare; that is, such costs must be 
``related'' to the care of Medicare beneficiaries, and such costs must 
actually be ``incurred.''
    Consistent with these provisions, we have issued instructions in 
section 2142 of the Provider Reimbursement Manual, Part I (PRM-I) for 
determining and reporting defined benefit pension costs on the cost 
report for Medicare cost-finding purposes. For Medicare wage index 
purposes, the cost reporting instructions in section 3605.2 of the 
Provider Reimbursement Manual, Part II (PRM-II) for Worksheet S-3, Part 
II, Lines 13 through 20, require hospitals to comply with the 
requirements in section 2142 of the PRM-I.
    Specifically, section 2142.5 of the PRM-I defines the current 
period liability for pension cost (that is, the maximum allowable 
pension cost) based on the actuarial accrued liability, normal cost, 
and unfunded actuarial liability. Under section 2142.4(A) of PRM-I, 
these liability measurements are to be computed in accordance with the 
Employee Retirement Income Security Act of 1974 (ERISA), regardless of 
whether or not the pension plan is subject to ERISA. Also, section 
2142.6(A) of the PRM-I requires the current period liability for 
pension cost to be funded in order to be allowable. In addition, 
section 2142.6(C) of the PRM-I allows for funding in excess of the 
current period liability to be carried forward and recognized in future 
periods. We note that, on March 28, 2008, CMS published Revision 436, a 
technical clarification to section 2142 of the PRM-I.
    Actuarial accrued liability and normal cost are typically 
determined on an ongoing plan basis using long-term, best-estimate 
assumptions. The interest assumption reflects the average rates of 
return expected over the period during which benefits were payable, 
taking into account the investment mix of plan assets. Pension costs 
for plans not subject to ERISA (such as church plans and plans 
sponsored by public sector employers) also are typically based on the 
actuarial accrued liability and normal cost using long-term, best 
estimate assumptions.
    The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended 
ERISA. Under the PPA amendments to ERISA, the actuarial accrued 
liability and normal cost are no longer used as a basis for determining 
ERISA minimum required or maximum tax deductible contributions. ERISA 
contribution limits are now based on a ``funding target'' and ``target 
normal cost'' measured on a settlement basis using the current market 
interest rates for investment grade corporate bonds that match the 
duration of the benefit payouts. The Internal Revenue Service (IRS) 
publishes the applicable interest rate tables on a monthly basis. 
Because pension liabilities are very sensitive to changes in the 
interest rate used to discount future benefit payouts, pension costs 
based on the PPA ``funding target'' and ``target normal cost'' values 
are expected to be less stable than those based on the pre-PPA 
traditional long-term, best-estimate assumptions, which change 
infrequently. Furthermore, plans not subject to the ERISA requirements, 
as amended by the PPA, are not likely to use the new ``funding target'' 
and ``target normal cost'' basis for determining pension costs, and 
ERISA plans are not likely to continue to report costs developed using 
the actuarial accrued liability and normal cost based on long-term 
basis, best estimate assumptions. Accordingly, there is no longer a 
standard actuarial basis used by all plans.
    In response to the PPA amendments to ERISA, we began a review of 
the rules for determining pension costs for Medicare cost-finding and 
wage index purposes. As an interim measure, we issued a Joint Signature 
Memorandum (JSM) in November 2009 that contained instructions and a 
spreadsheet to assist hospitals and Medicare contractors in determining 
the annual allowable defined benefit pension cost for the FY 2011 wage 
index (JSM/TDL-10061, 11-20-09, December 3, 2009). Although these 
instructions were released for purposes of the wage index, these 
instructions also serve as interim guidance for Medicare cost-finding 
purposes.
    In this proposed rule, we are proposing to revise our policy for 
determining pension cost for Medicare purposes. As mentioned above, due 
to the ERISA rules, as amended by the PPA, there is no longer a 
standard actuarial cost basis to be used by all types of plans. 
Therefore, we are proposing to no longer rely on actuarial computation 
to determine the maximum annual cost limitation for Medicare. Instead, 
the general parameters of our proposal would maintain the current 
requirement that pension costs must be funded to be reportable, and 
would require all hospitals to report the actual pension contributions 
funded during the reporting period, on a cash basis.
    In addition, under this cash basis approach, we are proposing 
separate methodologies for measuring pension costs for Medicare cost-
finding purposes (discussed below under section IV.M.2. of this 
preamble) and for purposes of updating the wage index (discussed in 
section III.D.2. of this preamble). We believe it is necessary to have 
two distinct proposals in order to address the different goals of 
determining a hospital's payments and updating the average hourly wage 
to establish the geographic area wage index. The function of the wage 
index is to measure relative hospital labor costs across areas. This 
function is distinct from Medicare payment determinations, where the 
goal is to measure the actual costs incurred by individual hospitals. 
These two distinct proposals would require separate updated 
instructions to section 2142 of the PRM-I for Medicare cost-finding 
purposes and section 3605.2 of the PRM-II for purposes of the wage 
index. Below is a detailed discussion of our proposal of a new 
methodology for reporting pension costs for Medicare cost-finding 
purposes. A full discussion of our proposal for reporting pension costs 
under the wage index is discussed in section III.D.2. of this preamble.
    The proposal below reflects our commitment to the general 
principles of the President's Executive Order released January 18, 
2011, entitled ``Improving Regulation and Regulatory Review.''
2. Proposal for Allowable Defined Benefit Pension Plan Cost for 
Medicare Cost-Finding Purposes
    As mentioned above, the defined benefit pension plan costs 
(hereafter referred to as ``pension costs'') reported for Medicare 
payment purposes should reflect the actual costs incurred by an 
individual provider. We are proposing to retain the policy in the 
current manual requiring pension costs to be funded in order to be 
reportable. We believe funding is an appropriate basis because it 
measures the actual expenditure towards the current period liability 
for pensions. We also are proposing to continue to limit the current 
period liability for pension costs

[[Page 25953]]

(that is, maximum annual allowable pension costs). However, we are 
proposing to change the methodology for calculating the limit on the 
current period liability. We are proposing that this methodology would 
be effective for cost reporting periods beginning on or after October 
1, 2011.
    Specifically, we are proposing a limit on the current period 
liability equal to 150 percent of the three consecutive reporting 
periods out of the recent reporting which produce the highest average. 
We believe a threshold of 150 percent is appropriate for the following 
reasons: First, the proposed threshold should be adequate to allow for 
typical fluctuations in contributions and for inflation. Second, we 
believe a threshold is necessary to limit the current period liability 
in order to ensure that reported pension costs are reasonable and do 
not reflect excessive or advance funding in any particular year. In 
addition, the proposed limit would help ensure that pension costs in 
the current year are reasonable because we expect the limit to capture 
pension costs which relate exclusively to patient care services 
furnished in the current cost reporting period. While we are proposing 
a limit, we recognize there may be situations in which pension costs in 
excess of the 150-percent limit might be reasonable, such as a funding 
requirement imposed by a third party, that is, ERISA's minimum funding 
requirement, statute or collective bargaining agreement. Therefore, we 
are proposing a process to allow hospitals with contributions in excess 
of the proposed limit to submit documentation demonstrating that all or 
a portion of the ``excess'' costs are reasonable and necessary for a 
particular cost reporting period.
    The proposed 150-percent limit was established based on an analysis 
of historical contribution data submitted by pension plans subject to 
ERISA and published by the U.S. Department of Labor (DOL). Based on our 
analysis of the DOL contribution data, we expect the limit to apply 
only in a small minority of cases. We believe the use of readily 
available historical contribution data to establish the limitation will 
avoid the complexity of a limitation based on technical actuarial 
measurements. A limit based on the three consecutive reporting periods 
out of the five most recent reporting periods which produce the highest 
average will help to ensure that periods when no contributions (or only 
minimal contributions) are made will not dramatically reduce the limit 
in subsequent periods.
    We believe use of a 5-year period would minimize the administrative 
burden on providers that would be associated with a longer period. We 
also believe using the three consecutive reporting periods which 
produce the highest average will better reflect a typical average 
pension cost while use of contributions for any three periods, even 
nonconsecutive, could introduce atypical results. Specifically, using 
the three highest contributions in the 5-year period may overstate the 
average contribution. However, because excessive contributions tend to 
reduce future funding requirements, we believe it would be unusual for 
excessive contributions to occur in three consecutive periods.
    While we are proposing a limit, we believe that providers' pension 
costs in excess of the 150-percent limit that are not considered 
reasonable for the current cost reporting period under the proposed 
review process are likely to be prefunded pension costs attributable to 
the patient care services for a future cost reporting period. 
Therefore, similar to the current instruction in section 2142.6(C) of 
the PRM-I, we are proposing to continue to use a carry forward policy. 
Specifically, we are proposing that current period contributions in 
excess of the 150-percent limit that are not considered reasonable for 
the current cost reporting period under the proposed review process be 
carried forward and reported in future period(s) as the applicable 
limit for the future period(s) will allow. Medicare contractors would 
be required to maintain historical data in order to determine the 150-
percent limit and track any carry forward amounts. We anticipate making 
a worksheet available for this purpose.
    We are interested in public comments as to documentation or 
criteria that would be appropriate for the review process proposed 
above. We also invite public comments on this proposal and are 
especially interested in receiving public comments related to our 
proposal to limit the reportable pension amount.

N. Rural Community Hospital Demonstration Program

1. Background
    Section 410A(a) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), Public Law 108-173, required the 
Secretary to establish a demonstration program to test the feasibility 
and advisability of establishing ``rural community hospitals'' to 
furnish covered inpatient hospital services to Medicare beneficiaries. 
The demonstration program pays rural community hospitals for such 
services under a cost-based methodology for Medicare payment purposes 
for covered inpatient hospital services furnished to Medicare 
beneficiaries. A rural community hospital, as defined in section 
410A(f)(1) of MMA, is a hospital that--
     Is located in a rural area (as defined in section 
1886(d)(2)(D) of the Act) or is treated as being located in a rural 
area under section 1886(d)(8)(E) of the Act;
     Has fewer than 51 beds (excluding beds in a distinct part 
psychiatric or rehabilitation unit) as reported in its most recent cost 
report;
     Provides 24-hour emergency care services; and
     Is not designated or eligible for designation as a CAH 
under section 1820 of the Act.
    Section 410A(a)(4) of Public Law 108-173, in conjunction with 
paragraphs (2) and (3) of section 410A(a), provided that the Secretary 
was to select for participation no more than 15 rural community 
hospitals in rural areas of States that the Secretary identified as 
having low population densities. Using 2002 data from the U.S. Census 
Bureau, we identified the 10 States with the lowest population density 
in which rural community hospitals were to be located in order to 
participate in the demonstration program: Alaska, Idaho, Montana, 
Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Utah, and 
Wyoming. (Source: U.S. Census Bureau, Statistical Abstract of the 
United States: 2003.)
    We originally solicited applicants for the demonstration program in 
May 2004; 13 hospitals began participation with cost reporting years 
beginning on or after October 1, 2004. In 2005, 4 of these 13 hospitals 
withdrew from the program and became CAHs. In a notice published in the 
Federal Register on February 6, 2008 (73 FR 6971), we announced a 
solicitation for up to 6 additional hospitals to participate in the 
demonstration program. Four additional hospitals were selected to 
participate under this solicitation. These four additional hospitals 
began under the demonstration program payment methodology with the 
hospital's first cost reporting period starting on or after July 1, 
2008. At that time, there were 13 hospitals participating in the 
demonstration program.
    Five hospitals (3 of the hospitals were among the 13 hospitals that 
were original participants in the demonstration program and 2 of the 
hospitals were among the 4 hospitals that began the demonstration 
program in 2008) withdrew from the

[[Page 25954]]

demonstration program during CYs 2009 and 2010. (Three of these 
hospitals indicated that they would be paid more for Medicare inpatient 
services under the rebasing option allowed under the SCH methodology 
provided for under section 122 of the Medicare Improvements for 
Patients and Providers Act of 2008 (Pub. L. 110-275). One hospital 
restructured to become a CAH, and one hospital closed.) These actions 
left 8 hospitals participating in the demonstration program as of 
November 1, 2010.
    In addition, section 410A(c)(2) of Public Law 108-173 required 
that, ``[i]n conducting the demonstration program under this section, 
the Secretary shall ensure that the aggregate payments made by the 
Secretary do not exceed the amount which the Secretary would have paid 
if the demonstration program under this section was not implemented.'' 
This requirement is commonly referred to as ``budget neutrality.'' 
Generally, when we implement a demonstration program on a budget 
neutral basis, the demonstration program is budget neutral in its own 
terms; in other words, the aggregate payments to the participating 
hospitals do not exceed the amount that would be paid to those same 
hospitals in the absence of the demonstration program. Typically, this 
form of budget neutrality is viable when, by changing payments or 
aligning incentives to improve overall efficiency, or both, a 
demonstration program may reduce the use of some services or eliminate 
the need for others, resulting in reduced expenditures for the 
demonstration program's participants. These reduced expenditures offset 
increased payments elsewhere under the demonstration program, thus 
ensuring that the demonstration program as a whole is budget neutral or 
yields savings. However, the small scale of this demonstration program, 
in conjunction with the payment methodology, makes it extremely 
unlikely that this demonstration program could be viable under the 
usual form of budget neutrality. Specifically, cost-based payments to 
participating small rural hospitals are likely to increase Medicare 
outlays without producing any offsetting reduction in Medicare 
expenditures elsewhere. Therefore, a rural community hospital's 
participation in this demonstration program is unlikely to yield 
benefits to the participant if budget neutrality were to be implemented 
by reducing other payments for these same hospitals.
    In the past seven IPPS final regulations, spanning the period for 
which the demonstration program has been implemented, we have adjusted 
the national inpatient PPS rates by an amount sufficient to account for 
the added costs of this demonstration program, thus applying budget 
neutrality across the payment system as a whole rather than merely 
across the participants in the demonstration program. As we discussed 
in the FY 2005, FY 2006, FY 2007, FY 2008, FY 2009, FY 2010, FY 2011 
IPPS final rules (69 FR 49183; 70 FR 47462; 71 FR 48100; 72 FR 47392; 
73 FR 48670; 74 FR 43922, and 75 FR 50343 respectively), we believe 
that the language of the statutory budget neutrality requirements 
permits the agency to implement the budget neutrality provision in this 
manner. In light of the statute's budget neutrality requirement, we are 
proposing a methodology to calculate a budget neutrality adjustment 
factor to the FY 2012 national IPPS rates.
2. Changes to the Demonstration Program Made by the Affordable Care Act
    Sections 3123 and 10313 of the Affordable Care Act (Pub. L. 111-
148) amended section 410A of Public Law 108-173, which established the 
rural community hospital demonstration program. Sections 3123 and 10313 
of the Affordable Care Act changed the rural community hospital 
demonstration program in several ways. First, the Secretary is required 
to conduct the demonstration program for an additional 5-year period 
that begins on the date immediately following the last day of the 
initial 5-year period under section 410A(a)(5) of Public Law 108-173, 
as amended (section 410A(g)(1) of Public Law 108-173, as added by 
section 3123(a) of the Affordable Care Act and further amended by 
section 10313 of that Act). Further, the Affordable Care Act requires 
that, in the case of a rural community hospital that is participating 
in the demonstration program as of the last day of the initial 5-year 
period, the Secretary shall provide for the continued participation of 
such rural hospital in the demonstration program during the 5-year 
extension, unless the hospital makes an election, in such form and 
manner as the Secretary may specify, to discontinue participation 
(section 410A(g)(4)(A) of Pub. L. 108-173, as added by section 3123(a) 
of the Affordable Care Act and further amended by section 10313 of such 
Act). In addition, the Affordable Care Act provides that during the 5-
year extension period, the Secretary shall expand the number of States 
with low population densities determined by the Secretary to 20 
(section 410A(g)(2) of Pub. L. 108-173, as added by section 3123(a) and 
amended by section 10313 of the Affordable Care Act). Further, the 
Secretary is required to use the same criteria and data that the 
Secretary used to determine the States under section 410A(a)(2) of 
Public Law 108-173 for purposes of the initial 5-year period. The 
Affordable Care Act also allows not more than 30 rural community 
hospitals in such States to participate in the demonstration program 
during the 5-year extension period (section 410A(g)(3) of Public Law 
108-173, as added by section 3123(a) of the Affordable Care Act and as 
further amended by section 10313 of such Act). Additionally, we note 
that we indicated in the FY 2011 IPPS final rule (75 FR 50343) that 
section 410A(g)(4)(b) of Public Law 108-173 as added by section 3123(a) 
of the Affordable Care Act and as further amended by section 10313 of 
that Act provides that the amount of payment under the demonstration 
program for covered inpatient hospital services furnished in a rural 
community hospital [other than services furnished in a psychiatric or 
rehabilitation unit of the hospital that is a distinct part] is the 
reasonable costs of providing such services for discharges occurring in 
the first cost reporting period beginning on or after the first day of 
the 5-year extension period. We want to clarify that we believe that 
section 410A(g)(4)(B) of Public Law 108-173, as added by section 
3123(a) the Affordable Care Act and as further amended by section 10313 
of such Act, provides this with respect to a rural community hospital 
that is participating in the demonstration program under section 410A 
as of the last day of the initial 5-year period. Specifically, the 
Affordable Care Act requires that in the case of a rural community 
hospital that is participating in the demonstration as of the last day 
of the initial 5-year period, the Secretary in calculating payments 
under subsection (b) shall substitute under paragraph (1)(A) the phrase 
``the reasonable costs of providing such services for discharges 
occurring in the first cost reporting period beginning on or after the 
first day of the 5-year extension period'' for the phrase ``the 
reasonable costs of providing such services for discharges occurring in 
the first cost reporting period beginning on or after the 
implementation of the demonstration.'' The phrase ``the reasonable 
costs of providing such services for discharges occurring in the first 
cost reporting period beginning on or after the implementation of the 
demonstration'' does not precisely track the language in section 
410A(b)(1)(A) of

[[Page 25955]]

Public Law 108-173, therefore we cannot delete and replace as described 
in the Affordable Care Act. However, we believe the language of section 
410A(g)(4)(B)(i) of Public Law 108-173 as amended is clear. Namely, a 
rural community hospital that is participating in the demonstration as 
of the last day of the initial 5-year period shall be paid for its 
covered inpatient hospital services ``the reasonable costs of providing 
such services for discharges occurring in the first cost reporting 
period beginning on or after the first day of the 5-year extension 
period.'' (This methodology does not apply to services furnished in a 
psychiatric or rehabilitation unit of the hospital which is a distinct 
part.) For discharges occurring in a subsequent cost reporting period 
during the demonstration, the formula in section 410A(b)(1)(B) of 
Public Law 108-173, as amended, would apply to such hospitals. That is, 
the payment will be the lesser of reasonable cost or the target amount. 
We calculate the target amount in the second cost reporting period by 
taking the reasonable costs of providing covered inpatient hospital 
services in the first cost reporting period beginning on or after the 
first day of the 5-year extension and increasing it by the IPPS market 
basket percentage increase for that particular cost reporting period. 
We calculate the target amount in subsequent cost reporting periods by 
taking the preceding cost reporting period's target amount and 
increasing it by the IPPS market basket percentage increase for that 
particular cost reporting period. (We note that in calculating target 
amounts we utilize the IPPS market basket percentage increase as 
defined in section 1886(b)(3)(B)(iii), opposed to the applicable 
percentage increase as defined in section 1886(b)(3)(B)(i) of the Act. 
We note that section 410A(b)(2)(B) of Public Law 108-173, in pertinent 
part, provides that target amounts are ``increased by the applicable 
percentage increase (under clause (i) of section 1886(b)(3)(B) of the 
Social Security Act * * *) in the market basket percentage increase (as 
defined in clause (iii) of such section) for that particular cost 
reporting period.'' The phrase ``applicable percentage increase (under 
clause (i) of section 1886(b)(3)(B) of the Social Security Act * * *) 
in the market basket percentage increase * * *'' is ambiguous as there 
is no applicable percentage increase in the market basket percentage 
increase. Because the focus of the provision is the amount of the IPPS 
market basket percentage increase, we believe the provision is 
addressing the IPPS market basket percentage increase, and not the 
applicable percentage increase, which includes other adjustments to the 
market basket percentage increase. Further, because section 
410A(b)(2)(B) of Public Law 108-173 is addressing target amounts under 
the demonstration we believed it was logical to read the statute as 
providing for an update structure mimicking the update structure for 
target amounts of reasonable cost-based providers like children's and 
cancer hospitals, as well as RNCHIs. This rationale applies any time we 
use the IPPS market basket percentage increase to update target amounts 
in the demonstration. With respect to hospitals that are newly joining 
the demonstration, they are paid the reasonable costs of providing 
covered inpatient hospital services, other than services furnished in a 
psychiatric or rehabilitation unit of the hospital which is a distinct 
part, for discharges occurring in the hospital's first cost reporting 
period beginning on or after the implementation of the demonstration 
program (section 410A(b)(1)(A) of Pub. L. 108-173). We have determined 
that each of these new hospitals will begin participating in the 
demonstration with its first cost reporting period beginning on or 
after April 1, 2011. We chose this date because it follows immediately 
upon the notification of the hospitals of their acceptance to the 
demonstration and it will allow the hospitals to begin participation in 
the demonstration as soon as possible. With respect to rural community 
hospitals newly joining the demonstration, for discharges occurring in 
a subsequent cost reporting period under the demonstration program, the 
formula in section 410A(b)(1)(B) of Public Law 108-173, as amended, 
would apply. That is, payments will be the lesser amount of reasonable 
costs or the target amount. We calculate the target amount in the 
second cost reporting period by taking the reasonable costs of 
providing covered inpatient hospital services in the first cost 
reporting period and increasing it by the IPPS market basket percentage 
increase for that particular cost reporting period. We calculate the 
target amount in subsequent cost reporting periods by taking the 
preceding cost reporting period's target amount and increasing it by 
the IPPS market basket percentage increase for that particular cost 
reporting period. In addition, various other technical and conforming 
changes were made to section 410A of Public Law 108-173 by section 
3123(a) of the Affordable Care Act and as further amended by section 
10313 of that Act.
    We published a solicitation for applications for additional 
participants in the Rural Community Hospital Demonstration Program in 
the Federal Register on August 30, 2010 (75 FR 52960). Applications 
were due on October 14, 2010. The 20 States with the lowest population 
density, which are eligible for the demonstration program are: Alaska, 
Arizona, Arkansas, Colorado, Idaho, Iowa, Kansas, Maine, Minnesota, 
Mississippi, Montana, Nebraska, Nevada, New Mexico, North Dakota, 
Oklahoma, Oregon, South Dakota, Utah, and Wyoming (Source: U.S. Census 
Bureau, Statistical Abstract of the United States: 2003). We approved 
19 new hospitals for participation in the demonstration program. As of 
this date, we are waiting for these hospitals to respond as to whether 
they accept the terms and conditions stipulated for their participation 
in the demonstration; therefore, it is possible that fewer than the 
total of 19 will participate. We have based cost estimates for the 
demonstration for this new set of hospitals based on the assumption 
that all 19 hospitals will elect to participate. If fewer actually make 
this election, we are proposing to accordingly adjust the demonstration 
cost estimates in the FY 2012 IPPS/LTCH PPS final rule.
3. Proposed FY 2012 Budget Neutrality Adjustment
    In order to ensure that the demonstration is budget neutral as is 
required by the statute, we are proposing to adjust the national IPPS 
rates in this proposed rule to account for any added costs attributable 
to the demonstration program. Specifically, the proposed budget 
neutrality adjustment would account for: (1) The estimated costs of the 
demonstration program in FY 2012 for the 8 currently participating 
hospitals (``pre-expansion participating hospitals''); (2) the 
estimated costs of the demonstration in FY 2012 for the 19 hospitals 
newly selected to begin participation in the demonstration program; and 
(3) the amount by which the costs of the demonstration program, as 
indicated by settled cost reports for cost reporting periods beginning 
in FYs 2007 and 2008 for hospitals participating in the demonstration 
program during FYs 2007 and 2008, exceeded the amount that was 
identified in the FY 2007 and FY 2008 IPPS final rules as the budget 
neutrality offsets for FYs 2007 and 2008.

[[Page 25956]]

a. Component of the Proposed FY 2012 Budget Neutrality Adjustment That 
Accounts for Estimated FY 2012 Demonstration Program Costs of the 
``Pre-Expansion Participating Hospitals''
    We note that eight hospitals that were selected for participation 
in either 2005 or 2008 are currently continuing to participate in the 
extension period mandated by the Affordable Care Act. We are proposing 
that the component of the proposed FY 2012 budget neutrality adjustment 
to the national IPPS rates that accounts for the estimated 
demonstration program costs in FY 2012 for the eight ``pre-expansion 
participating hospitals'' would be calculated by utilizing three 
separate methodologies: one methodology for the six hospitals that have 
participated in the demonstration program since its inception and that 
are continuing to participate in the demonstration program 
(``originally participating hospitals''); a second methodology for one 
hospital that is currently participating in the demonstration program 
and that was among the four hospitals that joined the demonstration 
program in 2008; and a third methodology for the other hospital that is 
currently participating in the demonstration program and that was among 
the four hospitals that joined the demonstration program in 2008. 
Different methods are used for these three sets of hospitals because 
the data available to us to estimate the demonstration program costs 
for each is different. Specifically, we are proposing to use the 
following hospital cost reports as the data sources used to estimate 
the costs attributable to the demonstration program under section 410A 
of Pub. L. 108-173 as amended:
    (1) For the six ``originally participating hospitals'', the 
estimate of the portion of the proposed budget neutrality adjustment 
that accounts for the estimated FY 2012 demonstration program costs is 
based on data from their settled cost reports applicable to the second 
year of the demonstration--that is, for cost reporting periods ending 
in FY 2007. We are proposing to use these cost reports because they are 
the most recent finalized cost reports and, thus, we believe their 
accounting of costs is the most accurate indicator available to us at 
this time to estimate FY 2012 demonstration costs.
    (2) For one of the two hospitals that joined the demonstration 
program in 2008, and that are still participating, we are proposing to 
estimate the FY 2012 demonstration program costs under section 410A of 
Public Law 108-173 as amended based on data from its as submitted cost 
report beginning January 1, 2008. Because we do not have final settled 
cost reports for this hospital for either 2008 or 2009, we are 
proposing to rely on its ``as submitted'' cost report for this period 
to estimate FY 2008 demonstration program costs for that hospital. We 
are proposing to use the ``as submitted cost report'' because we 
believe that as it is among the most recent cost reports, its 
accounting of costs is the most accurate indicator available to us at 
this time to estimate costs under the demonstration.
    (3) The remaining hospital of the eight ``pre-expansion 
participating hospitals'', which began participation in FY 2008, is an 
Indian Health Service provider. Historically, the hospital has not 
filed standard Medicare cost reports. To estimate its costs for FY 
2012, we are proposing to use its full ``as submitted'' cost report 
filed for the period ending September 30, 2009. We are proposing to use 
this ``as submitted'' cost report because as among the most recent cost 
reports we believe it allows us to estimate FY 2012 costs accurately.
    We are proposing to use the same general methodology as for the FY 
2011 IPPS/LTCH PPS final rule, but providing more detail. The proposed 
methodology for calculating the estimated FY 2012 demonstration cost 
for the eight ``pre-expansion hospitals'' is as follows:
    Step 1: In order to calculate demonstration costs for each of the 
six ``originally participating hospitals'' for the cost reporting 
period ending in FY 2007, we subtracted the amount it would have 
otherwise been paid under the applicable payment system(s) for covered 
inpatient hospital services without the demonstration during such 
period (as indicated on the settled cost report for this period) from 
the amount paid to it for such services under the reasonable cost 
methodology in section 410A(b) of Public Law 108-173 (as indicated on 
the settled cost report for this period). Steps 1(a) through (c) below 
are performed to calculate FY 2007 demonstration costs for these six 
hospitals. (We are proposing to use final settled cost reports ending 
in FY 2007 to represent FY 2007 demonstration costs for each of these 
hospitals because a substantial portion of the months included within 
these cost report years (respective to each hospital) fall within FY 
2007, and, therefore we believe that for purposes of this analysis it 
is appropriate to consider data from these cost reports to represent FY 
2007 inpatient costs for the demonstration during that period. In 
addition, we note that throughout the remainder of the preamble 
discussion on the budget neutrality adjustment for the rural community 
hospital demonstration we refer to ``covered inpatient hospital 
services'' as that term is defined in section 410A(f)(2) of Public Law 
108-173 as amended as ``inpatient hospital services.'' We also note 
that the phrase ``the reasonable cost methodology'' means the 
reasonable cost methodology in section 410A(b) of Public Law 108-173 or 
the reasonable cost methodology in section 410A(b) of Public Law 108-
173, as amended as applicable in the particular situation.
     Step 1(a): First, for each hospital, we subtracted the 
amount that would otherwise be paid under the IPPS for the hospital's 
inpatient hospital services (excluding those associated with swing 
beds) for the cost reporting period ending in FY 2007 (as indicated on 
the settled cost report for this period) from the amount paid for such 
services under the reasonable cost methodology (as indicated on the 
settled cost report for this period). The result of this difference is 
each hospital's demonstration costs for its inpatient hospital services 
(excluding those associated with swing beds) for the cost reporting 
period ending in FY 2007. (We used the amount the hospital would 
otherwise be paid under the IPPS as indicated above because this is the 
payment methodology under which the hospital's beds (excluding swing 
beds) would be paid in the absence of the demonstration. This rationale 
applies throughout the preamble discussion on the rural community 
hospital demonstration budget neutrality adjustment whenever this is a 
component of the proposed methodology.)
     Step 1(b): Next, with respect to the hospitals that have 
swing beds, we subtracted the amount the hospital would otherwise be 
paid under section 1888(e)(7) of the Act for the inpatient hospital 
services associated with the swing beds for the cost reporting period 
ending in FY 2007 (as indicated in the settled cost report for this 
period) from the amount paid for such services under the reasonable 
cost methodology (as indicated in the settled cost report for such 
period). The result of this difference is each hospital's demonstration 
costs associated with its swing beds for the cost reporting period 
ending in FY 2007. (We used the amount the hospital would otherwise be 
paid under section 1888(e)(7) of the Act as indicated above because 
this is the payment methodology under which the hospital's swing beds 
would be paid in the absence of the demonstration. This rationale 
applies throughout the preamble discussion on the rural

[[Page 25957]]

community hospital demonstration budget neutrality adjustment whenever 
this is a component of the proposed methodology.)
     Step 1(c): Next, in order to calculate total estimated FY 
2010 demonstration costs for all six hospitals, we added together the 
differences calculated above in Step 1(a) and Step 1(b) as applicable 
for each of the six hospitals and then multiplied this sum by the IPPS 
market basket percentage increases for FYs 2008 through 2010, which 
were adopted in the respective IPPS final rules and a 2-percent annual 
volume adjustment for the years 2008 through 2010.
    We note that we are proposing to apply the applicable IPPS market 
basket percentage increases described above to model estimated FY 2010 
demonstration costs because we believe that this update factor 
appropriately indicates the trend of increase in hospital operating 
costs. Further, this approach is consistent with the agency's use of 
the IPPS market basket percentage increase to update the rate-of-
increase limits (which is a reasonable cost-based methodology) for 
children's and cancer hospitals as well as RNCHIs. Therefore, we 
believe it enables us to estimate appropriately demonstration costs 
that are tied to a reasonable cost-based methodology. Also, this 
approach is consistent with how we update target amounts under the 
demonstration under section 410A(b)(2)(B) of Public Law 108-173. The 
proposed 2-percent annual volume adjustment was stipulated by the CMS 
Office of the Actuary in 2004, at the outset of the demonstration and 
is supposed to accurately reflect the tendency of hospitals' volumes to 
increase. We acknowledge the possibility that volumes for small 
hospitals may fluctuate, and are incorporating into the estimate of 
demonstration costs a factor to allow for a potential increase. We note 
that the rationale provided herein for utilizing an IPPS market basket 
percentage increase and a 2-percent annual volume adjustment to 
estimate demonstration costs is applicable throughout the preamble 
discussion on the rural community hospital budget neutrality adjustment 
whenever these factors are used in the proposed methodology.
    As a side note, as a special feature of the demonstration, we added 
a supplemental work sheet to the standard hospital cost report which is 
completed by the fiscal intermediary in the final settlement for these 
six ``originally participating hospitals.'' This supplemental work 
sheet includes the calculation of the hospital's first year reasonable 
costs of inpatient hospital services (excluding those associated with 
swing beds) as set forth in section 410A of Public Law 108-173, and, in 
addition, for the hospital's second year cost reports (those cost 
reports ending in FY 2007), the target amount (that is, the previous 
year's Medicare reasonable cost amount for inpatient hospital services 
updated by the IPPS market basket percentage increase as provided in 
section 410A(b)(2)(B) of Pub. L. 108-173). This supplemental work sheet 
also includes a calculation of the amount that would otherwise be paid 
for the hospital's inpatient hospital services under the IPPS, as is 
ordinarily presented on the standard hospital cost report. For 
hospitals that have swing beds, this supplemental work sheet also 
includes the following: the estimated amount the hospital would 
otherwise be paid under section 1888(e)(7) of the Act for the inpatient 
hospital services associated with the hospital's swing beds; the 
estimated amount the hospital would be paid under the reasonable cost 
methodology for the inpatient hospital services provided in its swing 
beds, and the hospital's target amount for its swing beds.
    Step 2: In order to calculate estimated FY 2008 demonstration costs 
for the non-Indian Health Service hospital that began the demonstration 
program in 2008, we subtracted the estimated amount it would have 
otherwise been paid for inpatient hospital services without the 
demonstration under the applicable payment system(s) (as indicated on 
the ``as submitted'' cost report beginning January 1, 2008) from the 
estimated costs of such services under the reasonable cost methodology 
(as indicated on the ``as submitted'' cost report for this period). 
Steps 2(a) through (c) below are performed to calculate this amount. We 
note that we are proposing to use the cost report beginning January 1, 
2008 to represent FY 2008 demonstration costs for this hospital because 
it corresponds most precisely to FY 2008 and, therefore, we believe 
correctly represents FY 2008 inpatient costs for the demonstration for 
that period.
     Step 2(a): Specifically, we subtracted the estimated 
amount that would otherwise be paid under the IPPS for the hospital's 
inpatient hospital services (excluding swing beds) for the cost 
reporting period beginning January 1, 2008 (as indicated on the ``as 
submitted'' cost report) from the estimated amount to be paid for such 
services under the reasonable cost methodology (as indicated on the 
``as submitted'' cost report for such period).
     Step 2(b): Next, we subtracted the estimated amount that 
would otherwise be paid under section 1888(e)(7) of the Act for the 
inpatient hospital services associated with the swing beds during the 
cost reporting period beginning January 1, 2008 (as indicated on the 
``as submitted'' cost report) from the estimated amount to be paid for 
such services under the reasonable cost methodology as indicated on the 
``as submitted'' cost report for such period.
     Step 2(c): We added together the differences calculated in 
Steps 2(a) and (b) above to obtain the hospital's total estimated FY 
2008 demonstration cost.
     Step 2(d): Then, in order to calculate the hospital's 
estimated FY 2010 demonstration costs, we took the amount calculated in 
Step 2(c) above and multiplied it by the IPPS market basket percentage 
increases for FYs 2009 and 2010 as adopted in the respective IPPS final 
rules and a 2-percent annual volume adjustment for each of FYs 2009 and 
2010.
    Step 3: In order to calculate the estimated FY 2009 demonstration 
costs for the Indian Health Service provider, we subtracted the 
estimated amount the hospital would have otherwise been paid for 
inpatient hospital services without the demonstration under the 
applicable payment system (as indicated on the ``as submitted'' cost 
report ending September 30, 2009) from the estimated costs for such 
services under the reasonable cost methodology (as indicated in the 
``as submitted'' cost report for such period). Step 3(a) below is 
performed to calculate this amount. (We note that we are proposing to 
use the cost report ending September 30, 2009 to represent FY 2009 
demonstration costs for this hospital because it corresponds most 
precisely to FY 2009 and, therefore, we believe correctly represents FY 
2009 inpatient costs for the demonstration for that period.)
     Step 3(a): Specifically, we subtracted the estimated 
amount the hospital would have otherwise been paid for inpatient 
hospital services under the IPPS in the cost reporting period ending 
September 30, 2009 without the demonstration (as indicated on the ``as 
submitted'' cost report for this period) from the estimated amount to 
be paid under the reasonable cost methodology for such services (as 
indicated in the ``as submitted'' cost report for such period). We note 
that this provider had no swing beds, therefore, we did not estimate 
any portion of the costs under section 1888(e)(7) of the Act.
     Step 3(b): Next, in order to calculate the Indian Health 
Service provider's

[[Page 25958]]

estimated FY 2010 demonstration costs, we multiplied the difference 
calculated in Step 3(a) above by the IPPS market basket percentage 
increase for FY 2010 adopted in the FY 2010 IPPS/LTCH PPS final rule 
and the 2-percent annual volume adjustment.
    Step 4: Then, in order to calculate total estimated FY 2010 
demonstration costs for all eight ``pre-expansion participating 
hospitals'', we added the estimated FY 2010 demonstration costs 
calculated in Steps 1(c), 2(d), and 3(b) above.
    Step 5: Next, in order to calculate total estimated FY 2012 
demonstration costs for all eight ``pre-expansion hospitals'', we 
multiplied the amount calculated in Step 4 above by the FY 2011 IPPS 
market basket percentage increase adopted in the FY 2011 IPPS/LTCH PPS 
final rule and the proposed FY 2012 IPPS market basket percentage 
increase contained elsewhere in this proposed rule and a 2-percent 
annual volume adjustment for FYs 2011 and 2012. Thus, we arrived at the 
total estimated FY 2012 demonstration costs for all eight currently 
participating hospitals which needs to be offset, which is $21,290,305. 
If updated data become available for the final rule, we are proposing 
to use them to estimate the costs of the demonstration program in FY 
2012 (including the use of any change in the FY 2012 market basket 
percentage increase).
b. Portion of the Proposed FY 2012 Budget Neutrality Adjustment That 
Accounts for Estimated FY 2012 Demonstration Program Costs for 
Hospitals Newly Selected To Participate in the Demonstration Program
    Section 410A(g)(3) of Public Law 108-173, as added by section 3123 
of the Affordable Care Act and as further amended by section 10313 of 
such Act, provides that ``[n]otwithstanding subsection (a)(4), during 
the 5-year extension period, not more than 30 rural community hospitals 
may participate in the demonstration program under this section.'' 
Consequently, up to 22 additional hospitals may be added to the 
demonstration program (30 hospitals minus the 8 ``pre-expansion 
participating hospitals''). In order to ensure budget neutrality for 
the 19 newly selected hospitals, we are proposing to include a 
component in the proposed budget neutrality adjustment factor to the 
proposed FY 2012 national IPPS rates to account for the estimated FY 
2012 costs of those new hospitals. For this proposed rule, we are 
proposing to generally use ``as submitted'' cost reports to estimate 
demonstration costs because they are the most recent cost reports and, 
therefore, we believe most accurately reflect the hospital's cost and 
payment for Medicare inpatient services in the respective year. We note 
that hospitals were required to submit pages from their most recent 
cost reports with their applications. For 13 of these hospitals, these 
cost reports had end dates in FY 2009; for the 6 remaining hospitals, 
they had end dates in FY 2010. Therefore, in various steps in the 
proposed methodology below, we begin various estimates with FY 2009 if 
the hospital submitted a cost report ending in FY 2009, and FY 2010 if 
the hospital submitted a cost report ending in FY 2010.
    We are proposing to use the following methodology in order to 
estimate FY 2012 demonstration program costs for the 19 newly selected 
hospitals. This methodology differs from that in the FY 2011 IPPS/LTCH 
PPS final rule, because, at that time, hospitals had not been selected 
for participation, and thus we had no data specific to those hospitals 
that would enter the demonstration as a result of its expansion 
mandated by the Affordable Care Act.
    Step 1(a): For each hospital that submitted a cost report ending in 
FY 2009, we subtracted the estimated amount that would be paid for its 
inpatient hospital services (excluding those associated with swing 
beds) under the IPPS for such period (as indicated on the ``as 
submitted'' cost report for such period) from the estimated amount for 
reasonable costs for such services (as indicated on the ``as 
submitted'' cost report for such period) in order to calculate the 
difference between the hospital's estimated cost and payment for its 
inpatient hospital services (excluding those associated with swing 
beds) during the cost reporting period ending in FY 2009.
    Step 1(b): For each hospital that submitted a cost report ending in 
FY 2010, we subtracted the estimated amount that would be paid for its 
inpatient hospital services (excluding those associated with swing 
beds) under the IPPS (as indicated on the ``as submitted'' cost report 
for such period) from the estimated amount for the reasonable cost for 
such services (as indicated on the ``as submitted'' cost report for 
such period) in order to calculate the difference between the 
hospital's estimated costs and payment for its inpatient hospital 
services (excluding those associated with swing beds) during such 
period.
    Step 1(c): While a portion of the 19 newly selected hospitals that 
have swing beds reported estimated costs for those beds, some hospitals 
did not, namely a portion of the hospitals that submitted cost reports 
ending in FY 2009 with their applications. Therefore, we needed to gap-
fill in order to account for this issue. For each of the hospitals with 
swing beds that submitted cost reports ending in FY 2009, but that did 
not submit with its application estimated costs associated with those 
swing beds, we assigned an estimated cost for its swing beds based on 
an average of the estimated cost-payment difference associated with the 
swing beds of the newly participating hospitals that reported such data 
on their applications. We are proposing to assign estimated costs based 
on the average of the cost-payment difference for those hospitals that 
submitted these data, because these hospitals represent a sample of 
hospitals chosen for the demonstration, which we believe can accurately 
reflect costs and payment. We believe that these amounts, derived from 
the applications of the hospitals that submitted these data, accurately 
reflect this sample because they are hospitals of similar size and 
circumstances. Furthermore, these hospitals, which submitted the data, 
were chosen from the same set of States as the overall set of the newly 
selected hospitals. We utilized the methodology in Steps 1(c)(i) 
through (c)(iii) below to calculate this amount:
     Step 1(c)(i): For each of the hospitals with swing beds 
that submitted with its application both a cost report ending in FY 
2009 and estimated costs of those swing beds during such period, we 
calculated its estimated cost-payment difference between the amount 
that the hospital estimates that will be paid under section 1888(e)(7) 
of the Act during such period for those swing beds (that is, the amount 
that the hospital estimates that will be paid under section 1886(e)(7) 
for the inpatient hospital services associated with its swing beds for 
such period from the amount that the hospital estimates that it would 
be paid for the reasonable costs for such services during such period 
as those amounts are reported on the hospital's application) by simply 
taking this amount from the hospital's application.
     Step 1(c)(ii): Then, for each of the hospitals with swing 
beds that submitted with its application both a cost report ending in 
FY 2010 and the estimated costs of those swing beds during such period, 
we calculated the difference between the estimate costs and payment for 
those swing beds for such period by simply taking this amount from the 
hospital's application. (We note that all hospitals that had

[[Page 25959]]

swing beds and that submitted cost reports ending in FY 2010 with their 
application supplied data on the estimated cost and payment for swing 
bed services on these cost reports.)
     Step 1(c)(iii): Next, we totaled all of the individual 
amounts calculated under Steps 1(c)(i) and (c)(ii) above and then 
divided this amount by the total number of hospitals that provided data 
on estimated costs on swing beds in their applications. We used the 
result of this computation as the estimated cost for the swing beds for 
each of the hospitals that failed to submit estimated costs for those 
beds with their applications.
     Step 1(d): Then, in order to calculate the total costs 
during the cost reporting period ending in FY 2009 for each hospital 
that submitted a cost report ending in FY 2009, we did the following: 
(a) If the hospital had no swing beds, its total estimated costs for 
such period is the difference calculated under Step 1(a); (b) If the 
hospital had swing beds, we added the difference calculated under Step 
1(a) with the difference calculated under Step 1(c)(i) or Step 
1(c)(iii) as applicable.
     Step 1(e): Next, in order to calculate total estimated FY 
2009 costs for all of the hospitals that submitted cost reports ending 
in FY 2009 with their applications, we added together all of the total 
estimated costs that were calculated for each such hospital under Step 
1(d) above. We note that we believe that using cost reports ending in 
FYs 2009 and 2010 best reflect costs and payment in FYs 2009 and 2010 
because these cost reports most closely respond to those fiscal years.
     Step 1(f): Then, in order to calculate the total estimated 
FY 2011 costs for the newly selected hospitals that submitted cost 
reports ending in FY 2009 with their applications, we multiplied the 
amount calculated in Step 1(e) above by the FYs 2010 and 2011 IPPS 
market basket percentage increases adopted in the respective IPPS/LTCH 
PPS final rules as well as a 2-percent annual volume adjustment for 
each of FYs 2010 and 2011.
     Step 1(g): Then, in order to calculate the total estimated 
FY 2010 costs for each hospital that submitted a cost report ending in 
FY 2010, we did the following: (a) If the hospital had no swing beds, 
its total estimated costs is the difference calculated under Step 1(b); 
(b) If the hospital had swing beds, we added the difference calculated 
under Step 1(b) with the difference calculated under Step 1(c)(ii).
     Step 1(h): Next, in order to calculate the total FY 2010 
costs for all of the hospitals that submitted FY 2010 cost reports with 
their applications, we added together all of the total estimated FY 
2010 costs calculated for each such hospital under Step 1(g) above.
     Step 1(i): Then, we calculated the total estimated FY 2011 
costs for all of the newly selected hospitals that submitted cost 
reports ending in FY 2010 by multiplying the amount calculated in Step 
1(h) above by the FY 2011 IPPS market basket percentage increase 
adopted in the respective IPPS/LTCH PPS final rule as well as a 2-
percent annual volume adjustment for FY 2011.
     Step 1(j): Next, in order to calculate total estimated FY 
2012 demonstration costs for all of the 19 newly selected hospitals, we 
added together the amounts calculated in Steps 1(f) and 1(i) above and 
then multiplied this sum by the proposed IPPS FY 2012 market basket 
percentage increase proposed elsewhere in this proposed rule and a 2-
percent annual volume adjustment for FY 2012. The amount of the 
estimated FY 2012 demonstration costs for the 19 newly selected 
hospitals needing to be offset is $31,351,908. If updated data become 
available for the final rule, we are proposing to use them to estimate 
the costs of the demonstration program in FY 2012.
c. Portion of the Proposed FY 2012 Budget Neutrality Adjustment To 
Offset the Amount by Which the Costs of the Demonstration Program in 
FYs 2007 and 2008 Exceeded the Amount That Was Identified in the FYs 
2007 and 2008 IPPS Final Rules as the Budget Neutrality Offset for FYs 
2007 and 2008
    In addition, in order to ensure that the demonstration program in 
FYs 2007 and 2008 was budget neutral, we are proposing to incorporate a 
component into the budget neutrality adjustment factor to the proposed 
FY 2012 national IPPS rates, which would offset the amount by which the 
demonstration program costs as indicated by settled cost reports 
beginning in FYs 2007 and 2008 for hospitals participating in the 
demonstration program during FYs 2007 and 2008 exceeded the amount that 
was identified in the FYs 2007 and 2008 IPPS final rules as the budget 
neutrality offset for FYs 2007 and 2008. Specifically, we are proposing 
the following methodology. This is the same methodology as used in the 
FY 2011 IPPS/LTCH PPS final rule, but we are adding detail. In this 
proposed rule, we are recognizing the possibility that in the year's 
time between the FY 2011 and FY 2012 final rule that the cost reports 
for the cost reporting years beginning in FY 2008 for the hospitals 
then participating in the demonstration may be finalized, that is, 
settled.
     Step One: Calculate the costs of the demonstration program 
for each of FYs 2007 and 2008 according to the settled cost reports 
that began in FYs 2007 or 2008 for the then participating hospitals 
(which represent the third and fourth years of the demonstration 
program for each of the then participating hospitals) and then add 
these two sums together. The costs of the demonstration program for 
each of FYs 2007 and 2008 is the difference resulting from subtracting 
the total amount that would otherwise be paid to the then participating 
hospitals under the applicable payment system(s) (that is, under the 
IPPS and under section 1888(e)(7) of the Act to the extent the 
participating hospital had swing beds) without the demonstration from 
the amount paid to those hospitals under the demonstration payment 
methodology in section 410A(b) of Public Law 108-173. (We are proposing 
to use these settled cost reports, which represent the third and fourth 
years of the demonstration program for each of the then participating 
hospitals, and, therefore, we believe correctly represent inpatient 
costs for the demonstration program during each of those 2 years.) 
These settled cost reports represent the third and fourth years of the 
demonstration, because the demonstration started with cost report start 
dates on or after October 1, 2004. Therefore, the first year of the 
demonstration program is represented by cost reports with a start date 
between October 1, 2004 and September 30, 2005 (that is, FY 2005; the 
second year of the demonstration program is represented by cost reports 
with a start date between October 1, 2005 and September 30, 2006 (FY 
2006); the third year of the demonstration program is represented by 
cost reports with a start date between October 1, 2006 and September 
30, 2007 (FY 2007); and the fourth year of the demonstration program is 
represented by cost reports with a start date between October 1, 2007 
and September 30, 2008 (FY 2008).
     Step Two: Subtract the amount that was offset by the 
budget neutrality adjustment for FYs 2007 and 2008 ($9,197,870 for FY 
2007 and $9,681,893 for FY 2008) from the combined costs of the 
demonstration program in FYs 2007 and 2008 as calculated in Step one.
     Step Three: The result of Step two is a dollar amount, for 
which we would calculate a factor that would offset such amounts and 
would be incorporated into the overall proposed budget neutrality 
adjustment to the proposed national IPPS rates for FY 2012. This 
specific component to the overall

[[Page 25960]]

proposed budget neutrality adjustment for FY 2012 would account for the 
difference between the combined costs of the demonstration program in 
FYs 2007 and 2008 and the amount of the budget neutrality adjustment 
published in the FYs 2007 and 2008 IPPS/LTCH PPS final rules and, 
therefore, would ensure that the demonstration program is budget 
neutral for FYs 2007 and 2008.
    Because of delays in the settlement process for the demonstration 
hospitals' third and fourth year cost reports, that is, for cost 
reporting periods starting in each FYs 2007 and 2008 respectively, we 
are unable to state the costs of the demonstration program 
corresponding to FYs 2007 and 2008 for purposes of determining the 
amount by which the costs corresponding to FYs 2007 and 2008 exceeded 
the amount offset by the budget neutrality adjustment for FYs 2007 and 
2008. Therefore, we are not proposing the specific numeric amount 
representing this offsetting process that would be incorporated into 
the budget neutrality adjustment applied to the national IPPS rates. We 
note that we anticipate that they may be available for the FY 2012 
IPPS/LTCH PPS final rule. Therefore, the estimated adjustment to the 
national IPPS rates in this proposed rule cannot include a component to 
account for these costs. However, to the extent such data is available 
for the final rule, we are proposing to have the budget neutrality 
offset to the IPPS rates account for the amount by which the costs 
corresponding to FYs 2007 and 2008 exceeded the amount offset by the 
budget neutrality adjustments for FYs 2007 and 2008 as calculated by 
the process described above.
    For this FY 2012 IPPS/LTCH PPS proposed rule, the estimated amount 
for which an adjustment to the proposed national IPPS rates is being 
calculated is the sum of the amounts specified in sections IV.N.3.a. 
and IV. N.3.b. of this proposed rule, which is $52,642,213 (this 
estimate does not account for the numeric result of the method in 
IV.N.3.c.). As explained previously, to the extent the numeric result 
of the method in IV.N.3.c. is available in the final rule, under our 
proposal, this amount would be included in the amount which needs to be 
offset by the budget neutrality adjustment. Sections IV.N.3.a. and 
IV.N.3.b. of this proposed rule state dollar amounts, which represent 
estimated costs attributable to the demonstration program for the 
respective component of the overall estimated calculation of the 
proposed budget neutrality factor for FY 2012. This estimated amount is 
based on the specific assumptions identified, as well as from data 
sources that are used because they represent either the most recently 
finalized, (that is, settled) or, if ``as submitted,'' recently 
available cost reports.

O. Bundling of Payments for Services Provided to Outpatients Who Later 
Are Admitted as Inpatients: 3-Day Payment Window

1. Background
    Section 1886(a)(4) of the Act includes in the definition of 
``operating costs of inpatient hospital services'' diagnostic services 
(including clinical diagnostic laboratory tests) or other services 
related to the admission (as defined by the Secretary) furnished by the 
hospital (or by an entity that is wholly owned or operated by the 
hospital) to the patient during the 3 days preceding the date of the 
patient's admission to a subsection (d) hospital subject to the IPPS. 
For a non-subsection (d) hospital (psychiatric hospitals and units, 
inpatient rehabilitation hospitals and units, long-term care hospitals, 
children's hospitals, and cancer hospitals), the statutory payment 
window is 1 day preceding the date of the patient's admission.
    Section 102(a)(1) of Preservation of Access to Care for Medicare 
Beneficiaries and Pension Relief Act of 2010 (Pub. L. 111-192, enacted 
on June 25, 2010) specifies that the term in section 1886(a)(4) of the 
Act, ``other services related to the admission'', includes ``all 
services that are not diagnostic services (other than ambulance and 
maintenance renal dialysis services) for which payment may be made 
under this title [Title XVIII] that are provided by a hospital (or an 
entity wholly owned or wholly operated by the hospital) to a patient--
(A) on the date of the patient's inpatient admission; or (B) during the 
3 days (or, in the case of a hospital that is not a subsection (d) 
hospital, during the 1 day) immediately preceding the date of admission 
unless the hospital demonstrates (in a form and manner, and at a time, 
specified by the Secretary) that such services are not related (as 
determined by the Secretary) to such admission.'' Public Law 111-192 
makes no changes to the existing policy regarding billing for 
diagnostic services.
    Under the 3-day (or 1-day) payment window policy, all outpatient 
diagnostic services furnished to a Medicare beneficiary by a hospital 
(or an entity wholly owned or operated by the hospital), on the date of 
a beneficiary's admission or during the 3 days (1 day for a non-
subsection (d) hospital) immediately preceding the date of a 
beneficiary's inpatient hospital admission, must be included on the 
Part A bill for the beneficiary's inpatient stay at the hospital. All 
outpatient nondiagnostic services provided by the hospital (or an 
entity wholly owned or wholly operated) on the date of the inpatient 
admission or during the 3 days (1 day for a non-subsection (d) 
hospital) immediately preceding the date of a beneficiary's inpatient 
hospital admission are deemed related to the admission and must be 
billed with the inpatient stay unless the hospital attests to specific 
nondiagnostic services as being unrelated to the hospital claim.
    In an interim final rule with comment period issued in the Federal 
Register on August 16, 2010 (75 FR 50346 through 50349), we discussed 
and made changes to the Medicare regulations pertaining to the 3-day 
payment window policy in order to comport with the requirements of 
section 102 of Public Law 111-192. We refer readers to that interim 
final rule with comment period for further information about the 3-day 
payment window policy. We have received public comments on the August 
16, 2010 interim final rule with comment period, and we plan to address 
these public comments as well as any public comments we may receive on 
the proposals in this proposed rule in the FY 2012 IPPS/LTCH PPS final 
rule.
2. Condition Code 51 (Attestation of Unrelated Outpatient Nondiagnostic 
Services)
    As we stated in the August 16, 2010 interim final rule with comment 
period (75 FR 50348), we intend to establish a process for hospitals to 
attest to nondiagnostic services as being unrelated to the hospital 
claim when a hospital submits an outpatient claim. As part of the 
process, hospitals would be required to maintain documentation in the 
beneficiary's medical record to support their claim that the outpatient 
nondiagnostic services are unrelated to the beneficiary's inpatient 
admission.
    The National Uniform Billing Committee (NUBC) is a committee 
established by the American Hospital Association and includes the 
participation of all the major national provider and payer 
organizations. The NUBC was formed to develop a single billing form and 
standard data set that could be used nationwide by institutional 
providers and payers for handling health care claims. The NUBC has 
provided a mechanism through the establishment of a condition code for 
a hospital to attest directly on the outpatient claim to specific 
nondiagnostic services as being clinically unrelated to an inpatient 
hospital claim (that is, the preadmission diagnostic services are 
clinically

[[Page 25961]]

distinct or independent from the reason for the beneficiary's inpatient 
admission). As of April 1, 2011, a hospital must add condition code 51 
on claims for separately billed outpatient nondiagnostic services 
furnished on or after June 25, 2010 (the date of enactment of Pub. L. 
111-192) if the hospital wishes to attest to nondiagnostic services as 
being unrelated to the hospital claim. We issued a manual system 
revision through Change Request 7142, Transmittal 796, on 
October 29, 2010, instructing CMS contractors to accept condition code 
51 on outpatient claims.
3. Applicability of the Payment Window Policy to Services Furnished at 
Physicians' Practices
    We have received several inquiries regarding the applicability of 
the payment window to preadmission services furnished at hospital-owned 
or hospital-operated physicians' clinics or practices. The statutory 
language under section 1886(a)(4) of the Act is clear that the 3-day 
(or, where applicable, 1-day) payment window policy applies not only to 
diagnostic and related nondiagnostic services furnished to patients at 
hospitals but also at entities that are wholly owned or operated by the 
admitting hospital. In a 1998 final rule on payment for preadmission 
services (63 FR 6866), we stated, ``A hospital-owned or hospital-
operated physician clinic or practice is subject to the payment window 
provision. The technical portion of preadmission diagnostic services 
performed by the physician clinic or practice must be included on the 
inpatient bill and may not be billed separately. A physician's 
professional service is not subject to the window.'' Thus, we made 
clear that the term ``entities'' under this section of the statute 
includes physicians' clinics or practices. Although the 1998 rule 
provides specific guidance regarding billing for preadmission 
diagnostic services furnished at hospital-owned or hospital-operated 
physician's practices, we had issued no guidelines regarding billing 
for preadmission nondiagnostic services provided by a hospital-owned or 
hospital-operated physician's practice, leaving many to assume that the 
payment window does not apply to such services.
    Prior to the June 25, 2010 enactment of section 102(a)(1) of Public 
Law 111-192, the payment window policy for preadmission nondiagnostic 
services was rarely applied because the policy required an exact match 
between the principal ICD-9 CM diagnosis codes for the outpatient 
services and the inpatient admission. Because of the exact match 
policy, very few services furnished in a physician's office or clinic 
that is wholly owned or operated by the hospital would be subject to 
the policy. However, the statutory change to the payment window policy 
made by Public Law 111-192 significantly broadened the definition of 
nondiagnostic services that are subject to the payment window to 
include any nondiagnostic service that is clinically related to the 
reason for a patient's inpatient admission, regardless of whether the 
inpatient and outpatient diagnoses are the same. This statutory change 
therefore significantly broadens the application of the payment window 
policy in hospital-owned or hospital-operated physician offices or 
clinics (that is, clinics that are not provider-based). We note that, 
under this change, hospitals and hospital-owned or hospital-operated 
entities must now attest that preadmission nondiagnostic services are 
not related to an admission using condition code 51 (Attestation of 
Unrelated Outpatient Nondiagnostic Services) when they submit a claim 
during the 3-day (or, where applicable, 1-day) preadmission period.
    In response to ongoing requests to clarify the applicability of the 
payment window policy to preadmission nondiagnostic services provided 
in hospital-owned or hospital-operated physicians' offices or clinics, 
we are clarifying in this proposed rule that the 3-day (or, where 
applicable, 1-day) payment window policy applies to both preadmission 
diagnostic and nondiagnostic services furnished to a patient at 
physician's practices that are wholly owned or wholly operated by the 
admitting hospital. For purposes of the payment window, ``wholly owned 
or operated'' literally means that the admitting hospital must be the 
sole owner or the sole operator of the entity providing the 
preadmission services in order for the payment window policy to apply. 
A hospital is considered the sole operator of an entity if the hospital 
has exclusive responsibility for conducting or overseeing the entity's 
routine operations, regardless of whether the hospital also has 
policymaking authority over the entity (we refer readers to the 
regulations at 42 CFR 412.2(c)(5)(i) and to discussions and examples of 
wholly owned or operated scenarios in rules issued in the Federal 
Register on January 12, 1994 (59 FR 1656) and February 11, 1998 (63 FR 
6865 through 6867)).
    In the circumstance where a clinic that is not provider-based meets 
the definition of being wholly owned or wholly operated by the hospital 
and the 3-day (or, if applicable, 1-day) payment window applies to 
related nondiagnostic preadmission services, the hospital's charge on 
the inpatient claim would include any overhead costs associated with 
Medicare's physician fee schedule payment. Therefore, it should follow 
that Medicare's payment to the physician for the physician fee schedule 
service should be at the lower facility rate, which does not include 
overhead, staff, equipment, and supplies required to perform the 
service in the physician's office (rather than the higher nonfacility 
rate that does include those overhead costs) to avoid paying for the 
services twice because they are no longer being paid separately under 
Part B.
    Under 42 CFR 414.22(b)(5)(i), Medicare pays physicians using the 
nonfacility relative value units when services are provided in a 
physician's office and bases physician payment on the facility relative 
value units when the physician provides services in a facility, 
including hospitals, skilled nursing facilities, community mental 
health centers, and ambulatory surgical centers. Because a hospital-
owned or hospital-operated physician practice or clinic that is not 
provider-based is a nonfacility setting, we will need to change the 
regulation to specifically provide for Medicare to pay for a service 
provided in a nonfacility setting at the facility rate in order to 
comply with section 102(a) of Pub. L. 111-192. We intend to discuss 
such a proposal in more detail in a future physician fee schedule 
proposed rule and address how this statutory provision will be 
implemented in physicians' offices that are wholly owned or wholly 
operated by the hospital. In all circumstances, we would expect the 
hospital to inform the physician offices and clinics where the hospital 
is the sole owner or sole operator and when an inpatient admission 
occurs.

P. Proposed Changes to MS-DRGs Subject to the Postacute Care Transfer 
Policy

1. Background
    Existing regulations at Sec.  412.4(a) define discharges under the 
IPPS as situations in which a patient is formally released from an 
acute care hospital or dies in the hospital. Section 412.4(b) defines 
acute care transfers, and Sec.  412.4(c) defines postacute care 
transfers. Our policy, set forth in Sec.  412(f), provides that when a 
patient is transferred and his or her length of stay is less than the 
geometric mean length of stay for the MS-DRG to which the case is 
assigned, the transferring hospital is generally paid based on a

[[Page 25962]]

graduated per diem rate for each day of stay, not to exceed the full 
MS-DRG payment that would have been made if the patient had been 
discharged without being transferred.
    The per diem rate paid to a transferring hospital is calculated by 
dividing the full DRG payment by the geometric mean length of stay for 
the MS-DRG. Based on an analysis that showed that the first day of 
hospitalization is the most expensive (60 FR 45804), our policy 
generally provides for payment that is double the per diem amount for 
the first day, with each subsequent day paid at the per diem amount up 
to the full MS-DRG payment (Sec.  412.4(f)(1)). Transfer cases are also 
eligible for outlier payments. In general, the outlier threshold for 
transfer cases, as described in Sec.  412.80(b), is equal to the fixed-
loss outlier threshold for nontransfer cases (adjusted for geographic 
variations in costs), divided by the geometric mean length of stay for 
the MS-DRG, and multiplied by the length of stay for the case, plus one 
day.
    We established the criteria set forth in Sec.  412.4 for 
determining which DRGs qualify for postacute care transfer payments in 
the FY 2006 IPPS final rule (70 FR 47419 through 47420). The 
determination of whether a DRG is subject to the postacute care 
transfer policy was initially based on the Medicare Version 23.0 
GROUPER (FY 2006) and data from the FY 2004 MedPAR file. However, if a 
DRG did not exist in Version 23.0 or a DRG included in Version 23.0 is 
revised, we use the current version of the Medicare GROUPER and the 
most recent complete year of MedPAR data to determine if the DRG is 
subject to the postacute care transfer policy. Specifically, if the 
DRG's total number of discharges and proportion of short-stay 
discharges to postacute care exceed the 55th percentile for all DRGs, 
CMS will apply the postacute care transfer policy to that DRG and to 
any other MS-DRG that shares the same base DRG. In the preamble to the 
FY 2006 final rule (70 FR 47419), we stated that ``we will not revise 
the list of DRGs subject to the postacute care transfer policy annually 
unless we are making a change to a specific DRG.''
    To account for MS-DRGs subject to the postacute care policy that 
exhibit exceptionally higher shares of costs very early in the hospital 
stay, Sec.  412.4(f) also includes special payment methodology. For 
these MS-DRGs, hospitals receive 50 percent of the full MS-DRG payment, 
plus the single per diem payment, for the first day of the stay, as 
well as a reduced per diem payment for subsequent days (up to the full 
MS-DRG payment (Sec.  412.4(f)(6)). For an MS-DRG to qualify for the 
special payment methodology, the geometric mean length of stay must be 
greater than 4 days, and the average charges of 1-day discharge cases 
in the MS-DRG must be at least 50 percent of the average charges for 
all cases within the MS-DRG. DRGs that are part of an MS-DRG group must 
meet DRG special payment policy if any one of the MS-DRGs that share 
that same base MS-DRG qualifies (Sec.  412.4(f)(6)).
2. Proposed Changes to the Postacute Care Transfer MS-DRGs
    Based on our annual review of MS-DRGs, we have identified a number 
of MS-DRGs that should be included on the list of MS-DRGs subject to 
the postacute care transfer policy. As we discuss in section III.G. of 
this proposed rule, in response to public comments and based on our 
analysis of FY 2010 MedPAR claims data, we are proposing to make 
several changes to MS-DRGs to better capture certain severity of 
illness levels, to be effective for FY 2012. Specifically, we are 
proposing to modify the assignment of the autologous bone marrow 
transplants now assigned to MS-DRG 015 (Autologous Bone Marrow 
Transplant) to capture the severity levels of ``with CC/MCC'' and 
``without CC/MCC.'' We are proposing to establish two new MS-DRGs 
(proposed MS-DRGs 016 and 017 (Autologous Bone Marrow Transplant with 
MCC/CC and without MCC/CC, respectively) to replace MS-DRG 015. We also 
are proposing to establish three new MS-DRGs to capture three severity 
of illness levels for skin debridement--proposed MS-DRG 570 (Skin 
Debridement with MCC); proposed MS-DRG 571 (Skin Debridement with CC); 
and proposed MS-DRG 572 (Skin Debridement without CC/MCC). In addition, 
we are proposing to move the codes for rechargeable dual array deep 
brain stimulation (codes 02.93 and 86.98) to MS-DRGs 023 and 024 
(Craniotomy with Major Device Implant/Acute Complex CNS PDX, with MCC 
and without MCC, respectively) where similar devices are currently 
assigned. We are proposing to move two procedure codes that either 
repair a thoracic aneurysm or place a stent graft (codes 38.45 and 
39.73) out of MS-DRG 237 and 238 (Major Cardiovascular Procedures w MCC 
or Thoracic Aortic Aneurysm Repair, and Major Cardiovascular Procedures 
with MCC and without MCC, respectively). We are proposing to assign 
these two codes to MS-DRGs 219, 220, and 221 (Cardiac Valve & Other 
Major Cardiothoracic Procedure without Cardiac Catheterization with 
MCC, with CC, and without CC, respectively). We are proposing to add a 
procedure code for partial gastrectomy (43.89) to MS-DRGs 619, 620, and 
621 (O.R. Procedure for Obesity with MCC, with CC, and without CC/MCC, 
respectively). A discussion of these proposed changes can be found in 
section II.G. of the preamble of this proposed rule.
    In light of these proposed changes to the MS-DRGs, according to the 
regulations under Sec.  412.4(c), we evaluated these proposed FY 2012 
MS-DRGs against the general postacute care transfer policy criteria 
using the FY 2010 MedPAR data. If an MS-DRG qualified for the postacute 
care transfer policy, we also evaluated that MS-DRG under the special 
payment methodology criteria according to regulations at Sec.  
412.4(f)(6). We note that these proposed changes to the MS-DRGs can 
result in interactive effects between MS-DRGs and in cases moving from 
existing MS-DRGs to the new proposed MS-DRGs, and that our review 
reflects this as well. As a result of our review, we are proposing to 
update the list of MS-DRGs that are subject to the postacute care 
transfer policy to include the proposed new MS-DRGs 570, 571, and 572 
for FY 2012. (These MS-DRGs are reflected in Table 5, which is listed 
in section VI. of the Addendum to this proposed rule and available via 
the Internet, and are also listed in the tables at the end of this 
section.)
    In addition, based on our evaluation of the proposed FY 2012 MS-
DRGs using the FY 2010 Med PAR data, we have identified the following 
two existing MS-DRGs that meet the criteria to be subject to the 
postacute care transfer policy for FY 2012: MS-DRGs 023 (Craniotomy 
with Major Device Implant or Acute Complex CNS PDX with MCC) and MS-DRG 
024 (Craniotomy with Major Device Implant or Acute Complex CNS PDX 
without MCC). We are proposing to add these two MS-DRGs to the list of 
MS-DRGs that are subject to the postacute care transfer policy for FY 
2012. The following table lists the respective criteria for each MS-DRG 
that we are proposing to add to the postacute transfer policy list.
    Further, based on our evaluation of the proposed FY 2012 MS-DRGs 
using the FY 2010 Med PAR data, we have determined that MS-DRGs 228 
(Other Cardiothoracic Procedures with MCC), 229 (Other Cardiothoracic 
Procedures with CC), 230 (Other Cardiothoracic Procedures without CC/
MCC), 640 (Miscellaneous Disorders of Nutrition, Metabolism, Fluids/
Electrolytes with MCC), and 641 (Miscellaneous

[[Page 25963]]

Disorders of Nutrition, Metabolism, Fluids/Electrolytes without MCC) no 
longer meet the postacute care transfer criteria. Therefore, we are 
proposing that they be removed from the list of DRGs subjected to the 
postacute care transfer policy, effective FY 2012. We refer readers to 
the bolded text in the following table to see which criteria were not 
met in our analysis for each MS-DRG removed from the postacute care 
transfer policy list.
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TP05MY11.072

BILLING CODE 4120-01-C

[[Page 25964]]

    Finally, we have determined that MS-DRGs 216 (Cardiac Valve & Other 
Major Cardiothoracic Procedure with Cardiac Catheterization with MCC), 
217 (Cardiac Valve & Other Major Cardiothoracic Procedure with Cardiac 
Catheterization with CC), and 218 (Cardiac Valve & Other Major 
Cardiothoracic Procedure without CC/MCC) meet the criteria for the 
special payment methodology. Therefore, we are proposing that they 
would be subject to the DRG special payment methodology, effective FY 
2012.
[GRAPHIC] [TIFF OMITTED] TP05MY11.073

Q. Hospital Services Furnished Under Arrangements

    For purposes of Medicare payment, section 1861(b) of the Act 
defines ``inpatient hospital services'' in part as ``* * * the 
following items and services furnished to an inpatient of a hospital 
and (except as provided in paragraph (3)) by the hospital--
    (1) Bed and board;
    (2) Such nursing services and other related services, such use of 
hospital facilities, and such medical social services as are ordinarily 
furnished by the hospital for the care and treatment of inpatients * * 
*; and
    (3) Such other diagnostic or therapeutic items or services, 
furnished by the hospital or by others under arrangements with them 
made by the hospital, as are ordinarily furnished to inpatients either 
by such hospital or by others under such arrangements;''
    We note that the statute specifies that ``routine services,'' for 
example, bed, board, nursing and other related services, except those 
specified at paragraph (3) of section 1861(b) of the Act are to be 
provided by ``the hospital,'' and not just ``a hospital.'' Similarly, 
our implementing regulations at 42 CFR 409.12 indicate that Medicare 
pays for ``nursing and related services, use of hospital * * * 
facilities, and medical social services as * * * inpatient hospital 
services or inpatient CAH services * * * only if those services are 
ordinarily furnished by the hospital or CAH.'' Consistent with the 
statute, only with regard to other diagnostic or therapeutic services 
do the regulations at 42 CFR 409.16 state that Medicare will also pay 
for these services if furnished ``by others under arrangements made by 
the hospital or CAH.''
    However, it has come to our attention that some providers in the 
hospital community may have interpreted our instructions under section 
2118 (Cost of Services Furnished under Arrangement) of the Provider 
Reimbursement Manual, Part I (PRM-I), relating to payment for routine 
services to allow additional services to be provided under 
arrangements. Some providers have interpreted the provision of the 
paragraph on ``Routine Services'' relating to services provided ``under 
arrangement'' under section 2118 of the PRM-I to mean that even routine 
services described in sections 1861(b)(1) and (b)(2) of the Act, which 
are normally provided to hospital inpatients by the hospital, can be 
provided by an outside entity under arrangement.
    To the extent that our manual provisions could be read to allow 
hospitals to furnish such ``routine services'' ``under arrangements,'' 
we are now proposing a change to limit the services a hospital may 
provide under arrangement to reflect the statutory definition of 
``inpatient hospital services'' and the implementing regulations. Under 
our proposed policy, if routine services, that is, services described 
in sections 1861(b)(1) and (b)(2) of the Act, are provided in the 
hospital, they are considered as being provided ``by the hospital.'' We 
believe that this proposal is consistent with the statute because the 
statutory language specifying that the routine services described in 
sections 1861(b)(1) and (b)(2) of the Act be provided ``by the 
hospital'' suggests that the hospital is required to exercise 
professional responsibility over the services, including quality 
controls. In situations

[[Page 25965]]

in which certain routine services are provided under arrangements ``in 
the hospital,'' for example, contracted nursing services, we believe 
the arrangement generally results in the hospital exercising the same 
level of control over those services as the hospital does in situations 
in which the services are provided by the hospital's salaried 
employees. Therefore, if these services are provided in the hospital to 
its inpatients, we consider the services as being provided by the 
hospital. However, if these services are provided outside the hospital, 
the services are considered as being provided under arrangement, and 
not by the hospital. That is, consistent with the statute, only 
therapeutic and diagnostic services can be provided under arrangement. 
If we finalize this proposed policy, we will change the provisions of 
section 2118 of the PRM-I accordingly.

V. Proposed Changes to the IPPS for Capital-Related Costs

A. Overview

    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient acute hospital services ``in 
accordance with a prospective payment system established by the 
Secretary.'' Under the statute, the Secretary has broad authority in 
establishing and implementing the IPPS for acute care hospital 
inpatient capital-related costs. We initially implemented the IPPS for 
capital-related costs in the Federal fiscal year (FY) 1992 IPPS final 
rule (56 FR 43358), in which we established a 10-year transition period 
to change the payment methodology for Medicare hospital inpatient 
capital-related costs from a reasonable cost-based methodology to a 
prospective methodology (based fully on the Federal rate).
    FY 2001 was the last year of the 10-year transition period 
established to phase in the IPPS for hospital inpatient capital-related 
costs. For cost reporting periods beginning in FY 2002, capital IPPS 
payments are based solely on the Federal rate for almost all acute care 
hospitals (other than hospitals receiving certain exception payments 
and certain new hospitals). (We refer readers to the FY 2002 IPPS final 
rule (66 FR 39910 through 39914) for additional information on the 
methodology used to determine capital IPPS payments to hospitals both 
during and after the transition period.) The basic methodology for 
determining capital prospective payments using the Federal rate is set 
forth in Sec.  412.312 of the regulations. For the purpose of 
calculating capital payments for each discharge, currently the standard 
Federal rate is adjusted as follows:
    (Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment 
Factor (GAF)) x (COLA for hospitals located in Alaska and Hawaii) x (1 
+ Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if 
applicable).

B. Exception Payments

    The regulations at Sec.  412.348(f) provide that a hospital may 
request an additional payment if the hospital incurs unanticipated 
capital expenditures in excess of $5 million due to extraordinary 
circumstances beyond the hospital's control. This policy was originally 
established for hospitals during the 10-year transition period, but as 
we discussed in the FY 2003 IPPS final rule (67 FR 50102), we revised 
the regulations at Sec.  412.312 to specify that payments for 
extraordinary circumstances are also made for cost reporting periods 
after the transition period (that is, cost reporting periods beginning 
on or after October 1, 2001). Additional information on the exception 
payment for extraordinary circumstances in Sec.  412.348(f) can be 
found in the FY 2005 IPPS final rule (69 FR 49185 and 49186).
    During the transition period, under Sec. Sec.  412.348(b) through 
(e), eligible hospitals could receive regular exception payments. These 
exception payments guaranteed a hospital a minimum payment percentage 
of its Medicare allowable capital-related costs depending on the class 
of the hospital (Sec.  412.348(c)), but were available only during the 
10-year transition period. After the end of the transition period, 
eligible hospitals can no longer receive this exception payment. 
However, even after the transition period, eligible hospitals receive 
additional payments under the special exceptions provisions at Sec.  
412.348(g), which guarantees all eligible hospitals a minimum payment 
of 70 percent of its Medicare allowable capital-related costs provided 
that special exceptions payments do not exceed 10 percent of total 
capital IPPS payments. Hospitals eligible for special exceptions 
payments are required to submit documentation to the fiscal 
intermediary or MAC indicating the completion date of their project. 
Special exceptions payments may be made only for the 10 years from the 
cost reporting year in which the hospital completes its qualifying 
project, and the hospital must have completed the project no later than 
the hospital's cost reporting period beginning before October 1, 2001. 
Thus, an eligible hospital may receive special exceptions payments for 
up to 10 years beyond the end of the capital IPPS transition period. 
Under this limitation on the period for special exceptions payments at 
Sec.  412.348(g)(7) of the regulations, FY 2012 is the final year 
hospitals can receive special exceptions payments. (For more detailed 
information regarding the special exceptions policy under Sec.  
412.348(g), we refer readers to the FY 2002 IPPS final rule (66 FR 
39911 through 39914) and the FY 2003 IPPS final rule (67 FR 50102).)

C. New Hospitals

    Under the IPPS for capital-related costs, Sec.  412.300(b) of the 
regulations defines a new hospital as a hospital that has operated 
(under current or previous ownership) for less than 2 years. For 
example, the following hospitals are not considered new hospitals: (1) 
A hospital that builds new or replacement facilities at the same or 
another location, even if coincidental with a change of ownership, a 
change in management, or a lease arrangement; (2) a hospital that 
closes and subsequently reopens; (3) a hospital that has been in 
operation for more than 2 years but has participated in the Medicare 
program for less than 2 years; and (4) a hospital that changes its 
status from a hospital that is excluded from the IPPS to a hospital 
that is subject to the capital IPPS. For more detailed information, we 
refer readers to the FY 1992 IPPS final rule (56 FR 43418). During the 
10-year transition period, a new hospital was exempt from the capital 
IPPS for its first 2 years of operation and was paid 85 percent of its 
reasonable costs during that period. Originally, this provision was 
effective only through the transition period and, therefore, ended with 
cost reporting periods beginning in FY 2002. Because, as discussed in 
the FY 2003 IPPS final rule (67 FR 50101), we believe that special 
protection to new hospitals is also appropriate even after the 
transition period, we revised the regulations at Sec.  412.304(c)(2) to 
provide that, for cost reporting periods beginning on or after October 
1, 2002, a new hospital (defined under Sec.  412.300(b)) is paid 85 
percent of its Medicare allowable capital-related costs through its 
first 2 years of operation, unless the new hospital elects to receive 
full prospective payment based on 100 percent of the Federal rate. (We 
refer readers to the FY 2003 IPPS final rule (67 FR 50101 through 
50102) for a detailed discussion of the special payment provisions for 
new hospitals under the capital IPPS after the 10-year transition 
period.)

[[Page 25966]]

D. Hospitals Located in Puerto Rico

    Section 412.374 of the regulations provides for the use of a 
blended payment amount for prospective payments for capital-related 
costs to hospitals located in Puerto Rico. Accordingly, under the 
capital IPPS, we compute a separate payment rate specific to Puerto 
Rico hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs. In general, hospitals located 
in Puerto Rico are paid a blend of the applicable capital IPPS Puerto 
Rico rate and the applicable capital IPPS Federal rate.
    Prior to FY 1998, hospitals in Puerto Rico were paid a blended 
capital IPPS rate that consisted of 75 percent of the capital IPPS 
Puerto Rico specific rate and 25 percent of the capital IPPS Federal 
rate. However, effective October 1, 1997 (FY 1998), in conjunction with 
the change to the operating IPPS blend percentage for hospitals located 
in Puerto Rico required by section 4406 of Public Law 105-33, we 
revised the methodology for computing capital IPPS payments to 
hospitals in Puerto Rico to be based on a blend of 50 percent of the 
capital IPPS Puerto Rico rate and 50 percent of the capital IPPS 
Federal rate. Similarly, in conjunction with the change in operating 
IPPS payments to hospitals located in Puerto Rico for FY 2005 required 
by section 504 of Public Law 108-173, we again revised the methodology 
for computing capital IPPS payments to hospitals located in Puerto Rico 
to be based on a blend of 25 percent of the capital IPPS Puerto Rico 
rate and 75 percent of the capital IPPS Federal rate effective for 
discharges occurring on or after October 1, 2004.

E. Proposed Changes for FY 2012: MS-DRG Documentation and Coding 
Adjustment

1. Background
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we adopted the MS-DRG patient classification system for 
the IPPS, effective October 1, 2007, to better recognize patient 
severity of illness in Medicare payment rates. Adoption of the MS-DRGs 
resulted in the expansion of the number of DRGs from 538 in FY 2007 to 
745 in FY 2008. (Currently, there are 747 MS-DRGs and we are proposing 
4 additional MS-DRGs for FY 2012.) By increasing the number of DRGs and 
more fully taking into account patient severity of illness in Medicare 
payment rates, the MS-DRGs encourage hospitals to change their 
documentation and coding of patient diagnoses. In that same final rule 
with comment period (72 FR 47183), we indicated that we believe the 
adoption of the MS-DRGs had the potential to lead to increases in 
aggregate payments without a corresponding increase in actual patient 
severity of illness due to the incentives for changes in documentation 
and coding. Accordingly, we established adjustments to both the 
national operating standardized amount and the national capital Federal 
rate to eliminate the estimated effect of changes in documentation and 
coding resulting from the adoption of the MS-DRGs that do not reflect 
real changes in case-mix. Specifically, we established prospective 
documentation and coding adjustments of -1.2 percent for FY 2008, -1.8 
percent for FY 2009, and -1.8 percent for FY 2010. However, to comply 
with section 7(a) of Public Law 110-90, enacted on September 29, 2007, 
in a final rule published in the Federal Register on November 27, 2007 
(72 FR 66886 through 66888), we modified the documentation and coding 
adjustment for FY 2008 to -0.6 percent, and consequently revised the FY 
2008 IPPS operating and capital payment rates, factors, and thresholds 
accordingly, with these revisions effective October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -1.8 
percent adjustment established in the FY 2008 IPPS final rule with 
comment period. As discussed in the FY 2008 IPPS final rule with 
comment period (72 FR 48447 and 48733 through 48774), we applied an 
additional documentation and coding adjustment of -0.9 percent to the 
FY 2009 IPPS national standardized amounts and the national capital 
Federal rate. The documentation and coding adjustments established in 
the FY 2009 IPPS final rule, as amended by Public Law 110-90, are 
cumulative. As a result, the -0.9 percent documentation and coding 
adjustment in FY 2009 was in addition to the -0.6 percent adjustment in 
FY 2008, yielding a combined effect of -1.5 percent. (For additional 
details on the development and implementation of the documentation and 
coding adjustments for FY 2008 and FY 2009, we refer readers to section 
II.D. of this preamble and the following rules published in the Federal 
Register: August 22, 2007 (72 FR 47175 through 47186 and 47431 through 
47432); November 27, 2007 (72 FR 66886 through 66888); and August 19, 
2008 (73 FR 48447 through 48450 and 48773 through 48775).)
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 
through 24101), we presented the results of a retrospective evaluation 
of the FY 2008 data for claims paid through December 2008. We sought 
public comment on our methodology and analysis and our proposal to 
apply a prospective adjustment to address the effect of documentation 
and coding changes unrelated to changes in real case-mix in FY 2008. In 
addition, we sought public comment on addressing in the FY 2011 
rulemaking cycle any effect of documentation and coding changes that do 
not reflect real changes in case-mix for discharges occurring during FY 
2009. However, after consideration of the public comments received on 
the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, consistent with the 
application of the documentation and coding adjustment to the operating 
IPPS standardized amounts, we determined that it would be appropriate 
to postpone the adoption of any additional documentation and coding 
adjustments to the capital IPPS rates until a full analysis of FY 2009 
case-mix changes could be completed (74 FR 43926 through 43928).
    For the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24014), we 
performed a thorough retrospective evaluation of the most recent 
available claims data, and the results of this evaluation were used by 
our actuaries to determine any necessary payment adjustments beyond the 
cumulative -1.5 percent adjustment that has already been applied to the 
national capital Federal rate to ensure budget neutrality for the 
implementation of MS-DRGs. Specifically, we performed a retrospective 
evaluation of the FY 2009 claims data updated through December 2009 
using the same analysis methodology as we did for FY 2008 claims in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed and final rules. Based on this 
evaluation, our actuaries determined that the implementation of the MS-
DRG system resulted in a 5.4 percent change in case-mix due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009. We also noted our intent to 
update our analysis with FY 2009 data on claims paid through March 2009 
(sic) for the FY 2011 IPPS/LTCH PPS final rule. (We note that the March 
2009 update date for claims paid data in the proposed rule should have 
stated March 2010.)
    As intended, as discussed in the FY 2011 IPPS/LTCH PPS final rule 
(75 FR 50355), we updated our analysis with FY 2009 data on claims paid 
through March 2010 in that final rule. For the FY 2011 IPPS/LTCH PPS 
final rule, applying the same analysis methodology

[[Page 25967]]

as we did for the proposed rule to an FY 2009 claims data updated 
through March 2010 verified the 5.4 percent change in case-mix due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009. The 5.4 percent estimate of 
the cumulative effect of changes in documentation and coding under the 
MS-DRG system that did not reflect real changes in case-mix for FYs 
2008 and 2009 exceeded the cumulative -1.5 percent prospective 
documentation and coding adjustment that had already been applied to 
the national capital Federal rate by 3.9 percentage points (5.4 percent 
minus 1.5 percent). Therefore, an additional cumulative adjustment of -
3.9 percent to the national capital Federal rate would be necessary to 
eliminate the full effect of the documentation and coding changes due 
to the adoption of the MS-DRGs on future payments.
    Therefore, in that same final rule, under the Secretary's broad 
authority under section 1886(g) of the Act, consistent with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, we 
implemented an adjustment to the FY 2011 national capital Federal rate 
of -2.9 percent to account for part of the effect of the estimated 
changes in documentation and coding changes under the MS-DRG system 
that occurred in FYs 2008 and 2009 that did not reflect real changes in 
case-mix. We also established that we will leave the -2.9 percent 
adjustment in place for subsequent fiscal years to account for the 
effect of that documentation and coding change in subsequent years. 
Furthermore, we stated our intention to address the remaining estimated 
adjustment to the national capital Federal rate of -1.0 percent (that 
is, the estimated effect of documentation and coding changes under the 
MS-DRG system of -5.4 percent minus the existing -0.6 percent and -0.9 
percent adjustments and the -2.9 percent adjustment for FY 2011) in 
future rulemaking cycles.
2. Proposed Prospective MS-DRG Documentation and Coding Adjustment to 
the National Capital Federal Rate for FY 2012 and Subsequent Years
    We continue to believe that it is appropriate to make adjustments 
to the capital IPPS rates to eliminate the effect of any documentation 
and coding changes as a result of the implementation of the MS-DRGs. 
These adjustments are intended to ensure that future annual aggregate 
IPPS payments are the same as payments that otherwise would have been 
made had the prospective adjustments for documentation and coding 
applied in FY 2008 and FY 2009 accurately reflected the changes due to 
documentation and coding that occurred in those years. As noted in 
section V.A. of this preamble, under section 1886(g) of the Act, the 
Secretary has broad authority in establishing and implementing the IPPS 
for acute-care hospital inpatient capital-related costs (that is, the 
capital IPPS). We have consistently stated since the initial 
implementation of the MS-DRG system that we do not believe it is 
appropriate for Medicare expenditures under the capital IPPS to 
increase due to MS-DRG related changes in documentation and coding. 
Accordingly, we believe that it is appropriate under the Secretary's 
broad authority under section 1886(g) of the Act, in conjunction with 
section 1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 
110-90, to make adjustments to the national capital Federal rate to 
eliminate the full effect of the documentation and coding changes 
resulting from the adoption of the MS-DRGs. We believe that this is 
appropriate because, in absence of such adjustments, the effect of the 
documentation and coding changes resulting from the adoption of the MS-
DRGs results in inappropriately high capital IPPS payments because that 
portion of the increase in aggregate payments is not due to an increase 
in patient severity of illness (and costs).
    As discussed above, based on our retrospective evaluation of the FY 
2009 claims, our actuaries determined that implementation of the MS-DRG 
system resulted in a 5.4 percent change in case-mix due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009. To date, we have made 
adjustments to the national capital Federal rate to account for 4.4 
percent (that is, -0.6 percent in FY 2008, -0.9 percent in FY 2009, and 
-2.9 percent in FY 2011) of the estimated 5.4 percent documentation and 
coding effect. Thus, our current estimate of the remaining adjustment 
to the national capital Federal rate is -1.0 percent to account for the 
effect of documentation and coding changes under the MS-DRG system for 
FYs 2008 and 2009.
    In this proposed rule, under the Secretary's broad authority under 
section 1886(g) of the Act, in conjunction with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, 
consistent with the intention we stated in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50357), we are proposing to reduce the national 
capital Federal rate in FY 2012 by -1.0 percent to account for the 
remainder of the cumulative effect of the estimated changes in 
documentation and coding under the MS-DRG system in FYs 2008 and 2009 
that did not reflect real changes in case-mix. Furthermore, consistent 
with the documentation and coding adjustments we have made in the past, 
we are proposing to leave this proposed -1.0 percent adjustment in 
place for subsequent fiscal years to account for the effect in FY 2012 
and subsequent years. As explained above, this proposed -1.0 percent 
adjustment accounts for the remainder of our current estimate of the 
cumulative effect of documentation and coding changes under the MS-DRG 
system for FYs 2008 and 2009 of -5.4 percent minus the existing -0.6 
percent, -0.9 percent, and -2.9 percent adjustments.
3. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Capital Rate
    Under Sec.  412.74, Puerto Rico hospitals are currently paid based 
on 75 percent of the national capital Federal rate and 25 percent of 
the Puerto Rico-specific capital rate. In the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50358 through 50359), we discussed the retrospective 
evaluation of the FY 2009 claims data from the March 2010 update of the 
MedPAR file of hospitals located in Puerto Rico using the same 
methodology used to estimate documentation and coding changes under 
IPPS for non-Puerto Rico hospitals. This analysis shows that the change 
in case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FYs 2008 and 2009 
from hospitals located in Puerto Rico was approximately 2.6 percent. 
(As discussed in that same final rule, the Puerto Rico-specific capital 
rate was not adjusted for the cumulative effects of documentation and 
coding changes in FY 2008 or FY 2009.) We also explained that we 
continue to believe that such an adjustment is appropriate because all 
hospitals have the same financial incentives for documentation and 
coding improvements, and the same ability to benefit from the resulting 
increase in aggregate payments that do not reflect real changes in 
case-mix.
    Given this case-mix increase due to changes in documentation and 
coding under the MS-DRGs, consistent with the adjustment we made to the 
FY 2011 national capital Federal rate (discussed above) and consistent 
with our adjustment to the FY 2011 Puerto Rico-specific standardized 
amount, under the

[[Page 25968]]

Secretary's broad authority under section 1886(g) of the Act, we 
established an adjustment to the Puerto Rico-specific capital rate of -
2.6 percent in FY 2011 for the cumulative increase in case-mix due to 
changes in documentation and coding under the MS-DRGs for FYs 2008 and 
2009. In addition, consistent with our implementation of other 
prospective MS-DRG documentation and coding adjustments to the capital 
Federal rate and operating IPPS standardized amounts, we established 
that we will leave that -2.6 percent adjustment in place for subsequent 
fiscal years in order to ensure that changes in documentation and 
coding resulting from the adoption of the MS-DRGs do not lead to an 
increase in aggregate payments not reflective of an increase in real 
case-mix in subsequent years. The -2.6 percent adjustment to the 
capital Puerto Rico-specific rate that we made in FY 2011 reflects the 
entire amount of our current estimate of the effects of documentation 
and coding that did not reflect real changes in case-mix for discharges 
occurring during FYs 2008 and 2009 from hospitals located in Puerto 
Rico. Consequently, in this proposed rule, we are not proposing to make 
any additional adjustments to the capital Puerto Rico-specific rate for 
FY 2012 for the effect of documentation and coding that did not reflect 
real changes in case-mix.

F. Other Proposed Changes for FY 2012

    The proposed annual update to the capital IPPS national Federal and 
Puerto Rico-specific rates, as provided for at Sec.  412.308(c), for FY 
2012 is discussed in section III. of the Addendum to this proposed 
rule.

VI. Proposed Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to a 
rate-of-increase ceiling. A per discharge limit (the target amount as 
defined in Sec.  413.40(a)) was set for each hospital or hospital unit 
based on the hospital's own cost experience in its base year, and 
updated annually by a rate-of-increase percentage. The updated target 
amount was multiplied by total Medicare discharges during that period 
and applied as an aggregate upper limit (the ceiling as defined in 
Sec.  413.40(a)) on total inpatient operating costs for a hospital's 
cost reporting period. Prior to October 1, 1997, these payment 
provisions applied consistently to all categories of excluded 
providers, which included rehabilitation hospitals and units (now 
referred to as IRFs), psychiatric hospitals and units (now referred to 
as IPFs), LTCHs, children's hospitals, and IPPS-excluded cancer 
hospitals.
    Payment to children's hospitals and cancer hospitals that are 
excluded from the IPPS continues to be subject to the rate-of-increase 
ceiling based on the hospital's own historical cost experience. (We 
note that, in accordance with Sec.  403.752(a) of the regulations, 
RNHCIs are also subject to the rate-of-increase limits established 
under Sec.  413.40 of the regulations.)
    We are proposing that the FY 2012 rate-of-increase percentage to be 
applied to the target amount for cancer and children's hospitals and 
RNHCIs be the estimated FY 2012 percentage increase in the IPPS 
operating market basket, estimated to be 2.8 percent. Beginning with FY 
2006, we have used the percentage increase in the IPPS operating market 
basket to update the target amounts for children's and cancer 
hospitals. As explained in the FY 2006 IPPS final rule (70 FR 47396 
through 47398), with IRFs, IPFs, and LTCHs being paid under their own 
PPS, the remaining number of providers being paid based on reasonable 
cost subject to a ceiling (that is, children's hospitals, 11 cancer 
hospitals, and RNHCIs) is too small and the cost report data are too 
limited to be able to create a market basket solely for these 
hospitals. For FY 2012, we are proposing to continue to use the IPPS 
operating market basket to update the target amounts for children's and 
cancer hospitals and RNHCIs for the reasons discussed in the FY 2006 
IPPS final rule.
    Therefore, we are proposing to use the revised and rebased FY 2006-
based IPPS operating market basket to update the target amounts for 
children's and cancer hospitals and RNHCIs for FY 2012. Based on IHS 
Global Insight, Inc.'s 2011 first quarter forecast, with historical 
data through the 2010 fourth quarter, we are estimating that the FY 
2012 update to the IPPS operating market basket would be 2.8 percent 
(that is, the estimate of the market basket rate-of-increase). (We are 
proposing that if more recent data become available for the final rule, 
we would use them to calculate the IPPS operating market basket update 
for FY 2012.)
    We note that IRFs, IPFs, and LTCHs, which were paid previously 
under the reasonable cost methodology, now receive payment under their 
own prospective payment systems, in accordance with changes made to the 
statute. In general, the prospective payment systems for IRFs, IPFs, 
and LTCHs provided transition periods of varying lengths during which 
time a portion of the prospective payment was based on cost-based 
reimbursement rules under Part 413. (However, certain providers do not 
receive a transition period or may elect to bypass the transition 
period as applicable under 42 CFR part 412, subparts N, O, and P.) We 
note that the various transition periods provided for under the IRF 
PPS, the IPF PPS, and the LTCH PPS have ended.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We 
refer readers to section IV. of the Addendum to this proposed rule for 
the specific proposed update changes to the Federal payment rates for 
LTCHs under the LTCH PPS for FY 2012. The annual updates for the IRF 
PPS and the IPF PPS are issued by the agency in separate Federal 
Register documents.

B. Critical Access Hospital (CAH) Payment for Ambulance Services

1. Background
    Section 1820 of the Act provides for the establishment of Medicare 
Rural Hospital Flexibility Programs (MRHFPs) under which individual 
States may designate certain facilities as critical access hospitals 
(CAHs). Facilities that are so designated and that meet the CAH 
conditions of participation under 42 CFR Part 485, Subpart F, will be 
certified as CAHs by CMS. Regulations governing payments to CAHs for 
services to Medicare beneficiaries are located in 42 CFR part 413. 
Section 1834(l) of the Act sets forth the payment rules for ambulance 
services. Generally, payment to ambulance providers and suppliers for 
ambulance services are made under the ambulance fee schedule. Section 
205 of Public Law 106-554 (BIPA) amended section 1834(l) of the Act by 
adding a paragraph (8) to that section, which provides that the 
Secretary shall pay the reasonable costs incurred in furnishing 
ambulance services if such services are furnished by a CAH (as defined 
in section 1861(mm)(1) of the Act), or by an entity that is owned and 
operated by a CAH, but only if the CAH or entity is the only provider 
or supplier of ambulance services that is located within a 35-mile 
drive of the CAH. The term ``provider of ambulance services'' includes 
all Medicare-participating providers that submit claims under Medicare 
for ambulance services (for example, hospitals, CAHs, skilled nursing 
facilities (SNFs), and home health agencies (HHAs)). The term 
``supplier of ambulance services'' is defined as an

[[Page 25969]]

entity that provides ambulance services and that is independent of any 
Medicare-participating or non-Medicare-participating provider. Section 
205 was effective for services furnished on or after December 21, 2000. 
Regulations implementing section 1834(l)(8) of the Act are set forth at 
42 CFR 413.70(b)(5).
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50361), we 
implemented section 3128(a) of the Affordable Care Act, which amended 
section 1834(l)(8) of the Act by inserting ``101 percent of'' before 
``the reasonable costs.'' As such, section 3128(a) increased payment 
for ambulance services furnished by a qualifying CAH or entity owned 
and operated by a CAH to 101 percent of reasonable costs, effective for 
cost reporting periods beginning on or after January 1, 2004. We 
amended the regulations at Sec.  413.70(b)(5)(i) to conform to this 
statutory change by stating that, effective for cost reporting periods 
beginning on or after January 1, 2004, payment for ambulance services 
furnished by a CAH or an entity that is owned and operated by a CAH is 
101 percent of the reasonable costs of the CAH or the entity in 
furnishing those services, but only if the CAH or the entity furnishing 
those services is the only provider or supplier of ambulance services 
located within a 35-mile drive of the CAH or the entity.
2. Requirement for CAH Ambulance Within a 35-Mile Location of a CAH or 
Entity
    Section 413.70(b)(5) of the existing regulations states that 
payment for ambulance services furnished by a CAH or an entity that is 
owned and operated by a CAH is 101 percent of reasonable costs of the 
CAH or the entity in furnishing those services, but only if the CAH or 
the entity is ``the only provider or supplier of ambulance services 
located within a 35-mile drive of the CAH or the entity''. However, the 
statutory language at section 1834(l)(8) of the Act states that a CAH 
is eligible to be paid based on 101 percent of reasonable cost for 
ambulance services furnished by the CAH or by an entity that is owned 
and operated by a CAH, but only if the CAH or entity is the only 
provider or supplier of ambulance services that is located within a 35-
mile drive of such CAH. Because the statute only requires that there be 
no other provider or supplier of ambulance services within a 35-mile 
drive of the CAH and does not address whether there is another provider 
or supplier of ambulance services within a 35-mile drive of the CAH-
owned and operated entity, we believe that the existing regulation is 
not consistent with the plain reading of the statutory language at 
section 1834(l)(8) of the Act. In addition, we believe the plain 
reading of the statutory language at section 1834(l)(8) of the Act does 
not address the situation where there is no provider or supplier of 
ambulance services within a 35-mile drive of the CAH, but there is a 
CAH-owned and operated entity furnishing ambulance services that is 
more than a 35-mile drive from the CAH, thus creating a ``gap'' in the 
statutory language. That is, the statutory language does not address 
the situation where the entity that is owned and operated by the CAH is 
located more than a 35-mile drive from the CAH.
    In order to ensure that the regulations are consistent with the 
plain language of section 1834(l)(8) of the Act, we are proposing to 
revise Sec.  413.70(b)(5)(i) by adding a new paragraph (C) to state 
that, effective for cost reporting periods beginning on or after 
October 1, 2011, payment for ambulance services furnished by a CAH or 
by a CAH-owned and operated entity is 101 percent of reasonable costs 
of the CAH or the entity in furnishing those services, but only if the 
CAH or the entity is the only provider or supplier of ambulance 
services located within a 35-mile drive of the CAH (Figure 1). Under 
this proposed change, the CAH-owned and operated entity would be paid 
101 percent of reasonable cost for its ambulance services only if there 
is no other provider or supplier of ambulance services within a 35-mile 
drive of the CAH. However, if there is a provider or supplier of 
ambulance services located within a 35-mile drive of the CAH (Figure 
2), the CAH-owned and operated entity would not be paid at 101 percent 
of reasonable cost, but instead would be paid under the ambulance fee-
schedule.
    In addition, we are proposing to establish a policy that would 
address the ``gap'' in the statutory language, that is, where the CAH-
owned and operated entity furnishing ambulance services is more than a 
35-mile drive from the CAH, but there is no other provider or supplier 
of ambulance services located within a 35-mile drive of the CAH. We are 
proposing to include in the proposed new paragraph (C) of Sec.  
413.70(b)(5)(i) a provision which states that, effective for cost 
reporting periods beginning on or after October 1, 2011, if there is no 
provider or supplier of ambulance services within a 35-mile drive of 
the CAH but there is a CAH-owned and operated entity that is more than 
a 35-mile drive from the CAH, the CAH-owned and operated entity would 
be paid at 101 percent of reasonable cost for its ambulance services as 
long as that entity is the closest provider or supplier of ambulance 
services to the CAH (Figure 3). Allowing the CAH-owned and operated 
entity to be paid at 101 percent of reasonable cost if there is no 
other provider or supplier of ambulance services that is closer to the 
CAH is consistent with the original purpose of section 1834(l)(8) of 
the Act, which was intended to help ensure an adequate level of 
ambulance services in areas served by CAHs. The statute allows for 
reasonable cost-based payment only if there is no other provider or 
supplier of ambulance services within a 35-mile drive of the CAH. If 
there is another provider or supplier of ambulance services located 
within a 35-mile drive of the CAH, the statute does not allow for 
payment to the CAH or a CAH-owned and operated entity at 101 percent of 
reasonable cost because there is an adequate level of ambulance 
services available. Accordingly, where a CAH-owned and operated entity 
is located more than a 35-mile drive from the CAH, we are proposing to 
allow payment at 101 percent of reasonable cost only if there is no 
other provider or supplier of ambulance services located closer to the 
CAH. If there is a closer provider or supplier of ambulance services, 
that closer provider or supplier would also be assuring an adequate 
level of ambulance services in the area served by the CAH, and there 
would be no need to pay the CAH-owned and operated entity at 101 
percent of reasonable cost in order to ensure access to ambulance 
services. Therefore, if the CAH-owned and operated entity (located more 
than a 35-mile drive from the CAH) is not the closest provider or 
supplier of ambulance services to the CAH (Figure 4), the CAH-owned and 
operated entity would be reimbursed under the ambulance fee schedule.

[[Page 25970]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.074

    Figure 1:
    The CAH-owned and operated entity would be paid at 101 percent of 
reasonable cost for its ambulance service because there is no other 
provider or supplier of ambulance services within a 35-mile drive of 
the CAH.
[GRAPHIC] [TIFF OMITTED] TP05MY11.075

    Figure 2:
    The CAH-owned and operated entity would be paid under the ambulance 
fee schedule for its ambulance services because the CAH-owned and 
operated entity is not the only provider or supplier of ambulance 
services located within a 35-mile drive of the CAH.
[GRAPHIC] [TIFF OMITTED] TP05MY11.076

[[Page 25971]]

    Figure 3:
    The CAH-owned and operated entity would be paid at 101 percent of 
reasonable cost for its ambulance services because even though the CAH-
owned and operated entity is more than a 35-mile drive from the CAH, it 
is the closest provider or supplier of ambulance services to the CAH.
[GRAPHIC] [TIFF OMITTED] TP05MY11.077

    Figure 4:
    The CAH-owned and operated entity would receive payment under the 
ambulance fee schedule for its ambulance service because there is 
another provider or supplier of ambulance services that is closer to 
the CAH than the CAH-owned and operated entity.
    In summary, we are proposing to amend Sec.  413.70(b)(5)(i) by 
adding a new paragraph (C) to state that, effective for cost reporting 
periods beginning on or after October 1, 2011, payment for ambulance 
services furnished by a CAH or by a CAH-owned and operated entity is 
101 percent of reasonable costs of the CAH or the entity in furnishing 
those services, but only if the CAH or the entity is the only provider 
or supplier of ambulance services located within a 35-mile drive of the 
CAH. In addition, we are proposing to include in the proposed new Sec.  
413.70(b)(5)(i)(C) a provision to state that, effective for cost 
reporting periods beginning on or after October 1, 2011, if there is no 
provider or supplier of ambulance services located within a 35-mile 
drive of the CAH, but there is a CAH-owned and operated entity more 
than a 35-mile drive from the CAH, the CAH-owned and operated entity 
would be paid at 101 percent of reasonable cost for its ambulance 
services as long as that entity is the closest provider or supplier of 
ambulance services to the CAH. We also are making a conforming change 
to Sec.  413.70(b)(5)(i)(B) to make the effective date of that 
paragraph consistent with the effective date of the new proposed 
paragraph (C).

VII. Proposed Changes to the Long-Term Care Hospital Prospective 
Payment System (LTCH PPS) for FY 2012

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority
    Section 123 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals that are described in section 1886(d)(1)(B)(iv) of the 
Social Security Act (the Act), effective for cost reporting periods 
beginning on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a ``per 
discharge'' system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In the August 30, 2002 Federal Register, we issued a final rule 
that implemented the LTCH PPS authorized under the BBRA and BIPA (67 FR 
55954). For the initial implementation of the LTCH PPS (FYs 2003 
through FY 2007), the system used information from LTCH patient records 
to classify patients into distinct long-term care diagnosis-related 
groups (LTC-DRGs) based on clinical characteristics and expected 
resource needs. Beginning in FY 2008, we adopted the Medicare severity 
long-term care diagnosis-related groups (MS-LTC-DRGs) as the patient 
classification system used under the LTCH PPS. Payments are calculated 
for each MS-LTC-DRG and provisions are made for appropriate payment 
adjustments. Payment rates under the LTCH PPS are updated annually and 
published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

[[Page 25972]]

(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR Part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare 
discharges. (Generally, in section VIII. of this preamble, when we 
refer to discharges, the intent is to describe Medicare discharges.) 
The August 30, 2002 final rule further details the payment policy under 
the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we provided for a 5-year 
transition period. During this 5-year transition period, a LTCH's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decrease in the percentage of the 
LTCH PPS payment that is based on reasonable cost concepts. However, 
effective for cost reporting periods beginning on or after October 1, 
2006, total LTCH PPS payments are based on 100 percent of the Federal 
rate.
    In addition, in the August 30, 2002 final rule, we presented an in-
depth discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of the BBRA. The 
same final rule that established regulations for the LTCH PPS under 42 
CFR Part 412, Subpart O also contained LTCH provisions related to 
covered inpatient services, limitation on charges to beneficiaries, 
medical review requirements, furnishing of inpatient hospital services 
directly or under arrangement, and reporting and recordkeeping 
requirements. We refer readers to the August 30, 2002 final rule for a 
comprehensive discussion of the research and data that supported the 
establishment of the LTCH PPS (67 FR 55954).
    In the June 6, 2003 Federal Register, we published a final rule 
that set forth the FY 2004 annual update of the payment rates for the 
Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 
34122). It also changed the annual period for which the payment rates 
were to be effective, such that the annual updated rates were effective 
from July 1 through June 30 instead of from October 1 through September 
30. We referred to the July through June time period as a ``long-term 
care hospital rate year'' (LTCH PPS rate year). In addition, we changed 
the publication schedule for the annual update to allow for an 
effective date of July 1. The payment amounts and factors used to 
determine the annual update of the LTCH PPS Federal rate are based on a 
LTCH PPS rate year. In the past, while the LTCH payment rate updates 
were effective July 1, the annual update of the DRG classifications and 
relative weights for LTCHs continued to be linked to the annual 
adjustments of the acute care hospital inpatient DRGs and were 
effective each October 1.
    As discussed in detail in the RY 2009 LTCH PPS final rule (73 FR 
26797 through 26798), we again changed the schedule for the annual 
updates of the LTCH PPS Federal payment rates beginning with RY 2010. 
We consolidated the rulemaking cycle for the annual update of the LTCH 
PPS Federal payment rates and description of the methodology and data 
used to calculate these payment rates with the annual update of the MS-
LTC-DRG classifications and associated weighting factors for LTCHs so 
that the updates to the rates and the relative weights now occur on the 
same schedule and appear in the same publication. As a result, the 
updates to the rates and the relative weights are now effective on 
October 1 (on a Federal fiscal year schedule), and the annual updates 
to the LTCH PPS Federal rates are no longer published with a July 1 
effective date.
    Public Law 110-173 (MMSEA), enacted on December 29, 2007, included 
provisions that have various effects on the LTCH PPS. In addition to 
amending section 1861 of the Act to add a subsection (ccc) which 
provided an additional definition of LTCHs, Public Law 110-173 also 
required the Secretary to submit, no later than 18 months after the 
date of enactment of the law, a report to Congress on a study of 
national long-term care hospital facility and patient criteria that 
included ``recommendations for such legislation and administrative 
actions, including timelines for the implementation of LTCH patient 
criteria or other actions, as the Secretary determines appropriate.'' 
The payment policy provisions under sections 114(c)(1) and (c)(2) of 
Public Law 110-173 focused on providing 3 years of relief for certain 
LTCHs from the percentage threshold payment adjustment policy at 42 CFR 
412.534 and 412.536. However, because of the original implementation 
schedule of those sections of the regulations, the payment provisions 
had varying timeframes of applicability (73 FR 29701 through 29704). In 
addition, section 114(c)(3) of Public Law 110-173 provided that the 
Secretary shall not apply, for the 3-year period beginning on the date 
of enactment of the Act the revision to the short-stay outlier (SSO) 
policy that was finalized in the RY 2008 LTCH PPS final rule (72 FR 
26904 and 26992). In addition, section 114(c)(4) of Public Law 110-173 
provided that the Secretary shall not, for the 3-year period beginning 
on the date of enactment of the Act, make the one-time adjustment to 
the payment rates provided for in Sec.  412.523(d)(3) or any similar 
provision (73 FR 26800 through 26804). The statute also provided that 
the base rate for RY 2008 be the same as the base rate for RY 2007 (the 
revised base rate, however, does not apply to discharges occurring on 
or after July 1, 2007, and before April 1, 2008) (73 FR 24875 through 
24877). Section 114(d) of Public Law 110-173 established a 3-year 
moratorium (with specified exceptions) on the establishment and 
classification of new LTCHs, LTCH satellites, and on the increase in 
the number of LTCH beds in existing LTCHs or satellite facilities. 
Finally, section 114(f) of Public Law 110-173 provided for an expanded 
review of medical necessity for admission and continued stay at LTCHs.
    In the RY 2009 LTCH PPS final rule (73 FR 26804 through 26812), we 
established the applicable Federal rates for RY 2009, consistent with 
section 1886(m)(2) of the Act as amended by Public Law 110-173. We also 
revised the regulations at Sec.  412.523(d)(3) to change the 
methodology for the one-time budget neutrality adjustment and to comply 
with section 114(c)(4) of Public Law 110-173. Other policy revisions 
that were necessary as a result of the statutory changes of Public Law 
110-173 were addressed in separate interim final rules with comment 
period (73 FR 24871 and 73 FR 29699). In the FY 2010 IPPS/RY 2010 LTCH 
PPS final rule (74 FR 43976 through 43990), we addressed all of the 
public comments received and finalized these two interim final rules 
with comment period.
    Section 4302 of the ARRA, Public Law 111-5, enacted on February 17, 
2009, included several amendments to the provisions set forth in 
section 114 of Public Law 110-173. Specifically, section 4302(a) 
modified the effective

[[Page 25973]]

dates of the provisions of section 114(c) of Public Law 110-173, 
described above, and added an additional category of LTCHs or satellite 
facilities that would not be subject to the percentage threshold 
payment adjustment at Sec.  412.536 for a 3-year period. In addition, 
section 4302(a)(2)(A) of Public Law 111-5 added ``grandfathered'' 
satellites (specified in Sec.  412.22(h)(3)(i) of the regulations) to 
those ``applicable'' LTCHs (specified in Sec.  412.534(g) of the 
regulations) originally granted relief under section 114(c) of Public 
Law 110-173. We issued instructions to the fiscal intermediaries and 
MACs interpreting the provisions of section 4302 of Public Law 111-5 
(Change Request 6444). In addition, in the FY 2010 IPPS/RY 2010 LTCH 
PPS final rule (74 FR 43990 through 43992), we implemented the 
provisions of section 4302 of Public Law 111-5 through an interim final 
rule with comment period. We received one piece of timely 
correspondence regarding the provisions of section 4302 of Public Law 
111-5 that were implemented through the interim final rule with comment 
period that was included in the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule. We addressed this public comment and finalized the interim final 
rule with comment period in section VII.E. of the preamble of the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50399).
    As discussed in the FY 2011 IPPS/LTCH PPS final rule, a number of 
the provisions of the Affordable Care Act affected the policies, 
payment rates and factors under the LTCH PPS. Specifically, section 
1886(m)(3)(A)(ii) of the Act, as added by section 3401(c) of the 
Affordable Care Act, specifies that, for each of rate years 2010 
through 2019, any annual update to the standard Federal rate shall be 
reduced by the other adjustment specified in new section 1886(m)(4) of 
the Act. Furthermore, section 1886(m)(3)(A)(i) of the Act specifies 
that, for rate year 2012 and subsequent rate years, any annual update 
to the standard Federal rate shall be reduced by the productivity 
adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. 
Section 1886(m)(3)(A)(ii) and sections 1886(m)(4)(A) and (B) of the Act 
require a 0.25 percentage point reduction for rate year 2010 and a 0.50 
percentage point reduction for rate year 2011. Section 1886(m)(3)(B) of 
the Act provides that the application of paragraph (3) of section 
1886(m) of the Act may result in the annual update being less than zero 
for a rate year, and may result in payment rates for a rate year being 
less than such payment rates for the preceding rate year. Furthermore, 
section 3401(p) of the Affordable Care Act specifies that the 
amendments made by section 3401(c) of such Act shall not apply to 
discharges occurring before April 1, 2010 (75 FR 50387 through 50390). 
Sections 3106 and 10312 of the Affordable Care Act together provide for 
a 2-year extension to the payment policies applicable to LTCHs and LTCH 
satellite facilities set forth in sections 114(c) and (d)(1) of the 
MMSEA, as amended by the ARRA. Specifically, sections 3106 and 10312 of 
the Affordable Care Act together result in the phrase ``3-year period'' 
being replaced with the phrase ``5-year period'' each place it appears 
in sections 114(c) and (d)(1) of MMSEA, as amended by the ARRA. As 
discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50399 through 
50400), sections 3106 and 10312 of the Affordable Care Act, which 
amended sections 114(c) and (d)(1) of the MMSEA, as amended by the 
ARRA, result in the following:
     An additional 2-year delay in the application of the SSO 
payment adjustment, which would have applied the additional payment 
option of an ``IPPS comparable'' payment to LTCHs for certain SSO cases 
where the covered length of stay is less than or equal to the ``IPPS 
comparable threshold.'' Therefore, the Secretary will not apply this 
SSO payment adjustment for the 5-year period beginning on the date of 
enactment of MMSEA (December 29, 2007).
     An additional 2-year delay in the one-time prospective 
budget neutrality adjustment to the standard Federal rate (Sec.  
412.523(d)(3)). Thus, the Secretary is precluded from making the one-
time adjustment to standard Federal rate until December 29, 2012.
     An increase from 3 years to 5 years to the timeframes set 
forth in section 114(c) of the MMSEA as amended by the ARRA, thereby 
extending for an additional 2 years the delay in the application of the 
25-percent payment threshold policy for certain LTCHs and LTCH 
satellite facilities (Sec. Sec.  412.534 and 412.536), and extending 
for an additional 2 years, the increased percentage thresholds outlined 
at section 114(c)(2) of the MMSEA as amended by the ARRA.
     Additional 2-year extensions of the moratorium on the 
establishment of new LTCHs and LTCH satellite facilities and the 
moratorium on the increase of LTCH beds in existing LTCHs or satellite 
facilities as provided by section 114(d) of the MMSEA as amended by the 
ARRA. In general, section 114(d) of the MMSEA as amended by the ARRA 
precluded the establishment and classification of new LTCHs or LTCH 
satellite facilities or additional beds from being added to existing 
LTCHs or LTCH satellite facilities unless one of the specified 
exceptions to the particular moratorium was met.
2. Criteria for Classification as a LTCH
a. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient length of 
stay (LOS) of greater than 25 days. Alternatively, Sec.  
412.23(e)(2)(ii) states that for cost reporting periods beginning on or 
after August 5, 1997, a hospital that was first excluded from the PPS 
in 1986 and can demonstrate that at least 80 percent of its annual 
Medicare inpatient discharges in the 12-month cost reporting period 
ending in FY 1997 have a principal diagnosis that reflects a finding of 
neoplastic disease must have an average inpatient length of stay for 
all patients, including both Medicare and non-Medicare inpatients, of 
greater than 20 days.
b. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c), and therefore, are not subject to the 
LTCH PPS rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR Part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of the Social 
Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-
603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject 
to the rate-of-increase test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.
3. Limitation on Charges to Beneficiaries
    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, if the 
Medicare payment to

[[Page 25974]]

the LTCH is the full LTC-DRG payment amount, as consistent with other 
established hospital prospective payment systems, a LTCH may not bill a 
Medicare beneficiary for more than the deductible and coinsurance 
amounts as specified under Sec. Sec.  409.82, 409.83, and 409.87 and 
for items and services as specified under Sec.  489.30(a). However, 
under the LTCH PPS, Medicare will only pay for days for which the 
beneficiary has coverage until the SSO threshold is exceeded. 
Therefore, if the Medicare payment was for a SSO case (Sec.  412.529) 
that was less than the full LTC-DRG payment amount because the 
beneficiary had insufficient remaining Medicare days, the LTCH could 
also charge the beneficiary for services delivered on those uncovered 
days (Sec.  412.507).
4. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance
    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and the Health Insurance Portability and Accountability Act of 1996 
(HIPAA) (Pub. L. 104-191). Section 3 of the ASCA requires that the 
Medicare Program deny payment under Part A or Part B for any expenses 
incurred for items or services ``for which a claim is submitted other 
than in an electronic form specified by the Secretary.'' Section 
1862(h) of the Act (as added by section 3(a) of the ASCA) provides that 
the Secretary shall waive such denial in two specific types of cases 
and may also waive such denial ``in such unusual cases as the Secretary 
finds appropriate'' (68 FR 48805). Section 3 of the ASCA operates in 
the context of the HIPAA regulations, which include, among other 
provisions, the transactions and code sets standards requirements 
codified as 45 CFR parts 160 and 162, Subparts A and I through R 
(generally known as the Transactions Rule). The Transactions Rule 
requires covered entities, including covered health care providers, to 
conduct certain electronic healthcare transactions according to the 
applicable transactions and code sets standards.

B. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group 
(MS-LTC-DRG) Classifications and Relative Weights for FY 2012

1. Background
    Section 123 of the BBRA requires that the Secretary implement a PPS 
for LTCHs (that is, a per discharge system with a diagnosis-related 
group (DRG)-based patient classification system reflecting the 
differences in patient resources and costs). Section 307(b)(1) of the 
BIPA modified the requirements of section 123 of the BBRA by requiring 
that the Secretary examine ``the feasibility and the impact of basing 
payment under such a system [the long-term care hospital (LTCH) PPS] on 
the use of existing (or refined) hospital DRGs that have been modified 
to account for different resource use of LTCH patients, as well as the 
use of the most recently available hospital discharge data.''
    When the LTCH PPS was implemented for cost reporting periods 
beginning on or after October 1, 2002, we adopted the same DRG patient 
classification system (that is, the CMS DRGs) that was utilized at that 
time under the IPPS. As a component of the LTCH PPS, we refer to this 
patient classification system as the ``long-term care diagnosis-related 
groups (LTC-DRGs).'' Although the patient classification system used 
under both the LTCH PPS and the IPPS are the same, the relative weights 
are different. The established relative weight methodology and data 
used under the LTCH PPS result in relative weights under the LTCH PPS 
that reflect ``the differences in patient resource use * * *'' of LTCH 
patients (section 123(a)(1) of the BBRA (Pub. L. 106-113)).
    As part of our efforts to better recognize severity of illness 
among patients, in the FY 2008 IPPS final rule with comment period (72 
FR 47130), the MS-DRGs and the Medicare severity long-term care 
diagnosis-related groups (MS-LTC-DRGs) were adopted under the IPPS and 
the LTCH PPS, respectively, effective beginning October 1, 2007 (FY 
2008). For a full description of the development and implementation and 
rationale for the use of the MS-DRGs and MS-LTC-DRGs, we refer readers 
to the FY 2008 IPPS final rule with comment period (72 FR 47141 through 
47175 and 47277 through 47299). (We note that, in that same final rule, 
we revised the regulations at Sec.  412.503 to specify that for LTCH 
discharges occurring on or after October 1, 2007, when applying the 
provisions of 42 CFR Part 412, Subpart O applicable to LTCHs for policy 
descriptions and payment calculations, all references to LTC-DRGs would 
be considered a reference to MS-LTC-DRGs. For the remainder of this 
section, we present the discussion in terms of the current MS-LTC-DRG 
patient classification system unless specifically referring to the 
previous LTC-DRG patient classification system that was in effect 
before October 1, 2007.) We believe the MS-DRGs (and by extension, the 
MS-LTC-DRGs) represent a substantial improvement over the previous CMS 
DRGs in their ability to differentiate cases based on severity of 
illness and resource consumption.
    The MS-DRGs adopted in FY 2008 represent an increase in the number 
of DRGs by 207 (that is, from 538 to 745) (72 FR 47171). The MS-DRG 
classifications are updated annually. As described in section II.G. of 
this preamble, for FY 2012 we are proposing to delete one MS-DRG and 
create two new MS-DRGs for a net gain of one MS-DRG. If this proposal 
is adopted, we would have a total of 751 MS-DRG groupings. Consistent 
with section 123 of the BBRA, as amended by section 307(b)(1) of the 
BIPA, and Sec.  412.515 of the regulations, we use information derived 
from LTCH PPS patient records to classify LTCH discharges into distinct 
MS-LTC-DRGs based on clinical characteristics and estimated resource 
needs. We then assign an appropriate weight to the MS-LTC-DRGs to 
account for the difference in resource use by patients exhibiting the 
case complexity and multiple medical problems characteristic of LTCHs.
    In a departure from the IPPS, and as discussed in greater detail 
below in section VII.B.3.f. of this preamble, we are proposing to 
continue to use low-volume MS-LTC-DRGs (that is, MS-LTC-DRGs with less 
than 25 LTCH cases) in determining the MS-LTC-DRG relative weights 
because LTCHs do not typically treat the full range of diagnoses as do 
acute care hospitals. For purposes of determining the relative weights 
for the large number of low-volume MS-LTC-DRGs, we are proposing to 
group all of the low-volume MS-LTC-DRGs into five quintiles based on 
average charge per discharge. (A detailed discussion of the initial 
development and application of the quintile methodology appears in the 
August 30, 2002 LTCH PPS final rule (67 FR 55978).) We also are 
proposing to account for adjustments to payments for short-stay outlier 
(SSO) cases (that is, cases where the covered length of stay at the 
LTCH is less than or equal to five-sixths of the geometric average 
length of stay for the MS-LTC-DRG). Furthermore, we are proposing to 
make adjustments to account for nonmonotonically increasing weights, 
when necessary. That is, theoretically, cases under the MS-LTC-DRG 
system that are more severe require greater expenditure of medical care 
resources and will result in higher average charges

[[Page 25975]]

such that, in the severity levels within a base MS-LTC-DRG, the weights 
should increase monotonically with severity from the lowest to highest 
severity level. (We discuss nonmonotonicity in greater detail and our 
proposed methodology to adjust the FY 2011 MS-LTC-DRG relative weights 
to account for nonmonotonically increasing relative weights in section 
VII.B.3.g. (Step 6) of this preamble.)
2. Patient Classifications Into MS-LTC-DRGs
a. Background
    The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under 
the LTCH PPS) are based on the CMS DRG structure. As noted above in 
this section, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs 
although they are structurally identical to the MS-DRGs used under the 
IPPS.
    The MS-DRGs are organized into 25 major diagnostic categories 
(MDCs), most of which are based on a particular organ system of the 
body; the remainder involve multiple organ systems (such as MDC 22, 
Burns). Within most MDCs, cases are then divided into surgical DRGs and 
medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy 
that orders operating room (O.R.) procedures or groups of O.R. 
procedures by resource intensity. The GROUPER software program does not 
recognize all ICD-9-CM procedure codes as procedures affecting DRG 
assignment. That is, procedures that are not surgical (for example, 
EKG), or minor surgical procedures (for example, biopsy of skin and 
subcutaneous tissue (procedure code 86.11)) do not affect the MS-LTC-
DRG assignment based on their presence on the claim.
    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge and that payment varies 
by the MS-LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into MS-LTC-DRGs for payment based on the following six data 
elements:
     Principal diagnosis;
     Additional or secondary diagnoses;
     Surgical procedures;
     Age;
     Sex; and
     Discharge status of the patient.
    Through FY 2010, the number of secondary or additional diagnoses 
and the number of surgical procedures considered for MS-DRG assignment 
was limited to eight and six, respectively. In the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50127), we established that, for claims submitted 
on the 5010 format beginning January 1, 2011, we would increase the 
capacity to process diagnosis and procedure codes up to 25 diagnoses 
and 25 procedures. This includes one principal diagnosis and up to 24 
secondary diagnoses for severity of illness determinations. We refer 
readers to section II.G.11.c. of the preamble of the FY 2011 IPPS/LTCH 
PPS final rule for a complete discussion of this change (75 FR 50127).
    Upon the discharge of the patient from a LTCH, the LTCH must assign 
appropriate diagnosis and procedure codes from the most current version 
of the International Classification of Diseases, Ninth Revision, 
Clinical Modification (ICD-9-CM). HIPAA Transactions and Code Sets 
Standards regulations at 45 CFR Parts 160 and 162 require that no later 
than October 16, 2003, all covered entities must comply with the 
applicable requirements of Subparts A and I through R of Part 162. 
Among other requirements, those provisions direct covered entities to 
use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, 
Version 4010, and the applicable standard medical data code sets for 
the institutional health care claim or equivalent encounter information 
transaction (45 CFR 162.1002 and 45 CFR 162.1102). For additional 
information on the ICD-9-CM Coding System, we refer readers to the FY 
2008 IPPS final rule with comment period (72 FR 47241 through 47243 and 
47277 through 47281). We also refer readers to the detailed discussion 
on correct coding practices in the August 30, 2002 LTCH PPS final rule 
(67 FR 55981 through 55983). Additional coding instructions and 
examples are published in the Coding Clinic for ICD-9-CM, a product of 
the American Hospital Association. (We refer readers to section 
II.G.13. of this preamble for additional information on the annual 
revisions to the ICD-9-CM codes.)
    With respect to the ICD-9-CM coding system, we have been discussing 
the conversion to the ICD-10-CM and the ICD-10-PCS coding systems for 
many years. As is discussed in detail in section II.G.11. of the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50122 through 50127) and in 
section III.G.13 of this proposed rule, the ICD-10 coding systems 
applicable to hospital inpatient services will be implemented on 
October 1, 2013. In order for the industry to make the necessary 
conversions from ICD-9-CM to ICD-10-CM and ICD-10-PCS, we proposed, 
through the ICD-9-CM Coordination and Maintenance Committee, to 
consider a moratorium on updates to the ICD-9-CM and ICD-10 coding 
sets. We refer readers to section II.G.13. of this preamble for 
additional information on the adoption of the ICD-10-CM and ICD-10-PCS 
systems.
    To create the MS-DRGs (and by extension, the MS-LTC-DRGs), 
individual DRGs were subdivided according to the presence of specific 
secondary diagnoses designated as complications or comorbidities (CCs) 
into three, two, or one level, depending on the impact of the CCs on 
resources used for those cases. Specifically, there are sets of MS-DRGs 
that are split into 2 or 3 subgroups based on the presence or absence 
of a CC or a major complication and comorbidity (MCC). We refer readers 
to section II.D. of the FY 2008 IPPS final rule with comment period for 
a detailed discussion about the creation of MS-DRGs based on severity 
of illness levels (72 FR 47141 through 47175).
    Medicare contractors (that is, fiscal intermediaries and MACs) 
enter the clinical and demographic information submitted by LTCHs into 
their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a MS-LTC-DRG can be made. During 
this process, certain cases are selected for further development (74 FR 
43949).
    After screening through the MCE, each claim is classified into the 
appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software on the 
basis of diagnosis and procedure codes and other demographic 
information (age, sex, and discharge status). The GROUPER software used 
under the LTCH PPS is the same GROUPER software program used under the 
IPPS. Following the MS-LTC-DRG assignment, the Medicare contractor 
determines the prospective payment amount by using the Medicare PRICER 
program, which accounts for hospital-specific adjustments. Under the 
LTCH PPS, we provide an opportunity for LTCHs to review the MS-LTC-DRG 
assignments made by the Medicare contractor and to submit additional 
information within a specified timeframe as provided in Sec.  
412.513(c).
    The GROUPER software is used both to classify past cases to measure 
relative hospital resource consumption to establish the MS-LTC-DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the MedPAR file. The data in this file are used to 
evaluate possible MS-DRG and MS-LTC-DRG classification changes

[[Page 25976]]

and to recalibrate the MS-DRG and MS-LTC-DRG relative weights during 
our annual update under both the IPPS (Sec.  412.60(e)) and the LTCH 
PPS (Sec.  412.517), respectively.
b. Proposed Changes to the MS-LTC-DRGs for FY 2012
    As specified by our regulations at Sec.  412.517(a), which requires 
that the MS-LTC-DRG classifications and relative weights be updated 
annually and consistent with our historical practice of using the same 
patient classification system under the LTCH PPS as is used under the 
IPPS, we are proposing to update the MS-LTC-DRG classifications 
effective October 1, 2011, through September 30, 2012 (FY 2012) 
consistent with the proposed changes to specific MS-DRG classifications 
presented in section II.G. of this proposed rule (that is, proposed 
GROUPER Version 29.0). Therefore, the proposed MS-LTC-DRGs for FY 2012 
presented in this proposed rule are the same as the proposed MS-DRGs 
that would be used under the IPPS for FY 2012. In addition, because the 
proposed MS-LTC-DRGs for FY 2012 are the same as the proposed MS-DRGs 
for FY 2012, the other changes that affect MS-DRG (and by extension MS-
LTC-DRG) assignments under proposed Version 29.0 of the GROUPER 
discussed in section II.G. of the preamble of this proposed rule, 
including the proposed changes to the MCE software and proposed changes 
to the ICD-9-CM coding system, also would be applicable under the LTCH 
PPS for FY 2012.
3. Development of the Proposed FY 2012 MS-LTC-DRG Relative Weights
a. General Overview of the Development of the MS-LTC-DRG Relative 
Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55984), one of the primary goals for the implementation of the LTCH PPS 
is to pay each LTCH an appropriate amount for the efficient delivery of 
medical care to Medicare patients. The system must be able to account 
adequately for each LTCH's case-mix in order to ensure both fair 
distribution of Medicare payments and access to adequate care for those 
Medicare patients whose care is more costly. To accomplish these goals, 
we have annually adjusted the LTCH PPS standard Federal prospective 
payment system rate by the applicable relative weight in determining 
payment to LTCHs for each case.
    Although the adoption of the MS-LTC-DRGs resulted in some 
modifications of existing procedures for assigning weights in cases of 
zero volume and/or nonmonotonicity (as discussed in the FY 2008 IPPS 
final rule with comment period (72 FR 47289 through 47295) and the FY 
2009 IPPS final rule (73 FR 48542 through 48550)), the basic 
methodology for developing the proposed FY 2012 MS-LTC-DRG relative 
weights in this proposed rule continues to be determined in accordance 
with the general methodology established in the August 30, 2002 LTCH 
PPS final rule (67 FR 55989 through 55991). Under the LTCH PPS, 
relative weights for each MS-LTC-DRG are a primary element used to 
account for the variations in cost per discharge and resource 
utilization among the payment groups (Sec.  412.515). To ensure that 
Medicare patients classified to each MS-LTC-DRG have access to an 
appropriate level of services and to encourage efficiency, we calculate 
a relative weight for each MS-LTC-DRG that represents the resources 
needed by an average inpatient LTCH case in that MS-LTC-DRG. For 
example, cases in a MS-LTC-DRG with a relative weight of 2 will, on 
average, cost twice as much to treat as cases in a MS-LTC-DRG with a 
relative weight of 1.
b. Development of the Proposed MS-LTC-DRG Relative Weights for FY 2012
    Beginning with the FY 2008 update, we established a budget 
neutrality requirement for the annual update to the MS-LTC-DRG 
classifications and relative weights at Sec.  412.517(b) (in 
conjunction with Sec.  412.503), such that estimated aggregate LTCH PPS 
payments would be unaffected, that is, would be neither greater than 
nor less than the estimated aggregate LTCH PPS payments that would have 
been made without the classification and relative weight changes (RY 
2008 LTCH PPS final rule (72 FR 26882 through 26884)). Consistent with 
Sec.  412.517(b), we are proposing to apply a two-step budget 
neutrality methodology, which is based on the current year MS-LTC-DRG 
classifications and relative weights. (For additional information on 
the established two-step budget neutrality methodology, we refer 
readers to the FY 2008 IPPS final rule (72 FR 47295 through 47296).) 
Thus, for this proposed rule, the annual update to the MS-LTC-DRG 
classifications and relative weights for FY 2012 are based on the FY 
2011 MS-LTC-DRG classifications and relative weights established in the 
FY 2011 IPPS/LTCH PPS final rule (75 FR 50613 through 50627).
c. Data
    In this proposed rule, to calculate the proposed MS-LTC-DRG 
relative weights for FY 2012, we are proposing to obtain total charges 
from FY 2010 Medicare LTCH bill data from the December 2010 update of 
the FY 2010 MedPAR file, which are the best available data at this 
time, and to use the proposed Version 29.0 of the GROUPER to classify 
LTCH cases. We also are proposing that if more recent data become 
available, we would to use those data and the finalized Version 29.0 of 
the GROUPER in establishing the FY 2012 MS-LTC-DRG relative weights in 
the final rule.
    Consistent with our historical methodology, we are proposing to 
exclude the data from LTCHs that are all-inclusive rate providers and 
LTCHs that are reimbursed in accordance with demonstration projects 
authorized under section 402(a) of Public Law 90-248 or section 222(a) 
of Public Law 92-603. In addition, as is the case with the IPPS, 
Medicare Advantage (Part C) claims are now included in the MedPAR files 
(74 FR 43808). Consistent with IPPS policy, we are proposing to 
continue to exclude such claims in the calculations for the relative 
weights under the LTCH PPS that are used to determine payments for fee-
for-service Medicare claims. Specifically, we are proposing to remove 
any claims from the MedPAR files that have a GHO Paid indicator value 
of ``1,'' which effectively removes Medicare Advantage claims from the 
relative weight calculations (73 FR 48532). Therefore, in the 
development of the proposed FY 2012 MS-LTC-DRG relative weights in this 
proposed rule, we are proposing to exclude the data of 13 all-inclusive 
rate providers and the 2 LTCHs that are paid in accordance with 
demonstration projects that had claims in the FY 2010 MedPAR file, as 
well as any Medicare Advantage claims.
d. Hospital-Specific Relative Value (HSRV) Methodology
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
This nonrandom distribution of cases with relatively high (or low) 
charges in specific MS-LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. To account for the fact that 
cases may not be randomly distributed across LTCHs, consistent with the 
methodology we have used since the implementation of the LTCH PPS, we 
are proposing to continue to use a hospital-specific relative value

[[Page 25977]]

(HSRV) methodology to calculate the proposed MS-LTC-DRG relative 
weights for FY 2012. We believe this method removes this hospital-
specific source of bias in measuring LTCH average charges (67 FR 
55985). Specifically, we are proposing to reduce the impact of the 
variation in charges across providers on any particular proposed MS-
LTC-DRG relative weight by converting each LTCH's charge for a case to 
a relative value based on that LTCH's average charge.
    Under the HSRV methodology, we standardize charges for each LTCH by 
converting its charges for each case to hospital-specific relative 
charge values and then adjust those values for the LTCH's case-mix. The 
adjustment for case-mix is needed to rescale the hospital-specific 
relative charge values (which, by definition, average 1.0 for each 
LTCH). The average relative weight for a LTCH is its case-mix, so it is 
reasonable to scale each LTCH's average relative charge value by its 
case-mix. In this way, each LTCH's relative charge value is adjusted by 
its case-mix to an average that reflects the complexity of the cases it 
treats relative to the complexity of the cases treated by all other 
LTCHs (the average case-mix of all LTCHs).
    In accordance with our established methodology, we are proposing to 
continue to standardize charges for each case by first dividing the 
adjusted charge for the case (adjusted for SSOs under Sec.  412.529 as 
described below in section VII.B.3.g. (step 3) of the preamble of this 
proposed rule) by the average adjusted charge for all cases at the LTCH 
in which the case was treated. SSO cases are cases with a length of 
stay that is less than or equal to five-sixths the average length of 
stay of the MS-LTC-DRG (Sec.  412.529 and Sec.  412.503). The average 
adjusted charge reflects the average intensity of the health care 
services delivered by a particular LTCH and the average cost level of 
that LTCH. The resulting ratio is multiplied by that LTCH's case-mix 
index to determine the standardized charge for the case (67 FR 55989).
    Multiplying the resulting ratio by the LTCH's case-mix index 
accounts for the fact that the same relative charges are given greater 
weight at a LTCH with higher average costs than they would at a LTCH 
with low average costs, which is needed to adjust each LTCH's relative 
charge value to reflect its case-mix relative to the average case-mix 
for all LTCHs. Because we standardize charges in this manner, we count 
charges for a Medicare patient at a LTCH with high average charges as 
less resource intensive than they would be at a LTCH with low average 
charges. For example, a $10,000 charge for a case at a LTCH with an 
average adjusted charge of $17,500 reflects a higher level of relative 
resource use than a $10,000 charge for a case at a LTCH with the same 
case-mix, but an average adjusted charge of $35,000. We believe that 
the adjusted charge of an individual case more accurately reflects 
actual resource use for an individual LTCH because the variation in 
charges due to systematic differences in the markup of charges among 
LTCHs is taken into account.
e. Treatment of Severity Levels in Developing the Proposed MS-LTC-DRG 
Relative Weights
    For purposes of determining the MS-LTC-DRG relative weights, under 
our historical methodology, there are three different categories of 
DRGs based on volume of cases within specific MS-LTC-DRGs. MS-LTC-DRGs 
with at least 25 cases are each assigned a unique relative weight; low-
volume MS-LTC-DRGs (that is, MS-LTC-DRGs that contain between 1 and 24 
cases based on a given year's claims data) are grouped into quintiles 
(as described below) and assigned the relative weight of the quintile. 
No-volume MS-LTC-DRGs (that is, no cases in the given year's claims 
data were assigned to those MS-LTC-DRGs) are cross-walked to other MS-
LTC-DRGs based on the clinical similarities and assigned the relative 
weight of the cross-walked MS-LTC-DRG (as described in greater detail 
below). In this proposed rule, we are proposing to continue to utilize 
these same three categories of MS-LTC-DRGs for purposes of determining 
the proposed MS-LTC-DRG relative weights for FY 2012. (We provide in-
depth discussions of our proposed policy regarding weight-setting for 
proposed low-volume MS-LTC-DRGs in section VII.B.3.f. of the preamble 
of this proposed rule and for proposed no-volume MS-LTC-DRGs, under 
Step 5 in section VII.B.3.g. of the preamble of this proposed rule.)
    As also noted above, while the LTCH PPS and the IPPS use the same 
patient classification system, the methodology that is used to set the 
DRG relative weights for use in each payment system differs because the 
overall volume of cases in the LTCH PPS is much less than in the IPPS. 
In general, consistent with our existing methodology, we are proposing 
to use the following steps to determine the proposed FY 2012 MS-LTC-DRG 
relative weights: (1) If a proposed MS-LTC-DRG has at least 25 cases, 
it is assigned its own proposed relative weight; (2) if a proposed MS-
LTC-DRG has between 1 and 24 cases, it is assigned to a quintile for 
which we compute a proposed relative weight for all of the proposed MS-
LTC-DRGs assigned to that quintile; and (3) if a proposed MS-LTC-DRG 
has no cases, it is cross-walked to another proposed MS-LTC-DRG based 
upon clinical similarities to assign an appropriate proposed relative 
weight (as described below in detail in Step 5 of section VII.B.3.g. of 
this preamble). Furthermore, in determining the proposed FY 2012 MS-
LTC-DRG relative weights, when necessary, we are proposing to make 
adjustments to account for nonmonotonicity, as discussed in greater 
detail below in Step 6 of section VII.B.3.g. of this preamble. We refer 
readers to the discussion in the FY 2010 IPPS/RY LTCH PPS final rule 
for our rationale for including an adjustment for nonmonotonicity (74 
FR 43953 through 43954).
f. Proposed Low-Volume MS-LTC-DRGs
    In order to account for proposed MS-LTC-DRGs with low volume (that 
is, with fewer than 25 LTCH cases), consistent with our existing 
methodology we are proposing, for purposes of determining the proposed 
FY 2012 MS-LTC-DRG relative weights, to continue to employ the quintile 
methodology for proposed low-volume MS-LTC-DRGs, such that we group 
those proposed ``low-volume MS-LTC-DRGs'' (that is, proposed MS-LTC-
DRGs that contained between 1 and 24 cases annually) into one of five 
categories (quintiles) based on average charges (67 FR 55984 through 
55995 and 72 FR 47283 through 47288). In determining the proposed FY 
2012 MS-LTC-DRG relative weights in this proposed rule, in cases where 
the initial assignment of a proposed low-volume MS-LTC-DRG to quintiles 
resulted in nonmonotonicity within a base-DRG, in order to ensure 
appropriate Medicare payments, consistent with our historical 
methodology, we are proposing to make adjustments to the treatment of 
proposed low-volume MS-LTC-DRGs to preserve monotonicity, as discussed 
in detail below in section VII.B.3.g. (Step 6) in this preamble.
    In this proposed rule, using LTCH cases from the December 2010 
update of the FY 2010 MedPAR file, we identified 277 MS-LTC-DRGs that 
contained between 1 and 24 cases. This list of proposed MS-LTC-DRGs was 
then divided into one of the 5 low-volume quintiles, each containing a 
minimum of 55 proposed MS-LTC-DRGs (277/5 = 55 with 2 proposed MS-LTC-
DRG as the remainder). We assigned a proposed low-volume MS-LTC-DRG to 
a specific

[[Page 25978]]

low-volume quintile by sorting the proposed low-volume MS-LTC-DRGs in 
ascending order by average charge in accordance with our established 
methodology. Furthermore, because the number of MS-LTC-DRGs with less 
than 25 cases is not evenly divisible by 5, the average charge of the 
low-volume quintile was used to determine which of the proposed low-
volume quintiles would contain the 2 additional proposed low-volume MS-
LTC-DRGs. Specifically, after organizing the MS-LTC-DRGs by ascending 
order by average charge, we assigned the first fifth (1st through 55th) 
of proposed low-volume MS-LTC-DRGs (with the lowest average charge) 
into Quintile 1. The proposed MS-LTC-DRGs with the highest average 
charge cases would be assigned into Quintile 5. Because the average 
charge of the 56th proposed low-volume MS-LTC-DRG in the sorted list is 
closer to the average charge of the 55th proposed low-volume MS-LTC-DRG 
(assigned to Quintile 1) than to the average charge of the 57th 
proposed low-volume MS-LTC-DRG (assigned to Quintile 2), we are 
proposing to assign it to Quintile 1 (such that Quintile 1 would 
contain 56 proposed low-volume MS-LTC-DRGs before any adjustments for 
nonmonotonicity, as discussed below). This process was repeated through 
the remaining proposed low-volume MS-LTC-DRGs so that 3 of the 5 low-
volume quintiles contain 55 proposed MS-LTC-DRGs (Quintiles 2, 3, and 
5) and the other 2 low-volume quintiles contain 56 proposed MS-LTC-DRGs 
(Quintiles 1 and 4). Table 13A, which is listed in section VI. of the 
Addendum to this proposed rule and is available via the Internet, lists 
the composition of the proposed low-volume quantitles for MS-LTC-DRGs 
for FY 2012.
    Accordingly, in order to determine the proposed FY 2012 relative 
weights for the proposed MS-LTC-DRGs with low volume, we are proposing 
to use the 5 low-volume quintiles described above. The proposed 
composition of each of the 5 low-volume quintiles shown in the chart 
below was used in determining the proposed FY 2012 MS-LTC-DRG relative 
weights (as shown in Table 11 listed in section VI. of the Addendum to 
this proposed rule and available via the Internet). We determined a 
proposed relative weight and (geometric) average length of stay for 
each of the 5 low-volume quintiles using the methodology that we are 
proposing to apply to the proposed MS-LTC-DRGs (25 or more cases), as 
described in section VII.B.3.g. of the preamble of this proposed rule. 
We are proposing to assign the same relative weight and average length 
of stay to each of the proposed low-volume MS-LTC-DRGs that make up an 
individual low-volume quintile. We note that, as this system is 
dynamic, it is possible that the number and specific type of MS-LTC-
DRGs with a proposed low volume of LTCH cases will vary in the future. 
We are proposing to use the best available claims data in the MedPAR 
file to identify proposed low-volume MS-LTC-DRGs and to calculate the 
proposed relative weights based on our methodology.
    We note that we will continue to monitor the volume (that is, the 
number of LTCH cases) in the low-volume quintiles to ensure that our 
quintile assignments used in determining the proposed MS-LTC-DRG 
relative weights result in appropriate payment for such cases and do 
not result in an unintended financial incentive for LTCHs to 
inappropriately admit these types of cases.
g. Steps for Determining the Proposed FY 2012 MS-LTC-DRG Relative 
Weights
    In this proposed rule, we are proposing, in general, to determine 
the FY 2012 MS-LTC-DRG relative weights based on our existing 
methodology. For additional information on the original development of 
this methodology, and modifications to it since the adoption of the MS-
LTC-DRGs, we refer readers to the August 30, 2002 LTCH PPS final rule 
(67 FR 55989 through 55995) and the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule (74 FR 43951 through 43966).
    In summary, for FY 2012, to determine the proposed FY 2012 MS-LTC-
DRG relative weights, we are proposing to group LTCH cases to the 
appropriate proposed MS-LTC-DRG, while taking into account the proposed 
low-volume quintile (as described above). After grouping the cases to 
the appropriate MS-LTC-DRG (or low-volume quintile), we are proposing 
to calculate the proposed FY 2012 relative weights by first removing 
statistical outliers and cases with a length of stay of 7 days or less 
(as discussed in greater detail below). Next, we are proposing to 
adjust the number of cases in each MS-LTC-DRG (or low-volume quintile) 
for the effect of SSO cases (step 3 below). After removing statistical 
outliers (step 1 below) and cases with a length of stay of less than 8 
days (step 2 below), the SSO adjusted discharges and corresponding 
charges were then used to calculate proposed ``relative adjusted 
weights'' for each proposed MS-LTC-DRG (or proposed low-volume 
quintile) using the HSRV method.
    Below we discuss in detail the steps for calculating the proposed 
FY 2012 MS-LTC-DRG relative weights. We note that, as we stated in 
section VII.B.3.c. of this preamble, we excluded the data of all-
inclusive rate LTCHs, LTCHs that are paid in accordance with 
demonstration projects, and any Medicare Advantage claims in the FY 
2010 MedPAR file.
    Step 1--Remove statistical outliers.
    The first step in the calculation of the proposed FY 2012 MS-LTC-
DRG relative weights is to remove statistical outlier cases. Consistent 
with our historical relative weight methodology, we are proposing to 
continue to define statistical outliers as cases that are outside of 
3.0 standard deviations from the mean of the log distribution of both 
charges per case and the charges per day for each proposed MS-LTC-DRG. 
These statistical outliers are removed prior to calculating the 
proposed relative weights because we believe that they may represent 
aberrations in the data that distort the measure of average resource 
use. Including those LTCH cases in the calculation of the proposed 
relative weights could result in an inaccurate relative weight that 
does not truly reflect relative resource use among the proposed MS-LTC-
DRGs. (For additional information on this step of the relative weight 
methodology, we refer readers to 67 FR 55989 and 74 FR 43959.)
    Step 2--Remove cases with a length of stay of 7 days or less.
    The proposed MS-LTC-DRG relative weights reflect the average of 
resources used on representative cases of a specific type. Generally, 
cases with a length of stay of 7 days or less do not belong in a LTCH 
because these stays do not fully receive or benefit from treatment that 
is typical in a LTCH stay, and full resources are often not used in the 
earlier stages of admission to a LTCH. If we were to include stays of 7 
days or less in the computation of the proposed FY 2012 MS-LTC-DRG 
relative weights, the value of many relative weights would decrease 
and, therefore, payments would decrease to a level that may no longer 
be appropriate. We do not believe that it would be appropriate to 
compromise the integrity of the payment determination for those LTCH 
cases that actually benefit from and receive a full course of treatment 
at a LTCH by including data from these very short-stays. Therefore, 
consistent with our historical relative weight methodology, in 
determining the proposed FY 2012 MS-LTC-DRG relative weights, we 
removed LTCH cases with a length of stay of 7 days or less. (For 
additional information on this step of the relative weight methodology,

[[Page 25979]]

we refer readers to 67 FR 55989 and 74 FR 43959.)
    Step 3--Adjust charges for the effects of SSOs.
    After removing cases with a length of stay of 7 days or less, we 
are left with cases that have a length of stay of greater than or equal 
to 8 days. As the next step in the calculation of the proposed FY 2012 
MS-LTC-DRG relative weights, consistent with our historical relative 
weight methodology, we are proposing to adjust each LTCH's charges per 
discharge for those remaining cases for the effects of SSOs (as defined 
in Sec.  412.529(a) in conjunction with Sec.  412.503).
    We are proposing to make this adjustment by counting an SSO case as 
a fraction of a discharge based on the ratio of the length of stay of 
the case to the average length of stay for the proposed MS-LTC-DRG for 
non-SSO cases. This has the effect of proportionately reducing the 
impact of the lower charges for the SSO cases in calculating the 
average charge for the proposed MS-LTC-DRG. This process produces the 
same result as if the actual charges per discharge of an SSO case were 
adjusted to what they would have been had the patient's length of stay 
been equal to the average length of stay of the proposed MS-LTC-DRG.
    Counting SSO cases as full discharges with no adjustment in 
determining the proposed FY 2012 MS-LTC-DRG relative weights would 
lower the proposed FY 2012 MS-LTC-DRG relative weight for affected 
proposed MS-LTC-DRGs because the relatively lower charges of the SSO 
cases would bring down the average charge for all cases within a 
proposed MS-LTC-DRG. This would result in an ``underpayment'' for non-
SSO cases and an ``overpayment'' for SSO cases. Therefore, we are 
proposing to adjust for SSO cases under Sec.  412.529 in this manner 
because it results in more appropriate payments for all LTCH cases. 
(For additional information on this step of the relative weight 
methodology, we refer readers to 67 FR 55989 and 74 FR 43959.)
    Step 4--Calculate the proposed FY 2012 MS-LTC-DRG relative weights 
on an iterative basis.
    Consistent with our historical relative weight methodology, we are 
proposing to calculate the proposed FY 2012 MS-LTC-DRG relative weights 
using the HSRV methodology, which is an iterative process. First, for 
each LTCH case, we are proposing to calculate a hospital-specific 
relative charge value by dividing the SSO adjusted charge per discharge 
(see Step 3) of the LTCH case (after removing the statistical outliers 
(see Step 1)) and LTCH cases with a length of stay of 7 days or less 
(see Step 2) by the average charge per discharge for the LTCH in which 
the case occurred. The resulting ratio is then multiplied by the LTCH's 
case-mix index to produce a proposed adjusted hospital-specific 
relative charge value for the case. An initial case-mix index value of 
1.0 is used for each LTCH.
    For each proposed MS-LTC-DRG, we are proposing to calculate the 
proposed FY 2012 relative weight by dividing the average of the 
adjusted hospital-specific relative charge values (from above) for the 
proposed MS-LTC-DRG by the overall average hospital-specific relative 
charge value across all cases for all LTCHs. Using these recalculated 
proposed MS-LTC-DRG relative weights, each LTCH's average relative 
weight for all of its cases (that is, its case-mix) is calculated by 
dividing the sum of all the LTCH's proposed MS-LTC-DRG relative weights 
by its total number of cases. The LTCHs' hospital-specific relative 
charge values above were multiplied by these hospital-specific case-mix 
indexes. These hospital-specific case-mix adjusted relative charge 
values were then used to calculate a new set of proposed MS-LTC-DRG 
relative weights across all LTCHs. This iterative process was continued 
until there was convergence between the weights produced at adjacent 
steps, for example, when the maximum difference was less than 0.0001.
    Step 5--Determine a proposed FY 2012 relative weight for MS-LTC-
DRGs with no LTCH cases.
    As we stated above, we are proposing to determine the proposed FY 
2012 relative weight for each proposed MS-LTC-DRG using total Medicare 
allowable total charges reported in the best available LTCH claims data 
(that is, the December 2010 update of the FY 2010 MedPAR file for this 
proposed rule). Using these data, we identified a number of proposed 
MS-LTC-DRGs for which there were no LTCH cases in the database, such 
that no patients who would have been classified to those proposed MS-
LTC-DRGs were treated in LTCHs during FY 2010 and, therefore, no charge 
data were available for these proposed MS-LTC-DRGs. Thus, in the 
process of determining the proposed MS-LTC-DRG relative weights, we 
were unable to calculate proposed relative weights for the proposed MS-
LTC-DRGs with no LTCH cases using the methodology described in Steps 1 
through 4 above. However, because patients with a number of the 
diagnoses under these proposed MS-LTC-DRGs may be treated at LTCHs, 
consistent with our historical methodology, we are proposing to assign 
a proposed relative weight to each of the proposed no-volume MS-LTC-
DRGs based on clinical similarity and relative costliness (with the 
exception of ``transplant'' MS-LTC-DRGs and ``error'' MS-LTC-DRGs, as 
discussed below). (For additional information on this step of the 
relative weight methodology, we refer readers to 67 FR 55991 and 74 FR 
43959 through 43960.)
    In general, we are proposing to determine proposed FY 2012 relative 
weights for the proposed MS-LTC-DRGs with no LTCH cases in the FY 2010 
MedPAR file used in this proposed rule (that is, proposed ``no-volume'' 
MS-LTC-DRGs) by cross-walking each no-volume proposed MS-LTC-DRG to 
another proposed MS-LTC-DRG with a calculated proposed relative weight 
(determined in accordance with the proposed methodology described 
above). Then, the proposed ``no-volume'' MS-LTC-DRG was assigned the 
same relative weight (and average length of stay) of the proposed MS-
LTC-DRG to which it was cross-walked (as described in greater detail 
below).
    Of the 751 proposed MS-LTC-DRGs for FY 2012, we identified 237 
proposed MS-LTC-DRGs for which there were no LTCH cases in the database 
(including the 8 ``transplant'' proposed MS-LTC-DRGs and 2 ``error'' 
proposed MS-LTC-DRGs). As stated above, we are proposing to assign 
relative weights for each of the 237 proposed no-volume MS-LTC-DRGs 
(with the exception of the 8 ``transplant'' proposed MS-LTC-DRGs and 
the 2 ``error'' proposed MS-LTC-DRGs, which are discussed below) based 
on clinical similarity and relative costliness to one of the remaining 
514 (751--237= 514) proposed MS-LTC-DRGs for which we were able to 
determine proposed relative weights based on FY 2010 LTCH claims data 
using the steps described above. (For the remainder of this discussion, 
we refer to the proposed ``cross-walked'' MS-LTC-DRGs as the proposed 
MS-LTC-DRGs to which we crosswalk one of the 237 proposed ``no volume'' 
MS-LTC-DRGs for purposes of determining a proposed relative weight.) 
Then, we assigned the proposed no-volume MS-LTC-DRG the proposed 
relative weight of the proposed cross-walked MS-LTC-DRG. (As explained 
below in Step 6, when necessary, we made adjustments to account for 
nonmonotonicity.)
    For this proposed rule, we are proposing to crosswalk the proposed 
no-volume MS-LTC-DRG to a proposed MS-LTC-DRG for which there were LTCH 
cases in the FY 2010 MedPAR file, and to which it is similar clinically

[[Page 25980]]

in intensity of use of resources and relative costliness as determined 
by criteria such as care provided during the period of time surrounding 
surgery, surgical approach (if applicable), length of time of surgical 
procedure, postoperative care, and length of stay. We evaluated the 
relative costliness in determining the applicable proposed MS-LTC-DRG 
to which a proposed no-volume MS-LTC-DRG was cross-walked in order to 
assign an appropriate proposed relative weight for the proposed no-
volume MS-LTC-DRGs in FY 2012. (For more detail on our process for 
evaluating relative costliness, we refer readers to the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (73 FR 48543).) We believe in the rare event 
that there would be a few LTCH cases grouped to one of the proposed no-
volume MS-LTC-DRGs in FY 2012, the proposed relative weights assigned 
based on the proposed cross-walked MS-LTC-DRGs would result in an 
appropriate LTCH PPS payment because the crosswalks, which are based on 
similar clinical similarity and relative costliness, generally require 
equivalent relative resource use.
    We are proposing to then assign the proposed relative weight of the 
proposed cross-walked MS-LTC-DRG as the proposed relative weight for 
the proposed no-volume MS-LTC-DRG such that both of these proposed MS-
LTC-DRGs (that is, the proposed no-volume MS-LTC-DRG and the proposed 
cross-walked MS-LTC-DRG) have the same proposed relative weight for FY 
2012. We note that if the proposed cross-walked MS-LTC-DRG had 25 cases 
or more, its proposed relative weight, which was calculated using the 
proposed methodology described in Steps 1 through 4 above, was assigned 
to the proposed no-volume MS-LTC-DRG as well. Similarly, if the 
proposed MS-LTC-DRG to which the no-volume MS-LTC-DRG is cross-walked 
had 24 or less cases and, therefore, was designated to one of the low-
volume quintiles for purposes of determining the proposed relative 
weights, we assigned the proposed relative weight of the applicable 
low-volume quintile to the proposed no-volume MS-LTC-DRG such that both 
of these proposed MS-LTC-DRGs (that is, the proposed no-volume MS-LTC-
DRG and the proposed cross-walked MS-LTC-DRG) have the same proposed 
relative weight for FY 2012. (As we noted above, in the infrequent case 
where nonmonotonicity involving a proposed no-volume MS-LTC-DRG 
results, additional adjustments as described in Step 6 are required in 
order to maintain monotonically increasing relative weights.)
    For this proposed rule, a list of the proposed no-volume MS-LTC-
DRGs and the proposed MS-LTC-DRG to which it is cross-walked (that is, 
the proposed cross-walked MS-LTC-DRG) for FY 2012 is shown in Table 
13B, which is listed in section VI. of the Addendum to this proposed 
rule and is available via the Internet.
    To illustrate this methodology for determining the proposed 
relative weights for the FY 2012 MS-LTC-DRGs with no LTCH cases, we are 
providing the following example, which refers to the proposed no-volume 
MS-LTC-DRGs crosswalk information for FY 2012 provided in Table 13B.
    Example: There were no cases in the FY 2010 MedPAR file used for 
this proposed rule for MS-LTC-DRG 61 (Acute Ischemic Stroke with Use of 
Thrombolytic Agent with MCC). We determined that MS-LTC-DRG 70 
(Nonspecific Cebrovascular Disorders with MCC) was similar clinically 
and based on resource use to MS-LTC-DRG 61. Therefore, we assigned the 
same proposed relative weight of MS-LTC-DRG 70 of 0.8062 for FY 2012 to 
MS-LTC-DRG 61 (Table 11, which is listed in section VI. of the Addendum 
to this proposed rule and is available vie the Internet).
    Again, we note that, as this system is dynamic, it is entirely 
possible that the number of MS-LTC-DRGs with no volume of LTCH cases 
based on the system will vary in the future. We are proposing to use 
the most recent available claims data in the MedPAR file to identify 
proposed no-volume MS-LTC-DRGs and to determine the proposed relative 
weights in this proposed rule.
    Furthermore, for FY 2012, consistent with our historical relative 
weight methodology, we are proposing to establish proposed MS-LTC-DRG 
relative weights of 0.0000 for the following transplant proposed MS-
LTC-DRGs: Heart Transplant or Implant of Heart Assist System with MCC 
(proposed MS-LTC-DRG 1); Heart Transplant or Implant of Heart Assist 
System without MCC (proposed MS-LTC-DRG 2); Liver Transplant with MCC 
or Intestinal Transplant (proposed MS-LTC-DRG 5); Liver Transplant 
without MCC (proposed MS-LTC-DRG 6); Lung Transplant (proposed MS-LTC-
DRG 7); Simultaneous Pancreas/Kidney Transplant (proposed MS-LTC-DRG 
8); Pancreas Transplant (proposed MS-LTC-DRG 10); and Kidney Transplant 
(proposed MS-LTC-DRG 652). This is because Medicare will only cover 
these procedures if they are performed at a hospital that has been 
certified for the specific procedures by Medicare and presently no LTCH 
has been so certified. At the present time, we include these proposed 
eight transplant MS-LTC-DRGs in the GROUPER program for administrative 
purposes only. Because we use the same GROUPER program for LTCHs as is 
used under the IPPS, removing these proposed MS-LTC-DRGs would be 
administratively burdensome. (For additional information regarding our 
treatment of transplant MS-LTC-DRGs, we refer readers to the RY 2010 
LTCH PPS final rule (74 FR 43964).)
    Step 6--Adjust the proposed FY 2012 MS-LTC-DRG relative weights to 
account for nonmonotonically increasing relative weights.
    As discussed earlier in this section, the MS-DRGs contain base DRGs 
that have been subdivided into one, two, or three severity of illness 
levels. Where there are three severity levels, the most severe level 
has at least one code that is referred to as an MCC (that is, major 
complication or comorbidity). The next lower severity level contains 
cases with at least one code that is a CC (that is, complication or 
comorbidity). Those cases without an MCC or a CC are referred to as 
``without CC/MCC.'' When data do not support the creation of three 
severity levels, the base DRG is subdivided into either two levels or 
the base DRG is not subdivided. The two-level subdivisions could 
consist of the DRG with CC/MCC and the DRG without CC/MCC. 
Alternatively, the other type of two-level subdivision may consist of 
the DRG with MCC and the DRG without MCC.
    In those base MS-LTC-DRGs that are split into either two or three 
severity levels, cases classified into the ``without CC/MCC'' MS-LTC-
DRG are expected to have a lower resource use (and lower costs) than 
the ``with CC/MCC'' MS-LTC-DRG (in the case of a two-level split) or 
both the ``with CC'' and the ``with MCC'' MS-LTC-DRGs (in the case of a 
three-level split). That is, theoretically, cases that are more severe 
typically require greater expenditure of medical care resources and 
will result in higher average charges. Therefore, in the three severity 
levels, proposed relative weights should increase by severity, from 
lowest to highest. If the proposed relative weights decrease as 
severity decreased (that is, if within a base proposed MS-LTC-DRG, a 
proposed MS-LTC-DRG with CC has a higher proposed relative weight than 
one with MCC, or the proposed MS-LTC-DRG without CC/MCC has a higher 
proposed relative weight than either of the others), they are 
nonmonotonic. We

[[Page 25981]]

continue to believe that utilizing nonmonotonic relative weights to 
adjust Medicare payments would result in inappropriate payments because 
the payment for the cases in the higher severity level in a base MS-
LTC-DRG (which are generally expected to have higher resource use and 
costs) would be lower than the payment for cases in a lower severity 
level within the same base MS-LTC-DRG (which are generally expected to 
have lower resource use and costs). Consequently, in determining the 
proposed FY 2012 MS-LTC-DRG relative weights in this proposed rule, 
consistent with our historical methodology we are proposing to combine 
proposed MS-LTC-DRG severity levels within a base proposed MS-LTC-DRG 
for the purpose of computing a proposed relative weight when necessary 
to ensure that monotonicity is maintained. For a comprehensive 
description of our existing methodology to adjust for nonmonotonicity, 
we refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43964 through 43966). Any adjustments for nonmonotonicity that were 
made in determining the proposed FY 2012 MS-LTC-DRG relative weights in 
this proposed rule by applying this methodology are denoted in Table 
11, which is listed in sectin VI. of the Addendum to this proposed rule 
and is available via the Internet.
    Step 7-- Calculate the proposed FY 2012 budget neutrality factor.
    As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), 
under the broad authority conferred upon the Secretary to develop the 
LTCH PPS under section 123 of Public Law 106-113, as amended by section 
307(b) of Public Law 106-554, beginning with the MS-LTC-DRG update for 
FY 2008, the annual update to the MS-LTC-DRG classifications and 
relative weights is done in a budget neutral manner such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the MS-LTC-DRG 
classification and relative weight changes (Sec.  412.517(b) in 
conjunction with Sec.  412.503). (For a detailed discussion on the 
establishment of the budget neutrality requirement for the annual 
update of the MS-LTC-DRG classifications and relative weights, we refer 
readers to the RY 2008 LTCH PPS final rule (72 FR 26881).)
    The MS-LTC-DRG classifications and relative weights are updated 
annually based on the most recent available LTCH claims data to reflect 
changes in relative LTCH resource use (Sec.  412.517(a) in accordance 
with Sec.  412.503). Under the budget neutrality requirement at Sec.  
412.517(b), for each annual update, the MS-LTC-DRG relative weights are 
uniformly adjusted to ensure that estimated aggregate payments under 
the LTCH PPS would not be affected (that is, decreased or increased). 
Consistent with that provision, we are proposing to update the MS-LTC-
DRG classifications and relative weights for FY 2012 based on the most 
recent available LTCH data, and to apply a budget neutrality adjustment 
in determining the proposed FY 2012 MS-LTC-DRG relative weights.
    To ensure budget neutrality in the proposed update to the MS-LTC-
DRG classifications and relative weights under Sec.  412.517(b), we are 
proposing to continue to use our established two-step budget neutrality 
methodology. In this proposed rule, in the first step of our proposed 
MS-LTC-DRG budget neutrality methodology, we are proposing for FY 2012 
to calculate and apply a proposed normalization factor to the 
recalibrated proposed relative weights (the result of Steps 1 through 6 
above) to ensure that estimated payments are not influenced by changes 
in the composition of case types or the changes to the classification 
system. That is, the proposed normalization adjustment is intended to 
ensure that the recalibration of the proposed MS-LTC-DRG relative 
weights (that is, the process itself) neither increases nor decreases 
the average CMI.
    To calculate the proposed normalization factor for FY 2012 (the 
first step of our budget neutrality methodology), we are proposing to 
use the following three steps: (1.a.) We used the most recent available 
LTCH claims data (FY 2010) and grouped them using the proposed FY 2012 
GROUPER (Version 29.0) and the proposed recalibrated FY 2012 MS-LTC-DRG 
relative weights (determined in steps 1 through 6 of the Steps for 
Determining the Proposed FY 2012 MS-LTC-DRG Relative Weights above) to 
calculate the average CMI; (1.b.) we grouped the same LTCH claims data 
(FY 2010) using the FY 2011 GROUPER (Version 28.0) and FY 2011 MS-LTC-
DRG relative weights and calculated the average CMI; and (1.c.) we 
computed the ratio of these average CMIs by dividing the average CMI 
for FY 2011 (determined in Step 1.b.) by the proposed average CMI for 
FY 2012 (determined in step 1.a.). In determining the proposed MS-LTC-
DRG relative weights for FY 2012, each proposed recalibrated MS-LTC-DRG 
relative weight was multiplied by 1.11482 in the first step of the 
budget neutrality methodology, which produced ``normalized relative 
weights.''
    In this proposed rule, in the second step of our proposed MS-LTC-
DRG budget neutrality methodology, we are proposing to determine a 
budget neutrality factor to ensure that estimated aggregate LTCH PPS 
payments (based on the most recent available LTCH claims data) after 
reclassification and recalibration (that is, the proposed FY 2012 MS-
LTC-DRG classifications and relative weights) are equal to estimated 
aggregate LTCH PPS payments before reclassification and recalibration 
(that is, the FY 2011 MS-LTC-DRG classifications and relative weights). 
Accordingly, consistent with our existing methodology, we are proposing 
to use FY 2010 discharge data to simulate payments and compare 
estimated aggregate LTCH PPS payments using the FY 2011 MS-LTC-DRGs and 
relative weights to estimate aggregate LTCH PPS payments using the 
proposed FY 2012 MS-LTC-DRGs and relative weights. Furthermore, 
consistent with our historical policy of using the best available data, 
we also are proposing that if more recent data become available, we 
would use such data to determine the budget neutrality adjustment 
factor for FY 2012 in the final rule.
    For this proposed rule, we are proposing to determine the proposed 
FY 2012 budget neutrality adjustment factor using the following three 
steps: (2.a.) we simulated estimated total LTCH PPS payments using the 
proposed normalized relative weights for FY 2012 and proposed GROUPER 
Version 29.0 (as described above); (2.b.) we simulated estimated total 
LTCH PPS payments using the FY 2011 GROUPER (Version 28.0) and the FY 
2011 MS-LTC-DRG relative weights shown in Table 11 of the FY 2011 IPPS/
LTCH PPS final rule (75 FR 50613 through 50626); and (2.c.) we 
calculated the ratio of these estimated total LTCH PPS payments by 
dividing the estimated total LTCH PPS payments using the FY 2011 
GROUPER (Version 28.0) and the FY 2011 MS-LTC-DRG relative weights 
(determined in step 2.b.) by the estimated total LTCH PPS payments 
using the proposed FY 2012 GROUPER (Version 29.0) and the proposed 
normalized MS-LTC-DRG relative weights for FY 2012 (determined in Step 
2.a.). In determining the proposed FY 2012 MS-LTC-DRG relative weights, 
each proposed normalized relative weight was multiplied by a budget 
neutrality factor of 0.994312 in the second step of the proposed budget 
neutrality methodology to determine the proposed budget neutral FY 2012 
relative weight for each proposed MS-LTC-DRG.

[[Page 25982]]

    Accordingly, in determining the proposed FY 2012 MS-LTC-DRG 
relative weights in this proposed rule, consistent with our existing 
methodology, we are proposing to apply a normalization factor of 
1.11482 and a budget neutrality factor of 0.994312 (computed as 
described above). Table 11, which is listed in sectin VI. of the 
Addendum to this proposed rule and is available via the Internet, lists 
the proposed MS-LTC-DRGs and their respective proposed relative 
weights, geometric mean length of stay, and five-sixths of the 
geometric mean length of stay (used in determining SSO payments under 
Sec.  412.529) for FY 2012. The proposed FY 2012 MS-LTC-DRG relative 
weights in Table 11, which is listed in section VI. of the Addendum to 
this proposed rule and available via the Internet, reflect both the 
proposed normalization factor of 1.11482 and the proposed budget 
neutrality factor of 0.994312.

C. Proposed Quality Reporting Program for LTCHs

1. Background and Statutory Authority
    CMS seeks to promote higher quality and more efficient health care 
for Medicare beneficiaries, and our efforts are furthered by quality 
reporting programs coupled with public reporting of that information. 
Such quality reporting programs already exist for various settings such 
as hospital inpatient services via the Hospital Inpatient Quality 
Reporting (IQR) Program (formerly called the Reporting Hospital Quality 
Data for Annual Payment Update (RHQDAPU) Program), hospital outpatient 
services via the Hospital Outpatient Quality Data Reporting Program 
(HOP QDRP), and physicians' and other eligible professionals' services 
via the Physician Quality Reporting System (formerly called the 
Physician Quality Reporting Initiative, or PQRI). We have also 
implemented quality reporting programs for home health agencies and 
skilled nursing facilities that are based on conditions of 
participation, and an end-stage renal disease quality incentive program 
(ESRD QIP) that links payment to performance.
    Section 3004(a) of the Affordable Care Act authorizes an additional 
quality reporting program for LTCHs, by adding a new paragraph (5) to 
section 1886(m) of the Act. Section 1886(m)(5)(A)(i) of the Act 
requires that, for rate year 2014 and each subsequent rate year, the 
Secretary shall reduce any annual update to the standard Federal rate 
for discharges occurring during such rate year, by 2 percentage points, 
for any LTCH that does not comply with quality data submission 
requirements with respect to an applicable rate year. We note that 
section 1886(m)(5) of the Act uses the term ``rate year.'' Beginning 
with the annual update to the LTCH PPS that took effect on October 1, 
2009, we consolidated the rulemaking cycle for the annual update of the 
LTCH PPS Federal payment rates with the annual update of the MS-LTC-DRG 
classifications and weights so that the annual updates to the rates and 
factors have an October 1 effective date and occur on the same 
schedule. To reflect this change to the annual payment rate update 
cycle, we revised the regulations at Sec.  412.503 to specify that, 
beginning on or after October 1, 2009, the ``LTCH PPS rate year'' is 
defined as October 1 through September 30 (73 FR 26797 through 26798 
and 26838). Beginning October 1, 2010, we changed from using the term 
``rate year'' to ``fiscal year'' under the LTCH PPS in order to conform 
to the standard definition of the Federal fiscal year (October 1 
through September 30). For LTCH PPS purposes, the term ``rate year'' 
and the term ``fiscal year'' both refer to the time period beginning 
October 1 and ending September 30. For more information regarding this 
terminology change, we refer readers to the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50396 and 50397). For purposes of the discussion below, in 
order to eliminate any possible confusion that may be caused by using 
the term ``rate year'' with respect to the proposed Quality Measurement 
Reporting Program for LTCHs, we will use the term ``fiscal year'' 
rather than ``rate year.''
    As provided at section 1886(m)(5)(A)(ii) of the Act, depending on 
the amount of annual update for a particular year, a reduction of 2.0 
percentage points may result in the annual update being less than 0.0 
percent for a fiscal year and may result in payment rates under the 
LTCH PPS being less than payment rates for the preceding fiscal year. 
In addition, as set forth at section 1886(m)(5)(B) of the Act, any 
reduction based on failure to comply with the reporting requirements, 
as required by section 1886(m)(5)(A) of the Act, shall apply only with 
respect to the particular fiscal year involved, and any such reduction 
shall not be taken into account in computing the payment rate for 
subsequent fiscal years.
    Section 1886(m)(5)(C) of the Act requires that, for fiscal year 
2014 and each subsequent fiscal year, each LTCH shall submit to the 
Secretary data on quality measures as specified by the Secretary. Such 
data must be submitted in a form and manner, and at a time, specified 
by the Secretary. Any measures selected by the Secretary must have been 
endorsed by the entity with a contract under section 1890(a) of the 
Act. This contract is currently held by the NQF. The NQF is a voluntary 
consensus standard-setting organization with a diverse representation 
of consumer, purchaser, provider, academic, clinical, and other health 
care stakeholder organizations. The NQF was established to standardize 
health care quality measurement and reporting through its consensus 
development process. We have generally adopted NQF-endorsed measures in 
our reporting programs.
    However, section 1886(m)(5)(D)(ii) of the Act provides that, in the 
case of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) of the Act 
(currently, NQF), the Secretary may specify a measure(s) that is (are) 
not so endorsed, as long as due consideration is given to measures that 
have been endorsed or adopted by a consensus organization identified by 
the Secretary. Under section 1886(m)(5)(D)(iii) of the Act, the 
Secretary shall publish, by no later than October 1, 2012, measures 
which shall be applicable with respect to the FY 2014 payment 
determination.
    Section 1886(m)(5)(E) of the Act requires the Secretary to 
establish procedures for making data submitted under the LTCH quality 
reporting program available to the public. The Secretary must ensure 
that each LTCH has the opportunity to review the data that are to be 
made public with respect to that facility prior to such data being made 
public. The Secretary must also report quality measures that relate to 
services furnished in LTCHs on the CMS Web site.
2. Proposed Quality Measures for the LTCH Quality Reporting Program for 
FY 2014
a. Considerations in the Selection of the Proposed Quality Measures
    In implementing the LTCH quality reporting program, we believe that 
the development of a quality reporting program that is successful in 
promoting the delivery of high quality health care services in LTCHs is 
of paramount importance. As the statute provides in section 
1886(m)(5)(D) of the Act, in establishing the LTCH quality reporting 
program, we must publish quality measures to be reported with respect 
to the FY 2014 payment determination no later than October 1, 2012. In 
an effort

[[Page 25983]]

to meet that mandate, we sought to develop a quality reporting program 
that incorporates overarching health care aims and goals intended to 
facilitate quality care in a manner that is effective and meaningful, 
while remaining mindful of reporting burden and feasibility of data 
collection by LTCHs, in order to reduce and avoid duplicative reporting 
efforts when possible. We seek to efficiently collect information on 
valid, reliable, and relevant measures of quality and to share this 
information with the public, as provided at section 1886(m)(5)(E) of 
the Act.
    Several provisions of the Affordable Care Act, taken together, call 
on the Secretary to establish a national strategy to provide a 
comprehensive plan and priorities to improve the delivery of health 
care services, patient health outcomes, and population health through a 
transparent, collaborative process. This strategy, the National Quality 
Strategy, was released by the Secretary (available on the Web site at: 
http://www.healthcare.gov/center/reports/quality03212011a.html#es). We 
have used the priorities of the National Quality Strategy to guide 
identification of the proposed quality measures for LTCHs under section 
1886(m)(5) of the Act.
    We also applied the following additional considerations and 
criteria in selecting the proposed quality measures for LTCHs: whether 
a measure is included in, or facilitates alignment with, other Medicare 
and Medicaid programs; whether a measure addresses HHS priorities, such 
as prevention, care of chronic illness, high prevalence conditions, 
patient safety, patient and caregiver engagement, and care 
coordination; and whether a measure is evidence-based and may drive 
quality improvement as well as has a low probability of causing 
unintended adverse consequences, such as reduced LTCH admissions of 
higher risk patients.
    Furthermore, at the Listening Session held on November 15, 2010, 
for the Affordable Care Act section 3004 quality reporting programs, we 
sought input, and invited comments and suggestions, regarding quality 
reporting, quality measurement recommendation, prioritization, and 
feasibility, and did the same through the use of a Special Open Door 
Forum held on December 16, 2010, for the Affordable Care Act section 
3004 quality reporting programs. Transcripts for both the Listening 
Session and the Open Door Forum can be found on the CMS Web site at: 
http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting.
    In addition, we invited suggestions and input regarding the section 
3004 quality reporting programs to be sent to us using the CMS Web site 
mail box [email protected] found 
at http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting. We also 
received suggestions and input from a LTCH technical expert panel 
(TEP), convened by the CMS measure development contractor on January 
31, 2011, that reviewed and prioritized the quality measures identified 
by a LTCH environmental scan led by a CMS measures development 
contractor, RTI International, specifically for the LTCH quality 
reporting program. Specifically, this TEP reviewed measures found in 
the environmental scan and rated them for importance, scientific 
soundness, usability, and feasibility.
    In sum, in selecting the proposed quality measures discussed below, 
with applicability for FY 2014 and subsequent years, our goal is to 
achieve several objectives. First, the proposed measures should relate 
to the general aims of better care for the individual, better 
population health, and lower cost through better quality. Second, the 
proposed measures should promote improved quality specifically to the 
priorities that are of most relevance to LTCHs. These include patient 
safety, such as avoiding healthcare-associated infections (HAIs) and 
adverse events, better coordination of care, and person-centered and 
family-centered care. Third, the proposed measures should address 
improved quality for the primary role of LTCHs, which is to furnish 
extended medical care to individuals with clinically complex problems, 
such as multiple acute or chronic conditions, that need hospital-level 
care for relatively extended periods of greater than 25 days.
b. Proposed LTCH Quality Measures for FY 2014 Payment Determination
    We are proposing that, for the FY 2014 payment determination, LTCHs 
submit data on three quality measures: (1) Urinary Catheter-Associated 
Urinary Tract Infections (CAUTI); (2) Central Line Catheter-Associated 
Blood Stream Infection (CLABSI); and (3) Pressure Ulcers that are New 
or Have Worsened
    HAIs are a topic area widely acknowledged by the HHS Action Plan to 
Prevent HAIs, the Institute of Medicine (IOM), the National Priorities 
Partnership, and others as a high impact priority requiring measurement 
and improvement. Better care is one of the aims found in the National 
Quality Strategy, and patient safety is one of the priorities. 
Mitigating HAIs is essential in the improvement of patient safety, and, 
therefore, patient care. HAIs are among the leading causes of death in 
the United States and, therefore, are serious reportable events. CDC 
estimates that as many as 2 million infections are acquired each year 
in hospitals and result in approximately 90,000 deaths per year.\50\ 
HAIs not only put the patient at risk, but also increase the days of 
hospitalization required for patients and add considerable health care 
costs. Therefore, two of the three quality measures proposed are HAI 
measures.
---------------------------------------------------------------------------

    \50\ McKibben L; Horan T: Guidance on public reporting of 
healthcare-associated infections: Recommendations of the Healthcare 
Infection Control Practices Advisory Committee. AJIC 2005;33:217 
through 226.
---------------------------------------------------------------------------

    Other HAIs included in the HHS Action Plan to Prevent HAIs were 
under consideration for the LTCH quality reporting program beginning 
October 1, 2012. However, the TEP convened by the measure development 
contractor recommended the two proposed infection events, urinary 
catheter-associated urinary tract infection and central line catheter-
associated bloodstream infection (each an episode of an infection, such 
as CAUTI or CLABSI) as highly pertinent, and important for data 
collection as well as most ready and currently feasible for 
implementation in the LTCH setting. HAI quality measures are important 
for quality reporting, and we intend to propose additional HAI measures 
included in the HHS HAI Action Plan to Prevent HAIs through future 
rulemaking. These potential HAI quality measures are listed in our 
discussion of possible measures under consideration for future years. 
At this time, we are proposing the selection of the CLABSI and CAUTI 
events as the two initial HAI quality measures for the LTCH quality 
measure reporting program.
(1) Proposed FY 2014 LTCH Measure 1: Urinary Catheter-
Associated Urinary Tract Infections (CAUTI)
    The first measure we are proposing for LTCHs for purposes of the FY 
2014 payment determination is an application of the NQF-endorsed 
measure developed by CDC for hospital intensive care units (ICU) 
entitled (NQF CAUTI 0138) ``Urinary Catheter-Associated 
Urinary Tract Infection [CAUTI] rate per 1,000 urinary catheter days, 
for Intensive Care Unit Patients'' to all LTCH care units. This measure 
was developed by the CDC to measure the percentage of patients with 
CAUTIs in the ICU context. At the time we are developing this proposed 
rule, the measure we are applying, NQF CAUTI 0138, is 
undergoing measure

[[Page 25984]]

maintenance review by NQF. This review may result in a change in how 
the CDC calculates the aggregated data from using a rate for CAUTI, to 
the use of a Standardized Infection Ratio (SIR) of healthcare 
associated catheter-associated urinary tract infections. We are 
proposing to adopt the current measure in this rulemaking cycle. 
However, we intend to propose the adoption of any modifications to this 
measure that may result from the NQF review process in future 
rulemaking.
    While it is fast becoming a medical best practice to avoid urinary 
catheter use whenever possible, this may not always be possible with 
the LTCH patient population, due to the severity of their primary 
illnesses as well as comorbidities. Patients who are exposed to 
indwelling urinary catheters have a significantly higher risk of 
developing urinary tract infections (UTIs).
    UTIs are a common cause of morbidity and mortality. The HHS 
National Action Plan to Prevent HAIs identified catheter associated 
urinary tract infections as the leading type of HAI that is largely 
preventable, and the occurrence of which can be drastically reduced in 
order to reduce adverse health care related events and avoid excess 
costs.
    The urinary tract is the most common site of HAI, accounting for 
more than 30 percent of infections reported by acute care 
hospitals.\51\ Healthcare-associated UTIs are commonly attributed to 
catheterization of the urinary tract.
---------------------------------------------------------------------------

    \51\ Klevens RM, Edward JR, et al. Estimating health care-
associated infections and deaths in U.S. hospitals, 2002. Public 
Health Reports 2007;122:160-166.
---------------------------------------------------------------------------

    CAUTI can lead to such complications as cystitis, pyelonephritis, 
gram-negative bacteremia, prostatitis, epididymitis, and orchitis in 
males and, less commonly, endocarditis, vertebral osteomyelitis, septic 
arthritis, endophthalmitis, and meningitis in all patients. 
Complications associated with CAUTI also include discomfort to the 
patient, prolonged hospital stay, and increased cost and mortality. 
Each year, more than 13,000 deaths are associated with UTIs.\2\ 
Prevention of CAUTIs is discussed in the CDC/HICPAC document, Guideline 
for Prevention of Catheter-associated Urinary Tract Infections.\52\ The 
NQF-endorsed CAUTI measure we are proposing is currently collected by 
the National Healthcare Safety Network (NHSN) as part of State-mandated 
reporting and surveillance requirements for hospitals. We note that 
CDC's NHSN is a secure Internet-based surveillance system that 
currently has data collection forms and data submission and reporting 
mechanism in place for LTCHs. NHSN is currently used, in part, as one 
means by which certain State-mandated reporting and surveillance data 
are collected.
---------------------------------------------------------------------------

    \52\ Wong ES. Guideline for prevention of catheter-associated 
urinary tract infections. Infect Control 1981;2:126-30.
---------------------------------------------------------------------------

    We recognize that the NQF has endorsed this measure for the short 
term, acute care ICU setting, but believe that this measure is highly 
relevant to LTCHs, in that urinary catheters are commonly used in the 
LTCH care setting. As previously noted, NQF CAUTI 0138 is 
undergoing measure maintenance review by NQF. This review may result in 
a change in how CDC calculates the aggregated data from using a rate 
for CAUTI to the use of a SIR). We are proposing to adopt the current 
measure in this rule making cycle. However, we intend to propose the 
adoption of any modifications to this measure that may result from the 
NQF review process in future rulemaking. The TEP convened by the CMS 
measure development contractor on January 31, 2011, identified CAUTI as 
a high priority quality issue for LTCHs, and there was agreement by 
this TEP that this particular infection rate is worthy of surveillance 
within LTCHs. This measure is applicable for surveillance in long-term 
care units (CDC/NHSN Manual, Device-Associated Module, CAUTI Event, 
which is available on the CDC Web site at: http://www.cdc.gov/nhsn/pdfs/pscManual/7pscCAUTIcurrent.pdf.
    Section 1886(m)(5)(D)(ii) of the Act provides that ``[i]n the case 
of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) [of the 
Act], the Secretary may specify a measure that is not so endorsed as 
long as due consideration is given to measures that have been endorsed 
or adopted by a consensus organization identified by the Secretary.'' 
We reviewed the NQF's consensus-endorsed measures and were unable to 
identify any NQF-endorsed measures for urinary catheter-associated 
urinary tract infections for the LTCH setting. We are unaware of any 
other measures for catheter-associated urinary tract infections that 
have been approved by a voluntary consensus standards bodies and 
endorsed by NQF. We are proposing to adopt an application of this NQF-
endorsed (in the short-term acute care ICU setting) measure under the 
Secretary's authority to select non-NQF-endorsed measures. We are 
proposing to adopt the measure under the exception authority provided 
in section 1886(m)(5)(D)(ii) of the Act. As previously noted, NQF CAUTI 
0138 is undergoing measure maintenance review by NQF. This 
review may result in changes to this measure's specifications in how 
CDC calculates the aggregated data from using a rate for CAUTI to the 
use of a SIR. We are proposing to adopt the current measure in this 
rulemaking cycle. We intend to propose the adoption of any 
modifications to this measure that may result from the NQF review 
process in future rulemaking. We note that we intend to ask NQF to 
formally extend its endorsement of the CAUTI measure to the LTCH 
setting.
(2) FY 2014 Measure 2: Central Line Catheter-Associated 
Bloodstream Infection (CLABSI)
    The second measure we are proposing for LTCHs for the FY 2014 
payment determination is an application of a CDC-developed NQF-endorsed 
measure for hospital ICU and high-risk nursery patients; (NQF 
CLABSI 0139) ``Central Line Catheter-Associated Bloodstream Infection 
(CLABSI) Rate for ICU and High-Risk Nursery (HRN) Patients.'' This is a 
measure of the percentage of ICU and high-risk nursery patients who, 
over a certain amount of days, acquired central line catheter-
associated bloodstream infections over a specified number of line days. 
At the time we are developing this proposed rule, the measure we are 
proposing to apply, NQF CLABSI 0139, is undergoing measure 
maintenance review by NQF. This review may result in a change in how 
CDC calculates the aggregated data from using a rate for CLABSI to the 
use of a SIR of health care associated CLASBIs. We propose to adopt the 
measure in its current state in this rulemaking cycle. We intend to 
propose the adoption of any modifications to this measure that may 
result from the NQF review process in a future rule cycle.
    A central line is a catheter that health care providers often place 
in a large vein in the neck, chest, or groin to give medication or 
fluids or to collect blood for medical tests. Many LTCH patients have 
been discharged from short-term acute care hospital ICUs or ICU step-
down units with these central lines already in place. In other 
situations, a central line IV may be inserted during the patient's stay 
at the LTCH. Bloodstream infections are usually serious infections 
typically causing a prolongation of hospital stay and

[[Page 25985]]

increased cost and risk of mortality.\53\ An estimated 248,000 
bloodstream infections occur in U.S. hospitals each year.\54\ 
Furthermore, CLABSIs result in thousands of deaths each year and 
billions of dollars in added costs to the U.S. healthcare system, yet 
these infections are preventable. The CDC is providing guidelines and 
tools to the health care community to help reduce central line 
catheter-associated bloodstream infections. Techniques to prevent 
CLABSI through proper central line management are addressed in CDC's 
Healthcare Infection Control Practices Advisory Committee Guidelines 
for the Prevention of Intravascular Catheter Related Infections.\55\
---------------------------------------------------------------------------

    \53\ CDC/NHSN Manual. Device-Associated Module, CLABSI Event. 
Available at http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf, assessed on Jauary 20, 2011.
    \54\ Klevens RM, Edward JR, et al. Estimating health care-
associated infections and deaths in U.S. hospitals, 2002. Public 
Health Reports 2007;122:160-166.
    \55\ O'Grady NP, Alexander M, Dellinger EP, Gerberding JL, Heard 
SO, Maki DG, et al. Guidelines for the prevention of intravascular 
catheter-related infections. MMWR 2002;51(No. RR-10:1-26.
---------------------------------------------------------------------------

    We recognize that NQF endorsement of this measure is limited to ICU 
and HRN patients in hospital settings, but believe that this measure is 
also highly relevant in the LTCH setting because intravascular, central 
venous catheters (also known as a ``central line'') are used frequently 
due to the fact that these types of hospitals care for patients with 
complex medical problems which require LTCH stays and intensive 
treatment. As previously noted, NQF CLABSI 0139 is undergoing 
measure maintenance review by NQF. This review may result in changes to 
this measure's specifications in how CDC calculates the aggregated data 
from using a rate for CLABSI to the use of a SIR. We are proposing to 
adopt the current measure in this rulemaking cycle. We intend to 
propose the adoption of any modifications to this measure that may 
result from the NQF review process in future rulemaking. The CMS 
measure development contractor convened a TEP on January 31, 2011, 
which identified CLASBIs as a high priority quality issue for LTCHs; 
there was agreement by the TEP that this particular infection rate is 
worthy of surveillance within LTCHs. This measure is applicable for 
surveillance in long-term hospital care units (CDC/NHSN Manual, Device-
Associated Module, CLABSI Event, which is available at the CDC Web site 
at: http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf.
    Section 1886(m)(5)(D)(ii) of the Act provides that ``[i]n the case 
of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) [of the 
Act], the Secretary may specify a measure that is not so endorsed as 
long as due consideration is given to measures that have been endorsed 
or adopted by a consensus organization identified by the Secretary.'' 
We reviewed the NQF's consensus-endorsed measures, and were unable to 
identify any NQF endorsed measures for central line catheter-associated 
bloodstream infections for the LTCH setting. We are unaware of any 
other measures for CLABSI that have been approved by voluntary 
consensus standards bodies and endorsed by NQF. Therefore, we are 
proposing to adopt an application of this NQF-endorsed (for ICU and 
HRN) measure under the Secretary's authority provided in section 
1886(m)(5)(D)(ii) of the Act. As previously noted, NQF CLABSI 
0139 is undergoing measure maintenance review by NQF. This 
review may result in changes to this measure's specifications in how 
CDC calculates the aggregated data from using a rate for CLABSI to the 
use of a SIR. We are proposing to adopt the measure in its current 
state in this rulemaking cycle. We intend to propose the adoption of 
any modifications to this measure that may result from the NQF review 
process in future rulemaking. We note that we intend to ask NQF to 
formally extend its endorsement of the CLABSI measure to all care 
settings within the LTCH (that is, beyond the LTCH ICU).
(3) FY 2014 Measure 3: Pressure Ulcers
    The third measure we are proposing for LTCHs for purposes of the FY 
2014 payment determination is an application of a CMS-developed NQF-
endorsed measure for short-stay nursing home patients: (NQF NH-012-10) 
``Percent of Residents with Pressure Ulcers that Are New or Have 
Worsened.'' This measure includes the percentage of patients who have 
one or more stage 2-4 pressure ulcers that are new or worsened from a 
previous assessment. Consistent in our support of the National Quality 
Strategy principles, mitigating the occurrence or worsening of pressure 
ulcers is essential in the improvement of patient safety and, 
therefore, patient care.
    We recognize NQF endorsement of this measure is limited to short-
stay nursing home patients, but believe that this measure is highly 
relevant and a high priority quality issue for the care of LTCH 
patients. Pressure ulcers are high-volume and high-cost adverse events 
across the spectrum of health care settings from acute hospitals to 
home health. Patients in the LTCH setting are medically complex, have 
functional limitations that often are severe, and, therefore, are at 
high risk for the development, or worsening, of pressure ulcers. 
Pressure ulcers are serious medical conditions and an important measure 
of quality. Pressure ulcers can lead to serious, life-threatening 
infections, which substantially increase the total cost of care. 
Furthermore, as we noted in the FY 2008 IPPS final rule with comment 
period (72 FR 42705), in 2006 there were 322,946 reported cases of 
Medicare patients with a pressure ulcer as a secondary diagnosis--each 
case had an average charge of $40,381 for a hospital stay, for an 
annual total cost of 13 billion dollars. The prevalence of pressure 
ulcers in health care facilities is increasing, with some 2.5 million 
patients being treated annually for pressure ulcers in acute care 
facilities.56 57 In 2006, there were 503,300 acute hospital 
stays during which pressure ulcers were noted. This is a 78.9 percent 
increase from 1993 when there were about 281,300 hospital stays related 
to pressure ulcers.\58\
---------------------------------------------------------------------------

    \56\ Russo CA, Steiner C, Spector W.: Hospitalizations related 
to pressure ulcers among adults 18 years and older, 2006 (Healthcare 
Cost and Utilization Project Statistical Brief No. 64). December 
2008. Available at: http://www.hcup-us.ahrq.gov/reports/statbriefs/sb64.pdf.
    \57\ Institute for Healthcare Improvement: Relieve the pressure 
and reduce harm. May 21, 2007. Available at: http://www.ihi.org/IHI/Topics/PatientSafety/SafetyGeneral/ImprovementStories/FSRelievethePressureandReduceHarm.htm.
    \58\ MacLean DS.: Preventing & managing pressure sores. Caring 
for the Ages. March 2003;4(3):34-7. Available at: http://www.amda.com/publications/caring/march2003/policies.cfm.
---------------------------------------------------------------------------

    The CMS measure development contractor convened a TEP on January 
31, 2011, which identified this topic as highly relevant and a high 
priority quality issue for the care of LTCH patients, and the 
application of this measure (NQF NH-012-10) as appropriate for LTCHs.
    Section 1886(m)(5)(D)(ii) of the Act provides that ``[i]n the case 
of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) [of the 
Act], the Secretary may specify a measure that is not so endorsed as 
long as due consideration is given to measures that have been endorsed 
or adopted by a consensus organization identified by the Secretary.'' 
We

[[Page 25986]]

reviewed the NQFconsensus-endorsed measures, and we were unable to 
identify any NQF-endorsed measures for the monitoring of pressure 
ulcers that are new or worsened, for the LTCH setting. We are unaware 
of any other measure for the LTCH setting of new or worsened pressure 
ulcers that are approved by voluntary consensus standards bodies and 
endorsed by NQF. Therefore, we are proposing to adopt an application of 
this NQF-endorsed (for short-stay nursing home patients) measure for 
the LTCH quality reporting program under the Secretary's authority set 
forth at section 1886(m)(5)(D)(ii) of the Act. We also intend to ask 
NQF to extend its endorsement of the short-stay nursing home pressure 
ulcer measure specifically to the LTCH setting.
    We invite public comment on the proposed quality measures: (1) 
Urinary Catheter Associated Urinary Tract Infections (CAUTI); (2) 
Central Line Catheter-Associated Bloodstream Infection (CLABSI); and 
(3) Pressure Ulcers that are New or Have Worsened.
3. Possible LTCH Quality Measures Under Consideration for Future Years
    As discussed below, we seek to achieve a comprehensive set of 
quality measures to be available for widespread use for informed 
decision-making and quality improvement. Therefore, as stated 
previously, we intend to propose, through future rulemaking, measures 
included in the HHS Action Plan to Prevent HAIs. We also intend to 
propose through future rulemaking measures related to ventilator care 
such as the NQF-endorsed Institute for Healthcare Improvement process 
measure, NQF 0302, Ventilator Bundle, which is a comprehensive 
ventilator care-bundle process measure that is designed to facilitate 
protocols such as weaning, and mitigate ventilator-related infections, 
such as ventilator-associated pneumonia, and other complications. We 
also intend to propose additional outcome measures such as those 
related to acute care rehospitalization. We are aware of the limits 
related to feasibility in data submission at the present time. For 
example, there is no feasible means to submit the ventilator bundle 
process measure at this at this time, and are therefore currently 
identifying the data elements necessary for this measure using a data 
subset from the Continuity Assessment Record and Evaluation (CARE) data 
set as well as a submission mechanism. We also intend to propose, 
through future rulemaking, additional measures, such as those related 
to symptom management, physical restraints, medication use, falls, 
infections, and function, using the data subsets of the CARE data set 
necessary for measure calculations. We invite public comment and 
suggestions on the implementation of a standardized assessment 
instrument for LTCHs that would similarly support the calculation of 
quality measures. We also invite public comment on the measures and 
measures topics under consideration for future years set out below. In 
addition, we invite other suggestions and rationale to support the 
adoption of measures and topics not listed below.
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TP05MY11.078

[[Page 25988]]

BILLING CODE 4120-01-C
4. Proposed Data Submission Methods and Timelines
a. Proposed Method of Data Submission for HAIs
    We are proposing to adopt two proposed HAI quality measures, 
Central Line Catheter-Associated Blood Stream Infection (CLABSI) Event: 
CLABSI rate per 1000 central line days, and Urinary Catheter-Associated 
Urinary Tract Infection (CAUTI) Event: CAUTI rate per 1000 urinary 
catheter days. We are proposing to use CDC/NHSN for data collection and 
reporting for these two HAI measures (http://www.cdc.gov/nhsn/ ).
    As we noted above, the NHSN is a secure, Internet-based 
surveillance system. It is maintained by CDC, and can be utilized by 
all types of healthcare facilities in the United States, including 
LTCHs, acute care hospitals that collect and report HAIs through the 
NHSN as part of our Hospital IQR Program, as well as psychiatric 
hospitals, rehabilitation hospitals, outpatient dialysis centers, and 
ambulatory surgery centers. The NHSN enables health care facilities to 
submit their HAI event data, and access their data for the purposes of 
internal infection-surveillance.
    Facilities can also use the NHSN to obtain information on clinical 
practices known to prevent HAIs, information on the incidence or 
prevalence of multidrug-resistant organisms within their organizations, 
and information on other adverse events. Some States use the NHSN as a 
means of collecting State law-mandated HAI reporting. NHSN collects 
data via a Web-based tool hosted by the CDC and available at: http://www.cdc.nhsn. This reporting service is provided free of charge to 
healthcare facilities. In addition, CDC may have the ability to receive 
NHSN measures data from electronic health records (EHRs) in the near 
future. Currently, the data reporting of these two HAI events is 
completed through the NHSN. More than 20 States require hospitals to 
report HAIs using NHSN, and CDC supports more than 4,000 hospitals that 
are using the NHSN. Over 80 LTCHs currently submit HAI data via the 
NHSN.
    HAI event reporting, and meaningful HAI event surveillance by the 
LTCH, using the CDC/NHSN requires the submission of HAI events, 
regardless of payor. We believe delivery of high quality care in the 
LTCH setting is imperative. Collecting such quality data on all 
patients in the LTCH setting supports CMS' mission to ensure high 
quality care for Medicare beneficiaries. This will provide us with the 
most robust and accurate reflection of quality in the LTCH setting. 
Therefore, in order to facilitate and ensure that high quality care is 
delivered to Medicare beneficiaries in the LTCH setting, we are 
proposing that quality data related to HAIs be collected on all LTCH 
patients, regardless of payor.
    Currently the NHSN has data collection forms and data submission 
and reporting mechanisms in place that are in use by LTCHs for these 
CLABSI and CAUTI measures. Details related to the procedures using the 
NHSN for data submission can be found at: http://www.cdc.gov/nhsn. 
Specifically, details related to the procedures of using the NHSN for 
data submission and information on definitions, numerator data, 
denominator data and data analyses for CLABSI Event: CLABSI rate per 
1000 central line days calculated by dividing the number of CLABSI by 
the number of central line days and multiplying the result by 1000 can 
be found at http://www.cdc.gov/nhsn/PatientSafety.html. Details related 
to the CLABSI SIR can be found at http://www.cdc.gov/hai/pdfs/stateplans/SIR_05_25_2010.pdf. Details related to the procedures of 
using the NHSN for data submission and information on definitions, 
numerator data, denominator data and data analyses for CAUTI Event: 
CAUTI rate per 1000 urinary catheter days calculated by dividing the 
number of CAUTIs by the number of catheter days and multiplying the 
result by 1000 can also be found at http://www.cdc.gov/nhsn/PatientSafety.html.
    The reporting procedures for these HAI events would not be affected 
by the use of the SIR instead of the current rate calculation. CDC 
performs those calculations. Further information related to the use of 
the SIRs can be found on the Web sites at: http://www.hhs.gov/ash/initiatives/hai/appendices.html and http://www.cdc.gov/HAI/surveillance/QA_stateSummary.html.
b. Proposed Timeline for Data Reporting Related to HAIs
    CDC recommends that HAI reporting occur closest in time to the 
event, and further recommends that reporting occur no later than 30 
days following the event. To facilitate HAI surveillance and reporting 
for these proposed measures for payment determination, we are proposing 
an additional timeframe for reporting following the initial reporting 
period. We are proposing a data submission timeframe for NHSN event 
reporting for these proposed LTCH quality reporting program HAI 
measures of October 1, 2012 through December 31, 2012 for the 
determination of FY 2014 annual payment update, and that LTCHs submit 
their data no later than May 15, 2013.
    In order to better align with the current Hospital IQR Program HAI 
reporting processes (75 FR 20223), we also are proposing that all 
subsequent LTCH quality reporting cycles will be based on a calendar 
year cycle (for example, beginning January 1, 2013 through December 31, 
2013) for determination of the update to the standard Federal rate for 
each LTCH in FY 2015 and subsequent years. We are proposing that, 
beginning in CY 2013, and for all subsequent years, LTCHs would submit 
HAI event data via the NHSN, for four consecutive quarters of the 
calendar year. For example, for the FY 2015 annual payment update to 
the standard Federal rate, LTCHs would submit HAI data collected in the 
first quarter of CY 2013, the second quarter of CY 2013, the third 
quarter of CY 2013, and the fourth quarter of CY 2013.
    The proposed timelines for submission of quality data on the 
CLABSIs and CAUTIs for the FY 2015 annual payment update are set out 
below.

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[GRAPHIC] [TIFF OMITTED] TP05MY11.079

    LTCHs would have until the final submission deadline for the LTCH 
quality reporting program to submit their quarterly data to the NHSN. 
After the final submission deadline has occurred for each CY 2013 
quarter, CMS will receive a file from the CDC with the aggregated 
measurement rates of the specific calculations that have been generated 
by the NHSN for the LTCH quality reporting program and we will use 
those results for purposes of determining whether the LTCH met the 
requirements for the LTCH quality reporting program. We invite public 
comments on the proposed reporting cycle for LTCHs.
    In alignment with the Hospital IQR Program, (75 FR 50223), we also 
are proposing that once quarterly each LTCH will utilize an automated 
report function that will be made available to submitters in the NHSN, 
to generate a quarterly report containing individual LTCH-level 
numerator, denominator, and exclusion counts for these two HAI measures 
specifically. CDC will create an automated LTCH quality program report 
function and add it to NHSN's reporting functionalities. While LTCHs 
may be reporting other data elements to CDC for other reporting 
programs (that is: State-mandated surveillance programs), the quarterly 
LTCH quality program report that would be generated within NHSN would 
only contain those data elements needed to calculate the two measures 
currently being proposed for the LTCH quality reporting program. We 
would only receive this aggregated data from CDC.
    We also are proposing that any further details regarding data 
submission and reporting requirements for HAI measures to be reported 
via NHSN would be posted on the CMS Web site at: http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no later than January 31, 2012.
    Requirements for NHSN participation, measure specifications, and 
data collection can be found at the Web site at: http://www.cdc.gov/nhsn/. LTCHs are encouraged to visit this Web site in order to view the 
NHSN enrollment and reporting requirements. Training resources are 
available there. In order to allow adequate time for enrollment in the 
NHSN, and for training to take place, should these measures be 
finalized, additional details related to this reporting program's 
requirements, such as when enrollment is due to occur, will be 
announced by no later than January 31, 2012, on the CMS Web site at: 
http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/. In the 
announcement, we would propose to provide guidance on the 
specifications, definitions and reporting requirements.
    We invite public comments on the proposed HAI NHSN submission 
requirements, reporting cycle, and reporting timeline for LTCHs.
c. Proposed Method of Data Collection and Submission for the Pressure 
Ulcer Measure Data
    We are proposing that the pressure ulcer data elements necessary to 
calculate the pressure ulcer measure would be identical to those data 
elements collected through the Minimum Data Set 3.0 (MDS 3.0), which is 
a reporting instrument used in nursing homes The current MDS 3.0 
pressure ulcer items evolved as an outgrowth of CMS' work to develop a 
standardized patient assessment instrument, referred to as the 
Continuity Assessment Record and Evaluation tool, or CARE. The current 
MDS 3.0 pressure ulcer items are also currently used in the calculation 
of the NQF-endorsed nursing home pressure ulcer measure, Percent of 
Residents With Pressure Ulcers That Are New or Worsened [Short Stay] 
(NQF NH-012-10). We note that the MDS data elements were supported by 
the National Pressure Ulcer Advisory Panel (NPUAP).
    We believe that to support the standardized collection and 
calculation of the LTCH pressure ulcer quality measure will require the 
use of a subset of the standardized CARE instrument, and thus we are 
proposing the use of a subset of the CARE instrument's assessment items 
for data collection. We will be using specifically the pressure ulcer 
data elements necessary to calculate the pressure ulcer measure, and 
those data items are identical to those data elements collected through 
the Minimum Data Set 3.0 (MDS 3.0). The current MDS 3.0 pressure ulcer 
data items can be found at the CMS Web site at: https://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp.\59\ This 
data assessment subset will allow identical data elements to be 
collected in LTCHs and in nursing homes.
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    \59\ https://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp (Look for Downloads. Select MDS 3.0 
Item Subsets v1.002. Click on MDS 3.0 ALL Items. Scroll down to 
Section M, Skin Conditions, items M0100-M0900.)
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    The CARE assessment instrument, was developed and tested in the 
post-acute care payment reform demonstration (which included LTCHs) as 
required by section 5008 of the Deficit Reduction Act (DRA) (Pub. L. 
109-171). It is a standardized assessment instrument that can be used 
across all postacute care sites to measure functional status and other 
factors during treatment and at discharge from each provider. (For more 
information, we refer readers to the following Web site: http://www.pacdemo.rti.org.) CARE was tested

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over the last 2 years in 199 providers, of which 28 were LTCHs. 
Participant feedback suggested most of these items are already 
collected by LTCHs during their intake process and in monitoring the 
patients' health status during the stay. Importantly, the CARE items 
meet Federal interoperable data standards and should be transferable by 
most data systems. A data collection mechanism for transferring the 
data to CMS is currently under development, and it is anticipated to be 
similar to the current systems used to report assessment data for 
payment and quality monitoring in the other post acute care sites.
    We believe that, for the collection of data necessary to calculate 
this pressure ulcer measure, using a CARE subset of standardized data 
elements to collect, report, and calculate the proposed pressure ulcer 
quality measure will drive uniformity across settings which will lead 
to better quality of care in LTCHs and, ultimately, across the 
continuum of care settings. We also believe that the use of a 
standardized method of communication will lead to better informed 
decision making.
    If this proposal is finalized, additional details regarding the 
data elements needed to calculate this measure, submission requirements 
and specifications used for these data elements to calculate the 
proposed pressure ulcer quality measure using a subset of CARE 
instrument will be published on the CMS Web site at http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no later than January 31, 2012.
    We are proposing to use standardized assessment data elements for 
data collection that would support the calculation of quality measures 
in the LTCHs. Specifically, we are proposing to use a subset of the 
CARE instrument for the collection of the data elements necessary to 
calculate the proposed quality measure, the Percent of New or Worsened 
Pressure Ulcers.
    We invite public comment on the use of a subset of CARE items for 
the purposes of data collection for this proposed measure: Percent of 
Patients with New or Worsened Pressure Ulcers. We invite public comment 
on this proposal for the calculation of the proposed quality measure 
for pressure ulcers.
d. Proposed Timeline for Data Reporting Related to Pressure Ulcers
    The delivery of high quality care in the LTCH setting is 
imperative. We believe that collecting quality data on all patients in 
the LTCH setting supports CMS' mission to ensure quality care for 
Medicare beneficiaries. Collecting data on all patients provides the 
most robust and accurate reflection of quality in the LTCH setting. 
Accurate representation of quality provided in LTCHs is best conveyed 
using data related to pressure ulcers on all LTCH patients, regardless 
of payor. Thus, so as to facilitate and ensure this effort, we are 
proposing that quality data related to pressure ulcers shall be 
collected on all LTCH patients, regardless of payor, using a subset of 
the CARE data collection instrument in accordance with the timetable 
and schedule set forth in section VII.C.4.b. of this preamble. We will 
provide further details about the data collection instrument on the CMS 
Web site http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ as 
these details become available. We invite public comments on the 
proposed reporting cycle for LTCHs.
5. Public Reporting and Availability of Data Submitted
    Under section 1886(m)(5)(E) of the Act, the Secretary is required 
to establish procedures for making any quality data submitted by LTCHs 
available to the public. Such procedures will ensure that a LTCH has 
the opportunity to review the data that is to be made public with 
respect to the LTCH prior to such data being made public. The Secretary 
will report quality measures that relate to services furnished in LTCHs 
on the CMS Web site. Currently, the agency is developing plans 
regarding the implementation of this provision. Procedures for public 
reporting will be proposed through future rule making. At this time no 
procedures or timeline has been established for public reporting of 
data.

D. Proposed Rebasing and Revising of the Market Basket Used Under the 
LTCH PPS

1. Background
    The input price index (that is, the market basket) that was used to 
develop the LTCH PPS for FY 2003 was the ``excluded hospital with 
capital'' market basket. That market basket was based on 1997 Medicare 
cost report data and included data for Medicare-participating IRFs, 
IPFs, LTCHs, cancer hospitals, and children's hospitals. Although the 
term ``market basket'' technically describes the mix of goods and 
services used in providing hospital care, this term is also commonly 
used to denote the input price index (that is, cost category weights 
and price proxies combined) derived from that market basket. 
Accordingly, the term ``market basket,'' as used in this section, 
refers to an input price index.
    Beginning with RY 2007, LTCH PPS payments were updated using a FY 
2002-based market basket reflecting the operating and capital cost 
structures for IRFs, IPFs, and LTCHs (hereafter referred to as the 
rehabilitation, psychiatric, and long-term care (RPL) market basket). 
We excluded cancer and children's hospitals from the RPL market basket 
because their payments are based entirely on reasonable costs subject 
to rate-of-increase limits established under the authority of section 
1886(b) of the Act, which are implemented in regulations at Sec.  
413.40. They are not paid under a PPS. Also, the FY 2002 cost 
structures for cancer and children's hospitals are noticeably different 
than the cost structures of the freestanding IRFs, freestanding IPFs, 
and LTCHs. A complete discussion of the FY 2002-based RPL market basket 
appears in the RY 2007 LTCH PPS final rule (71 FR 27810 through 27817).
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 21062), 
we expressed our interest in exploring the possibility of creating a 
stand-alone LTCH market basket that reflects the cost structures of 
only LTCH providers. However, as we discussed in the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (74 FR 43967 through 43968), we are conducting 
further research to assist us in understanding the reasons for the 
variations in costs and cost structure between freestanding IRFs and 
hospital-based IRFs. We also are researching the reasons for similar 
variations in costs and cost structure between freestanding IPFs and 
hospital-based IPFs. We remain unable to sufficiently understand the 
observed differences in costs and cost structures between hospital-
based IRFs and freestanding IRFs and between hospital-based IPFs and 
freestanding IPFs. Therefore, we do not believe it is appropriate at 
this time to propose stand-alone market baskets for IRFs, IPFs, and 
LTCHs.
    We are currently exploring the viability of creating two separate 
market baskets from the current RPL market basket: One market basket 
would include freestanding IRFs and freestanding IPFs and would be used 
to update payments under both the IPF and IRF payment systems. The 
other market basket would be a stand-alone LTCH market basket. 
Depending on the outcome of our research, we may propose a stand-alone 
LTCH market basket in the next LTCH PPS update cycle. We invite public 
comment on the possibility of using this type of market basket to 
update LTCH payments in the future.
    Under the LTCH PPS for FY 2012, we are proposing to rebase and 
revise the

[[Page 25991]]

FY 2002-based RPL market basket by creating a proposed FY 2008-based 
RPL market basket as described below. In the following discussion, we 
provide an overview of the market basket and describe the methodologies 
we are proposing to use for purposes of determining the operating and 
capital portions of the proposed FY 2008-based RPL market basket.
2. Overview of the Proposed FY 2008-Based RPL Market Basket
    The proposed FY 2008-based RPL market basket is a fixed-weight, 
Laspeyres-type price index. A Laspeyres price index measures the change 
in price, over time, of the same mix of goods and services purchased in 
the base period. Any changes in the quantity or mix of goods and 
services (that is, intensity) purchased over time are not measured.
    The index itself is constructed in three steps. First, a base 
period is selected (in this proposed rule, we are proposing to use FY 
2008 as the base period) and total base period expenditures are 
estimated for a set of mutually exclusive and exhaustive spending 
categories, with the proportion of total costs that each category 
represents being calculated. These proportions are called cost or 
expenditure weights. Second, each expenditure category is matched to an 
appropriate price or wage variable, referred to as a price proxy. In 
nearly every instance, these price proxies are derived from publicly 
available statistical series that are published on a consistent 
schedule (preferably at least on a quarterly basis). Finally, the 
expenditure weight for each cost category is multiplied by the level of 
its respective price proxy. The sum of these products (that is, the 
expenditure weights multiplied by their price levels) for all cost 
categories yields the composite index level of the market basket in a 
given period. Repeating this step for other periods produces a series 
of market basket levels over time. Dividing an index level for a given 
period by an index level for an earlier period produces a rate of 
growth in the input price index over that timeframe.
    As noted above, the market basket is described as a fixed-weight 
index because it represents the change in price over time of a constant 
mix (quantity and intensity) of goods and services needed to furnish 
hospital services. The effects on total expenditures resulting from 
changes in the mix of goods and services purchased subsequent to the 
base period are not measured. For example, a hospital hiring more 
nurses to accommodate the needs of patients would increase the volume 
of goods and services purchased by the hospital, but would not be 
factored into the price change measured by a fixed-weight hospital 
market basket. Only when the index is rebased would changes in the 
quantity and intensity be captured, with those changes being reflected 
in the cost weights. Therefore, we rebase the market basket 
periodically so the cost weights reflect recent changes in the mix of 
goods and services that hospitals purchase (hospital inputs) to furnish 
inpatient care between base periods.
3. Proposed Rebasing and Revising of the RPL Market Basket
    We are inviting public comments on our proposed methodological 
changes to the RPL market basket. The terms ``rebasing'' and 
``revising,'' while often used interchangeably, actually denote 
different activities. ``Rebasing'' means moving the base year for the 
structure of costs of an input price index (for example, in this 
proposed rule, we are proposing to shift the base year cost structure 
for the RPL market basket from FY 2002 to FY 2008). ``Revising'' means 
changing data sources, price proxies, or methods, used to derive the 
input price index. For FY 2012, we are proposing to rebase and revise 
the market basket used to update the LTCH PPS.
a. Development of Cost Categories
(1) Medicare Cost Reports
    The proposed FY 2008-based RPL market basket consists of several 
major cost categories derived from the FY 2008 Medicare cost reports 
for freestanding IRFs, freestanding IPFs, and LTCHs, including wages 
and salaries, pharmaceuticals, professional liability insurance, 
capital, and a residual. These FY 2008 Medicare cost reports include 
providers whose cost report begin date is on or between October 1, 
2007, and September 30, 2008. We are proposing to use FY 2008 as the 
base year because we believe that the Medicare cost reports for this 
year represent the most recent, complete set of Medicare cost report 
data available for IRFs, IPFs, and LTCHs. However, there is an issue 
with obtaining data specifically for benefits and contract labor from 
this set of FY 2008 Medicare cost reports because IRFs, IPFs, and LTCHs 
were not required to complete the Medicare cost report worksheet from 
which these data were collected (Worksheet S-3, Part II). As a result, 
only a small number of providers (less than 30 percent) reported data 
for these categories, and we do not expect these FY 2008 data to 
improve over time. However, because IRFs, IPFs, and LTCHs were not 
required to submit data for Worksheet S-3, Part II in previous cost 
reporting years, we have always had this issue of incomplete Medicare 
cost report data for benefits and contract labor (including when we 
finalized the FY 2002-based RPL market basket). Due to the incomplete 
benefits and contract labor data for IRFs, IPFs, and LTCHs, we are 
proposing to develop these cost weights using FY 2008 Medicare cost 
report data for IPPS hospitals (similar to the method that was used for 
the FY 2002-based RPL market basket). We provide additional detail on 
this approach later in this section.
    Because our goal is to measure cost shares that are reflective of 
case-mix and practice patterns associated with providing services to 
Medicare beneficiaries, we are proposing to limit our selection of 
Medicare cost reports to those from hospitals that have a Medicare 
average length of stay that is within a comparable range of their total 
facility average length of stay. We believe this provides a more 
accurate reflection of the structure of costs for Medicare covered 
days. We are proposing to use the cost reports of LTCHs and IRFs with 
Medicare average lengths of stay within 15 percent (that is, 15 percent 
higher or lower) of the total facility average length of stay for the 
hospital. This is the same edit we applied to derive the FY 2002-based 
RPL market basket and generally includes those LTCHs and IRFs with 
Medicare average length of stay within approximately 5 days of the 
facility average length of stay of the hospital.
    We are proposing to use a less stringent measure of Medicare 
average length of stay for IPFs. For this provider type, and in order 
to produce a robust sample size, we are proposing to use those 
facilities' Medicare cost reports whose average length of stay is 
within 30 or 50 percent (depending on the total facility average length 
of stay) of the total facility average length of stay. This is the same 
edit we applied to derive the FY 2002-based RPL market basket.
    We applied these length of stay edits to first obtain a set of cost 
reports for facilities that have a Medicare length of stay within a 
comparable range of their total facility length of stay. Using this set 
of Medicare cost reports, we then calculated cost weights for four cost 
categories and a residual as represented by all other costs directly 
from the FY 2008 Medicare cost reports for freestanding IRFs, 
freestanding IPFs, and LTCHs (found in Table VII.D-1 below). These 
Medicare cost report cost weights were then supplemented with 
information obtained from other data sources (explained in more detail

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below) to derive the proposed FY 2008-based RPL market basket cost 
weights.
[GRAPHIC] [TIFF OMITTED] TP05MY11.080

(2) Other Data Sources
    In addition to the IRF, IPF and LTCH Medicare cost reports for 
freestanding IRFs, freestanding IPFs, and LTCHs, the other data sources 
we used to develop the proposed FY 2008-based RPL market basket cost 
weights were the FY 2008 IPPS Medicare cost reports and the 2002 
Benchmark Input-Output (I-O) Tables created by the Bureau of Economic 
Analysis (BEA), U.S. Department of Commerce. The FY 2008 Medicare cost 
reports include providers whose cost report begin date is on or between 
October 1, 2007, and September 30, 2008.
    As noted above, the proposed FY 2008-based RPL cost weights for 
benefits and contract labor were derived using FY 2008-based IPPS 
Medicare cost reports. We used these Medicare cost reports to calculate 
cost weights for ``wages and salaries,'' ``benefits,'' and ``contract 
labor'' for IPPS hospitals for FY 2008. For the proposed benefits cost 
weight for the FY 2008-based RPL market basket, the ratio of the FY 
2008 IPPS benefits cost weight to the FY 2008 IPPS wages and salaries 
cost weight was applied to the RPL wages and salaries cost weight. 
Similarly, the ratio of the FY 2008 IPPS contract labor cost weight to 
the FY 2008 IPPS wages and salaries cost weight was applied to the RPL 
wages and salaries cost weight to derive a contract labor cost weight 
for the proposed FY 2008-based RPL market basket.
    The ``All other'' cost category is divided into other hospital 
expenditure category shares using the 2002 BEA Benchmark I-O data 
following the removal of the portions of the ``all other'' cost 
category provided in Table VII.D-1 that are attributable to the 
benefits and contract labor cost categories. The BEA Benchmark I-O data 
are generally scheduled for publication every 5 years. The most recent 
data available are for 2002. BEA also produces Annual I-O estimates; 
however, the 2002 Benchmark I-O data represent a much more 
comprehensive and complete set of data that are derived from the 2002 
Economic Census. For the FY 2002-based RPL market basket, we used the 
1997 Benchmark I-O data. We are proposing to use the 2002 Benchmark I-O 
data in the FY 2008-based RPL market basket. Instead of using the less 
detailed Annual I-O data, we aged the 2002 Benchmark I-O data forward 
to 2008. The methodology we used to age the data forward involves 
applying the annual price changes from the respective price proxies to 
the appropriate cost categories. We repeat this practice for each year.
    The ``all other'' cost category expenditure shares are determined 
as being equal to each category's proportion to total ``all other'' 
expenditures based on the aged 2002 Benchmark I-O data. For instance, 
if the cost for telephone services represented 10 percent of the sum of 
the ``all other'' Benchmark I-O hospital expenditures, then telephone 
services would represent 10 percent of the ``all other'' cost category 
of the RPL market basket.
b. Final Cost Category Computation
    As stated previously, for this FY 2012 rebasing proposal, we are 
proposing to use the Medicare cost reports for IRFs, IPFs, and LTCHs to 
derive four major cost categories. The proposed FY 2008-based RPL 
market basket includes two additional cost categories that were not 
broken out separately in the FY 2002-based RPL market basket: 
``Administrative and Business Support Services'' and ``Financial 
Services.'' The inclusion of these two additional cost categories, 
which are derived using the Benchmark I-O data, is consistent with the 
addition of these two cost categories to the FY 2006-based IPPS market 
basket (74 FR 43845). We are proposing to break out both categories so 
we can better match their respective expenses with more appropriate 
price proxies. A thorough discussion of our rationale for each of these 
cost categories is provided below in section VII.D.3.f. of this 
proposed rule. Also, the proposed FY 2008-based RPL market basket 
excludes one cost category: ``Photographic Supplies.'' The 2002 
Benchmark I-O weight for this category is considerably smaller than the 
1997 Benchmark I-O weight, presently accounting for less than one-tenth 
of one percentage point of the RPL market basket. Therefore, we are 
proposing to include the photographic supplies costs in the 
``Chemicals'' cost category weight with other similar chemical 
products.
    We are not proposing to change our definition of the labor-related 
share. However, we are proposing to rename our aggregate cost 
categories from ``labor-intensive'' and ``nonlabor-intensive'' services 
to ``labor-related'' and ``nonlabor-related'' services. This is 
consistent with the FY 2006-based IPPS market basket (74 FR 43845). As 
discussed in more detail below and similar to the FY 2002-based RPL 
market basket, we classify a cost category as labor-related and include 
it in the labor-related share if the cost category is defined as being 
labor-intensive and its cost varies with the local labor market. In 
previous regulations, we grouped cost categories that met both of these 
criteria into labor-intensive services. We believe the

[[Page 25993]]

proposed new labels more accurately reflect the concepts that they are 
intended to convey. We are not proposing to change our definition of 
the labor-related share because we continue to classify a cost category 
as labor-related if the costs are labor-intensive and vary with the 
local labor market.
c. Selection of Price Proxies
    After computing the FY 2008 cost weights for the proposed rebased 
RPL market basket, it was necessary to select appropriate wage and 
price proxies to reflect the rate of price change for each expenditure 
category. With the exception of the proxy for Professional Liability 
Insurance, all of the proxies for the operating portion of the proposed 
FY 2008-based RPL market basket are based on Bureau of Labor Statistics 
(BLS) data and are grouped into one of the following BLS categories:
    Producer Price Indexes--Producer Price Indexes (PPIs) measure price 
changes for goods sold in markets other than the retail market. PPIs 
are preferable price proxies for goods and services that hospitals 
purchase as inputs because these PPIs better reflect the actual price 
changes encountered by hospitals. For example, we use a PPI for 
prescription drugs, rather than the Consumer Price Index (CPI) for 
prescription drugs, because hospitals generally purchase drugs directly 
from a wholesaler. The PPIs that we use measure price changes at the 
final stage of production.
    Consumer Price Indexes--Consumer Price Indexes (CPIs) measure 
change in the prices of final goods and services bought by the typical 
consumer. Because they may not represent the price encountered by a 
producer, we used CPIs only if an appropriate PPI was not available, or 
if the expenditures were more similar to those faced by retail 
consumers in general rather than by purchasers of goods at the 
wholesale level. For example, the CPI for food purchased away from home 
is used as a proxy for contracted food services.
    Employment Cost Indexes--Employment Cost Indexes (ECIs) measure the 
rate of change in employee wage rates and employer costs for employee 
benefits per hour worked. These indexes are fixed-weight indexes and 
strictly measure the change in wage rates and employee benefits per 
hour. Appropriately, they are not affected by shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. Availability means that the proxy 
is publicly available. Finally, relevance means that the proxy is 
applicable and representative of the cost category weight to which it 
is applied. The proposed PPIs, CPIs, and ECIs selected meet these 
criteria.
    Table VII.D-2 below sets forth the proposed FY 2008-based RPL 
market basket, including cost categories and their respective weights 
and price proxies. For comparison purposes, the corresponding FY 2002-
based RPL market basket cost weights also are listed. For example, 
``Wages and Salaries'' are 49.447 percent of total costs in the 
proposed FY 2008-based RPL market basket compared to 52.895 percent for 
the FY 2002-based RPL market basket. ``Employee Benefits'' are 12.831 
percent in the proposed FY 2008-based RPL market basket compared to 
12.982 percent for the FY 2002-based RPL market basket. As a result, 
compensation costs (wages and salaries plus employee benefits) for the 
proposed FY 2008-based RPL market basket are 62.278 percent of total 
costs compared to 65.877 percent for the FY 2002-based RPL market 
basket.
    Following Table VII.D-2 is a summary outlining the choice of the 
proxies we are proposing to use for the operating portion of the FY 
2008-based RPL market basket. The price proxies proposed for the 
capital portion are described in more detail in the capital methodology 
section below in section VII.D.3.d. of this proposed rule.
    We note that the proxies for the operating portion of the FY 2008-
based RPL market basket are the same as those used for the FY 2006-
based IPPS operating market basket. Because these proxies meet our 
criteria of reliability, timeliness, availability, and relevance, we 
believe they are the best measures of price changes for the cost 
categories. For further discussion on the FY 2006-based IPPS market 
basket, we refer readers to the discussion in the FY 2010 IPPS/RY 2010 
LTCH PPS final rule (74 FR 43843).
BILLING CODE 4120-01-P

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[[Page 25997]]

BILLING CODE 4120-01-C
(1) Wages and Salaries
    We are proposing to use the ECI for Wages and Salaries for Hospital 
Workers (All Civilian) (BLS series code CIU1026220000000I) to measure 
the price growth of this cost category. This same proxy was used in the 
FY 2002-based RPL market basket.
(2) Employee Benefits
    We are proposing to use the ECI for Employee Benefits for Hospital 
Workers (All Civilian) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based RPL market 
basket.
(3) Electricity
    We are proposing to use the PPI for Commercial Electric Power (BLS 
series code WPU0542). This same proxy was used in the FY 2002-based RPL 
market basket.
(4) Fuel, Oil, and Gasoline
    For the FY 2002-based RPL market basket, this category only 
included expenses classified under North American Industry 
Classification System (NAICS) 21 (Mining). We used the PPI for 
Commercial Natural Gas (BLS series code WPU0552) as a proxy for this 
cost category. For the proposed FY 2008-based market basket, we are 
proposing to add costs to this category that had previously been 
grouped in other categories. The added costs include petroleum-related 
expenses under NAICS 324110 (previously captured in the miscellaneous 
category), as well as petrochemical manufacturing classified under 
NAICS 325110 (previously captured in the chemicals category). These 
added costs represent 80 percent of the hospital industry's fuel, oil, 
and gasoline expenses (or 80 percent of this category). Because the 
majority of the industry's fuel, oil, and gasoline expenses originate 
from petroleum refineries (NAICS 324110), we are proposing to use the 
PPI for Petroleum Refineries (BLS series code PCU324110324110) as the 
proxy for this cost category.
(5) Water and Sewage
    We are proposing to use the CPI for Water and Sewerage Maintenance 
(All Urban Consumers) (BLS series code CUUR0000SEHG01) to measure the 
price growth of this cost category. This same proxy was used in the FY 
2002-based RPL market basket.
(6) Professional Liability Insurance
    We are proposing to proxy price changes in hospital professional 
liability insurance premiums (PLI) using percentage changes as 
estimated by the CMS Hospital Professional Liability Index. To generate 
these estimates, we collect commercial insurance premiums for a fixed 
level of coverage while holding nonprice factors constant (such as a 
change in the level of coverage). This method is also used to proxy PLI 
price changes in the Medicare Economic Index (75 FR 73268). This same 
proxy was used in the FY 2002-based RPL market basket.
(7) Pharmaceuticals
    We are proposing to use the PPI for Pharmaceuticals for Human Use, 
Prescription (BLS series code WPUSI07003) to measure the price growth 
of this cost category. We note that we are not making a change to the 
PPI that is used to proxy this cost category. Although there was a 
recent change to the BLS naming convention for this series, this is the 
same proxy that was used in the FY 2002-based RPL market basket.
(8) Food: Direct Purchases
    We are proposing to use the PPI for Processed Foods and Feeds (BLS 
series code WPU02) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
(9) Food: Contract Services
    We are proposing to use the CPI for Food Away From Home (All Urban 
Consumers) (BLS series code CUUR0000SEFV) to measure the price growth 
of this cost category. This same proxy was used in the FY 2002-based 
RPL market basket.
(10) Chemicals
    We are proposing to use a blended PPI composed of the PPI for 
Industrial Gas Manufacturing (NAICS 325120) (BLS series code 
PCU325120325120P), the PPI for Other Basic Inorganic Chemical 
Manufacturing (NAICS 325180) (BLS series code PCU32518-32518-), the PPI 
for Other Basic Organic Chemical Manufacturing (NAICS 325190) (BLS 
series code PCU32519-32519-), and the PPI for Soap and Cleaning 
Compound Manufacturing (NAICS 325610) (BLS series code PCU32561-32561-
). Using the 2002 Benchmark I-O data, we found that these NAICS 
industries accounted for approximately 90 percent of the hospital 
industry's chemical expenses.
    Therefore, we are proposing to use this blended index because we 
believe its composition better reflects the composition of the 
purchasing patterns of hospitals than does the PPI for Industrial 
Chemicals (BLS series code WPU061), the proxy used in the FY 2002-based 
RPL market basket. Table VII.D-3 below shows the weights for each of 
the four PPIs used to create the blended PPI, which we determined using 
the 2002 Benchmark I-O data.
[GRAPHIC] [TIFF OMITTED] TP05MY11.084

 (11) Medical Instruments
    We are proposing to use the PPI for Medical, Surgical, and Personal 
Aid Devices (BLS series code WPU156) to measure the price growth of 
this cost category. In the 1997 Benchmark I-O data, approximately half 
of the expenses classified in this category were for surgical and 
medical instruments. Therefore, we used the PPI for Surgical and 
Medical Instruments and Equipment (BLS series code WPU1562) to proxy 
this category in the FY 2002-based RPL market basket. The 2002 
Benchmark I-O data show that surgical and medical instruments now 
represent only 33 percent of these expenses and

[[Page 25998]]

that the largest expense category is surgical appliance and supplies 
manufacturing (corresponding to BLS series code WPU1563). Due to this 
reallocation of costs over time, we are proposing to change the price 
proxy for this cost category to the more aggregated PPI for Medical, 
Surgical, and Personal Aid Devices.
(12) Photographic Supplies
    We are proposing to eliminate the cost category specific to 
photographic supplies for the proposed FY 2008-based RPL market basket. 
These costs would now be included in the Chemicals cost category 
because the costs are presently reported as all other chemical 
products. Notably, although we would be eliminating the specific cost 
category, these costs would still be accounted for within the RPL 
market basket.
(13) Rubber and Plastics
    We are proposing to use the PPI for Rubber and Plastic Products 
(BLS series code WPU07) to measure price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
(14) Paper and Printing Products
    We are proposing to use the PPI for Converted Paper and Paperboard 
Products (BLS series code WPU0915) to measure the price growth of this 
cost category. This same proxy was used in the FY 2002-based RPL market 
basket.
(15) Apparel
    We are proposing to use the PPI for Apparel (BLS series code 
WPU0381) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
(16) Machinery and Equipment
    We are proposing to use the PPI for Machinery and Equipment (BLS 
series code WPU11) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
(17) Miscellaneous Products
    We are proposing to use the PPI for Finished Goods Less Food and 
Energy (BLS series code WPUSOP3500) to measure the price growth of this 
cost category. Using this index would remove the double-counting of 
food and energy prices, which would already be captured elsewhere in 
the market basket. This same proxy was used in the FY 2002-based RPL 
market basket.
(18) Professional Fees: Labor-Related
    We are proposing to use the ECI for Compensation for Professional 
and Related Occupations (Private Industry) (BLS series code 
CIS2020000120000I) to measure the price growth of this category. It 
includes occupations such as legal, accounting, and engineering 
services. This same proxy was used in the FY 2002-based RPL market 
basket.
(19) Administrative and Business Support Services
    We are proposing to use the ECI for Compensation for Office and 
Administrative Support Services (Private Industry) (BLS series code 
CIU2010000220000I) to measure the price growth of this category. 
Previously these costs were included in the All Other: Labor-intensive 
category (now renamed the All Other: Labor-related Services category), 
and were proxied by the ECI for Compensation for Service Occupations. 
We believe that this compensation index better reflects the changing 
price of labor associated with the provision of administrative services 
and its incorporation represents a technical improvement to the market 
basket.
(20) All Other: Labor-Related Services
    We are proposing to use the ECI for Compensation for Service 
Occupations (Private Industry) (BLS series code CIU2010000300000I) to 
measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based RPL market basket.
(21) Professional Fees: Nonlabor-Related
    We are proposing to use the ECI for Compensation for Professional 
and Related Occupations (Private Industry) (BLS series code 
CIS2020000120000I) to measure the price growth of this category. This 
is the same price proxy that we are proposing to use for the 
Professional Fees: Labor-related cost category.
(22) Financial Services
    We are proposing to use the ECI for Compensation for Financial 
Activities (Private Industry) (BLS series code CIU201520A000000I) to 
measure the price growth of this cost category. Previously these costs 
were included in the All Other: Nonlabor-intensive category (now 
renamed the All Other: Nonlabor-related Services category), and were 
proxied by the CPI for All Items. We believe that this compensation 
index better reflects the changing price of labor associated with the 
provision of financial services and its incorporation represents a 
technical improvement to the market basket.
(23) Telephone Services
    We are proposing to use the CPI for Telephone Services (BLS series 
code CUUR0000SEED) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
(24) Postage
    We are proposing to use the CPI for Postage (BLS series code 
CUUR0000SEEC01) to measure the price growth of this cost category. This 
same proxy was used in the FY 2002-based RPL market basket.
(25) All Other: Nonlabor-Related Services
    We are proposing to use the CPI for All Items Less Food and Energy 
(BLS series code CUUR0000SA0L1E) to measure the price growth of this 
cost category. Previously these costs were proxied by the CPI for All 
Items in the FY 2002-based RPL market basket. We believe that using the 
CPI for All Items Less Food and Energy would remove the double counting 
of changes in food and energy prices, as they are already captured 
elsewhere in the market basket. Consequently, we believe that the 
incorporation of this proxy would represent a technical improvement to 
the market basket.
d. Proposed Methodology for Capital Portion of the RPL Market Basket
    In the FY 2002-based RPL market basket, we did not have 
freestanding IRF, freestanding IPF, and LTCH 2002 Medicare cost report 
data for the capital cost weights, due to a change in the 2002 
reporting requirements. Therefore, we used these hospitals' 2001 
expenditure data for the capital cost categories of depreciation, 
interest, and other capital expenses, and aged the data to a 2002 base 
year using relevant price proxies.
    For the proposed FY 2008-based RPL market basket, we are proposing 
to calculate weights for the proposed RPL market basket capital costs 
using the same set of FY 2008 Medicare cost reports used to develop the 
operating share for IRFs, IPFs, and LTCHs. To calculate the proposed 
total capital cost weight, we first apply the same length of stay edits 
as applied when calculating the operating cost weights as described 
above in section VII.D.3.a. of this preamble The resulting proposed 
capital weight for the FY 2008 base year is 8.392 percent.
    Lease expenses are unique in that they are not broken out as a 
separate cost category in the RPL market basket, but rather are 
proportionally distributed amongst the cost categories of

[[Page 25999]]

Depreciation, Interest, and Other, reflecting the assumption that the 
underlying cost structure of leases is similar to that of capital costs 
in general. As was done in the FY 2002-based RPL market basket, we 
first assumed 10 percent of lease expenses represents overhead and 
assigned those costs to the Other Capital-Related Costs category 
accordingly. The remaining lease expenses were distributed across the 
three cost categories based on the respective weights of depreciation, 
interest, and other capital not including lease expenses.
    Depreciation contains two subcategories: (1) Building and Fixed 
Equipment; and (2) Movable Equipment. The apportionment between 
building and fixed equipment and movable equipment was determined using 
the FY 2008 Medicare cost reports for freestanding IRFs, freestanding 
IPFs, and LTCHs. This methodology was also used to compute the 
apportionment used in the FY 2002-based RPL market basket (71 FR 
27815).
    The total Interest expense cost category is split between 
government/nonprofit interest and for-profit interest. The FY 2002-
based RPL market basket allocated 75 percent of the total Interest cost 
weight to government/nonprofit interest and proxied that category by 
the average yield on domestic municipal bonds. The remaining 25 percent 
of the Interest cost weight was allocated to for-profit interest and 
was proxied by the average yield on Moody's Aaa bonds (70 FR 47912). 
This was based on the FY 2002-based IPPS capital input price index (70 
FR 23406) due to insufficient Medicare cost report data for 
freestanding IRFs, freestanding IPFs, and LTCHs. For the proposed FY 
2008-based RPL market basket, we are proposing to derive the split 
using the FY 2008 Medicare cost report data on interest expenses for 
government/nonprofit and for-profit freestanding IRFs, freestanding 
IPFs, and LTCHs. Based on these data, we calculated a proposed 33/67 
split between government/nonprofit and for-profit interest. We believe 
it is important that this split reflects the latest relative cost 
structure of interest expenses for RPL providers. As stated above, we 
first apply the average length of stay edits (as described in section 
VII.D.3.a. of this preamble) prior to calculating this split. 
Therefore, we are using cost reports that are reflective of case mix 
and practice patterns associated with providing services to Medicare 
beneficiaries. Using data specific to government/nonprofit and for-
profit freestanding IRFs, freestanding IPFs, and LTCHs as well as the 
application of these length of stay edits are the primary reasons for 
the difference in this split relative to the FY 2002-based RPL market 
basket.
    Because capital is acquired and paid for over time, capital 
expenses in any given year are determined by both past and present 
purchases of physical and financial capital. The vintage-weighted 
capital portion of the proposed FY 2008-based RPL market basket is 
intended to capture the long-term consumption of capital, using vintage 
weights for depreciation (physical capital) and interest (financial 
capital). These vintage weights reflect the proportion of capital 
purchases attributable to each year of the expected life of building 
and fixed equipment, movable equipment, and interest. We are proposing 
to use the vintage weights to compute vintage-weighted price changes 
associated with depreciation and interest expense.
    Vintage weights are an integral part of the proposed FY 2008-based 
RPL market basket. Capital costs are inherently complicated and are 
determined by complex capital purchasing decisions, over time, based on 
such factors as interest rates and debt financing. In addition, capital 
is depreciated over time instead of being consumed in the same period 
it is purchased. The capital portion of the proposed FY 2008-based RPL 
market basket would reflect the annual price changes associated with 
capital costs, and would be a useful simplification of the actual 
capital investment process. By accounting for the vintage nature of 
capital, we are able to provide an accurate and stable annual measure 
of price changes. Annual nonvintage price changes for capital are 
unstable due to the volatility of interest rate changes and, therefore, 
do not reflect the actual annual price changes for Medicare capital-
related costs. The capital component of the proposed FY 2008-based RPL 
market basket would reflect the underlying stability of the capital 
acquisition process and provides hospitals with the ability to plan for 
changes in capital payments.
    To calculate the vintage weights for depreciation and interest 
expenses, we needed a time series of capital purchases for building and 
fixed equipment and movable equipment. We found no single source that 
provides an appropriate time series of capital purchases by hospitals 
for all of the above components of capital purchases. The early 
Medicare cost reports did not have sufficient capital data to meet this 
need. Data we obtained from the American Hospital Association (AHA) do 
not include annual capital purchases. However, AHA does provide a 
consistent database back to 1963. We used data from the AHA Panel 
Survey and the AHA Annual Survey to obtain a time series of total 
expenses for hospitals. We then used data from the AHA Panel Survey 
supplemented with the ratio of depreciation to total hospital expenses 
obtained from the Medicare cost reports to derive a trend of annual 
depreciation expenses for 1963 through 2008.
    In order to estimate capital purchases using data on depreciation 
expenses, the expected life for each cost category (building and fixed 
equipment, movable equipment, and interest) is needed to calculate 
vintage weights. For the FY 2002-based RPL market basket, due to 
insufficient Medicare cost report data for freestanding IRFs, 
freestanding IPFs, and LTCHs, we used 2001 Medicare cost reports for 
IPPS hospitals to determine the expected life of building and fixed 
equipment and movable equipment (71 FR 27816). The FY 2002-based RPL 
market basket was based on an expected average life of building and 
fixed equipment of 23 years. It used 11 years as the average expected 
life for moveable equipment. We believed that this data source 
reflected the latest relative cost structure of depreciation expenses 
for hospitals at the time and was analogous to freestanding IRFs, 
freestanding IPFs, and LTCHs.
    The expected life of any asset can be determined by dividing the 
value of the asset (excluding fully depreciated assets) by its current 
year depreciation amount. This calculation yields the estimated useful 
life of an asset if depreciation were to continue at current year 
levels, assuming straight-line depreciation. Following a similar method 
to what was applied for the FY 2002-based RPL market basket, we are 
proposing to use the average expected life of building and fixed 
equipment to be equal to 26 years, and the average expected life of 
movable equipment to be 11 years. These expected lives are calculated 
using FY 2008 Medicare cost reports for IPPS hospitals since we are 
currently unable to obtain robust measures of the expected lives for 
building and fixed equipment and movable equipment using the Medicare 
cost reports from freestanding IRFs, freestanding IPFs, and LTCHs.
    We also are proposing to use the building and fixed equipment and 
movable equipment weights derived from FY 2008 Medicare cost reports 
for freestanding IRFs, freestanding IPFs, and LTCHs to separate the 
depreciation expenses into annual amounts of building and fixed 
equipment depreciation and movable equipment depreciation. Year-end 
asset costs for building and fixed equipment and movable equipment were 
determined by

[[Page 26000]]

multiplying the annual depreciation amounts by the expected life 
calculations. We then calculated a time series, back to 1963, of annual 
capital purchases by subtracting the previous year asset costs from the 
current year asset costs. From this capital purchase time series, we 
were able to calculate the vintage weights for building and fixed 
equipment and for movable equipment. Each of these sets of vintage 
weights is explained in more detail below.
    For the proposed building and fixed equipment vintage weights, we 
used the real annual capital purchase amounts for building and fixed 
equipment to capture the actual amount of the physical acquisition, net 
of the effect of price inflation. This real annual purchase amount for 
building and fixed equipment was produced by deflating the nominal 
annual purchase amount by the building and fixed equipment price proxy, 
BEA's chained price index for nonresidential construction for hospitals 
and special care facilities. Because building and fixed equipment have 
an expected life of 26 years, the vintage weights for building and 
fixed equipment are deemed to represent the average purchase pattern of 
building and fixed equipment over 26-year periods. With real building 
and fixed equipment purchase estimates available from 2008 back to 
1963, we averaged twenty 26-year periods to determine the average 
vintage weights for building and fixed equipment that are 
representative of average building and fixed equipment purchase 
patterns over time. Vintage weights for each 26-year period are 
calculated by dividing the real building and fixed capital purchase 
amount in any given year by the total amount of purchases in the 26-
year period. This calculation is done for each year in the 26-year 
period, and for each of the twenty 26-year periods. We used the average 
of each year across the twenty 26-year periods to determine the average 
building and fixed equipment vintage weights for the FY 2008-based RPL 
market basket.
    For the proposed movable equipment vintage weights, the real annual 
capital purchase amounts for movable equipment were used to capture the 
actual amount of the physical acquisition, net of price inflation. This 
real annual purchase amount for movable equipment was calculated by 
deflating the nominal annual purchase amounts by the movable equipment 
price proxy, the PPI for Machinery and Equipment. This is the same 
proxy used for the FY 2002-based RPL market basket. Based on our 
determination that movable equipment has an expected life of 11 years, 
the vintage weights for movable equipment represent the average 
expenditure for movable equipment over an 11-year period. With real 
movable equipment purchase estimates available from 2008 back to 1963, 
thirty-five 11-year periods were averaged to determine the average 
vintage weights for movable equipment that are representative of 
average movable equipment purchase patterns over time. Vintage weights 
for each 11-year period are calculated by dividing the real movable 
capital purchase amount for any given year by the total amount of 
purchases in the 11-year period. This calculation was done for each 
year in the 11-year period and for each of the thirty-five 11-year 
periods. We used the average of each year across the thirty-five 11-
year periods to determine the average movable equipment vintage weights 
for the FY 2008-based RPL market basket.
    For the proposed interest vintage weights, the nominal annual 
capital purchase amounts for total equipment (building and fixed, and 
movable) were used to capture the value of the debt instrument. Because 
we have determined that hospital debt instruments have an expected life 
of 26 years, the vintage weights for interest are deemed to represent 
the average purchase pattern of total equipment over 26-year periods. 
With nominal total equipment purchase estimates available from 2008 
back to 1963, twenty 26-year periods were averaged to determine the 
average vintage weights for interest that are representative of average 
capital purchase patterns over time. Vintage weights for each 26-year 
period are calculated by dividing the nominal total capital purchase 
amount for any given year by the total amount of purchases in the 26-
year period. This calculation is done for each year in the 26-year 
period and for each of the twenty 26-year periods. We used the average 
of each year across the twenty 26-year periods to determine the average 
interest vintage weights for the FY 2008-based RPL market basket. The 
vintage weights for the capital portion of the FY 2002-based RPL market 
basket and the FY 2008-based RPL market basket are presented in Table 
VII.D-4 below.
BILLING CODE 4120-01-P

[[Page 26001]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.085

BILLING CODE 4120-01-C
    After the capital cost category weights were computed, it was 
necessary to select appropriate price proxies to reflect the rate-of-
increase for each expenditure category. We are proposing to use the 
same price proxies for the capital portion of the proposed FY 2008-
based RPL market basket that were used in the FY 2002-based RPL market 
basket with the exception of the Boeckh Construction Index. We replaced 
the Boeckh Construction Index with BEA's chained price index for 
nonresidential construction for hospitals and special care facilities. 
The BEA index represents construction of facilities such as hospitals, 
nursing homes, hospices, and rehabilitation centers. Although these 
price indices move similarly over time, we believe that it is more 
technically appropriate to use an index that is more specific to the 
hospital industry. We believe these are the most appropriate proxies 
for hospital capital costs that meet our selection criteria of 
relevance, timeliness, availability, and reliability.
    The price proxies (prior to any vintage weighting) for each of the 
capital cost categories are the same as those used for the FY 2006-
based Capital Input Price Index (CIPI) as described in the FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43857).
e. Proposed FY 2012 Market Basket Update for LTCHs
    For FY 2012 (that is, October 1, 2011 through September 30, 2012), 
we are proposing to use an estimate of the proposed FY 2008-based RPL 
market basket update based on the best available data. Consistent with 
historical practice, we estimate the RPL market basket update for the 
LTCH PPS based on IHS Global Insight, Inc.'s (IGI's) forecast using the 
most recent available data. IGI is a nationally

[[Page 26002]]

recognized economic and financial forecasting firm that contracts with 
CMS to forecast the components of the market baskets.
    Based on IGI's first quarter 2011 forecast with history through the 
4th quarter of 2010, the projected market basket update for FY 2012 is 
2.8 percent. Therefore, consistent with our historical practice of 
estimating market basket increases based on the best available data, we 
are proposing a market basket update of 2.8 percent for FY 2012. 
Furthermore, because the proposed FY 2012 annual update is based on the 
most recent market basket estimate for the 12-month period (currently 
2.8 percent), we also are proposing that if more recent data are 
subsequently available (for example, a more recent estimate of the 
market basket), we would use such data, if appropriate, to determine 
the FY 2012 annual update in the final rule. (As discussed in greater 
detail in section V.A.2. of the Addendum to this proposed rule, we are 
proposing an annual update of 1.5 percent to the LTCH PPS standard 
Federal rate for FY 2012 under proposed Sec.  412.523(c)(3)(viii) of 
the regulations.)
    Using the current FY 2002-based RPL market basket and IGI's first 
quarter 2011 forecast for the market basket components, the FY 2012 
market basket update would be 2.8 percent (before taking into account 
any statutory adjustment). Table VII.D-5 below compares the proposed FY 
2008-based RPL market basket and the FY 2002-based RPL market basket 
percent changes.
[GRAPHIC] [TIFF OMITTED] TP05MY11.086

    For FY 2012, the proposed FY 2008-based RPL market basket update 
(2.8 percent) is the same as the market basket update based on the FY 
2002-based RPL market basket. The lower total compensation weight in 
the proposed FY 2008-based RPL market basket (62.278 percent) relative 
to the FY 2002-based RPL market basket (65.877 percent), absent other 
factors, would have resulted in a slightly lower market basket update 
using the FY 2008-based RPL market basket. However, this impact is 
partially offset by the larger weight associated with the Professional 
Fees category. In both market baskets, these expenditures are proxied 
by the ECI for Compensation for Professional and Related Services. The 
weight for Professional Fees in the FY 2002-based RPL market basket is 
2.892 percent compared to 6.325 percent in the proposed FY 2008-based 
RPL market basket. The net effect is that the market basket update is 
the same for FY 2012 based on the current FY 2002-based RPL market 
basket and the proposed FY 2008-based RPL market basket.
f. Proposed Labor-Related Share
    As discussed in section V.B. of the Addendum to this proposed rule, 
under the authority of section 123 of the BBRA as amended by section 
307(b) of the BIPA, we established an adjustment to the LTCH PPS 
payments to account for differences in LTCH area wage levels (Sec.  
412.525(c)). The labor-related portion of the LTCH PPS standard Federal 
rate, hereafter referred to as the labor-related share, is adjusted to 
account for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index.
    The labor-related share is determined by identifying the national 
average proportion of total costs that are related to, influenced by, 
or vary with the local labor market. We continue to classify a cost 
category as labor-related if the costs are labor-intensive and vary 
with the local labor market. Given this, based on our definition of the 
labor-related share, we are proposing to include in the labor-related 
share the sum of the relative importance of Wages and Salaries, 
Employee Benefits,

[[Page 26003]]

Professional Fees: Labor-related, Administrative and Business Support 
Services, All Other: Labor-related Services (previously referred to in 
the FY 2002-based RPL market basket as labor-intensive), and a portion 
of the Capital-Related cost weight.
    Consistent with previous rebasings, the All Other: Labor-related 
Services cost category is mostly comprised of building maintenance and 
security services (including, but not limited to, commercial and 
industrial machinery and equipment repair, nonresidential maintenance 
and repair, and investigation and security services). Because these 
services tend to be labor-intensive and are mostly performed at the 
hospital facility (and, therefore, unlikely to be purchased in the 
national market), we believe that they meet our definition of labor-
related services.
    As stated in the RY 2007 LTCH PPS final rule (71 FR 27829), the 
labor-related share was defined as the sum of the relative importance 
of the labor-related share of operating costs (Wages and Salaries, 
Employee Benefits, Professional Fees, and All Other: Labor-intensive 
Services), and capital costs of the RPL market basket based on FY 2002 
data. Therefore, to determine the labor-related share for the LTCH PPS 
for FY 2011, we used the FY 2002-based RPL market basket cost weights 
relative importance to determine the labor-related share for the LTCH 
PPS.
    For the proposed FY 2008-based RPL market basket rebasing, the 
proposed inclusion of the Administrative and Business Support Services 
cost category into the labor-related share remains consistent with the 
current labor-related share because this cost category was previously 
included in the Labor-intensive cost category. As previously stated, we 
are proposing to establish a separate Administrative and Business 
Support Service cost category so that we can use the ECI for 
Compensation for Office and Administrative Support Services to more 
precisely proxy these specific expenses.
    For the FY 2002-based RPL market basket, we assumed that all 
nonmedical professional services (including accounting and auditing 
services, engineering services, legal services, and management and 
consulting services) were purchased in the local labor market and, 
therefore, all of their associated fees varied with the local labor 
market. As a result, we previously included 100 percent of these costs 
in the labor-related share. In an effort to more accurately determine 
the share of professional fees that should be included in the labor-
related share, we surveyed hospitals regarding the proportion of those 
fees that go to companies that are located beyond their own local labor 
market (the results are discussed below).
    We continue to look for ways to refine our market basket approach 
to more accurately account for the proportion of costs influenced by 
the local labor market. To that end, we conducted a survey of hospitals 
to empirically determine the proportion of contracted professional 
services purchased by the industry that are attributable to local firms 
and the proportion that are purchased from national firms. We notified 
the public of our intent to conduct this survey on December 9, 2005 (70 
FR 73250) and received no comments.
    With approval from the Office of Management and Budget (OMB), we 
contacted a sample of IPPS hospitals and received responses to our 
survey from 108 hospitals. We believe that these data serve as an 
appropriate proxy for the purchasing patterns of professional services 
for LTCHs as they are also institutional providers of health care 
services. Using data on full-time equivalents (FTEs) to allocate 
responding hospitals across strata (region of the country and urban/
rural status), we calculated post-stratification weights. Based on 
these weighted results, we determined that hospitals purchase, on 
average, the following portions of contracted professional services 
outside of their local labor market:
     34 percent of accounting and auditing services.
     30 percent of engineering services.
     33 percent of legal services.
     42 percent of management consulting services.
    We applied each of these percentages to its respective Benchmark I-
O cost category underlying the professional fees cost category to 
determine the Professional Fees: Nonlabor-related costs. The 
Professional Fees: Labor-related costs were determined to be the 
difference between the total costs for each Benchmark I-O category and 
the Professional Fees: Nonlabor-related costs. This is the methodology 
that we used to separate the proposed FY 2008-based RPL market basket 
professional fees category into Professional Fees: Labor-related and 
Professional Fees: Nonlabor-related cost categories. In addition to the 
professional services listed above, we also classified expenses under 
NAICS 55, Management of Companies and Enterprises, into the 
Professional Fees cost category as was done in previous rebasings. The 
NAICS 55 data are mostly comprised of corporate, subsidiary, and 
regional managing offices, or otherwise referred to as home offices. 
Formerly, all of the expenses within this category were considered to 
vary with, or be influenced by, the local labor market and were thus 
included in the labor-related share. Because many hospitals are not 
located in the same geographic area as their home office, we analyzed 
data from a variety of sources in order to determine what proportion of 
these costs should be appropriately included in the labor-related 
share.
    Using data primarily from the Medicare cost reports and a CMS 
database of Home Office Medicare Records (HOMER) (a database that 
provides city and state information (addresses) for home offices), we 
were able to determine that 19 percent of the total number of 
freestanding IRFs, freestanding IPFs, and LTCHs that had home offices 
had those home offices located in their respective local labor 
markets--defined as being in the same Metropolitan Statistical Area 
(MSA).
    The Medicare cost report requires hospitals to report their home 
office provider numbers. Using the HOMER database to determine the home 
office location for each home office provider number, we compared the 
location of the provider with the location of the hospital's home 
office. We then placed providers into one of the following three 
groups:
     Group 1--Provider and home office are located in different 
States.
     Group 2--Provider and home office are located in the same 
State and same city.
     Group 3--Provider and home office are located in the same 
State and different city.
    We found that 63 percent of the providers with home offices were 
classified into Group 1 (that is, different State) and, thus, these 
providers were determined to not be located in the same local labor 
market as their home office. Although there were a very limited number 
of exceptions (that is, providers located in different States but the 
same MSA as their home office), the 63 percent estimate was unchanged.
    We found that 9 percent of all providers with home offices were 
classified into Group 2 (that is, same State and same city and, 
therefore, the same MSA). Consequently, these providers were determined 
to be located in the same local labor market as their home offices.
    We found that 27 percent of all providers with home offices were 
classified into Group 3 (that is, same State and different city). Using 
data from the Census Bureau to determine the specific MSA for both the 
provider

[[Page 26004]]

and its home office, we found that 10 percent of all providers with 
home offices were identified as being in the same State, a different 
city, but the same MSA.
    Pooling these results, we were able to determine that approximately 
19 percent of providers with home offices had home offices located 
within their local labor market (that is, 9 percent of providers with 
home offices had their home offices in the same State and city (and, 
thus, the same MSA), and 10 percent of providers with home offices had 
their home offices in the same State, a different city, but the same 
MSA). We are proposing to apportion the NAICS 55 expense data by this 
percentage. Thus, we are proposing to classify 19 percent of these 
costs into the Professional Fees: Labor-related cost category and the 
remaining 81 percent into the Professional Fees: Nonlabor-related 
Services cost category.
    Using this proposed method and the IGI forecast for the first 
quarter 2011 of the proposed FY 2008-based RPL market basket, the 
proposed LTCH labor-related share for FY 2012 is the sum of the FY 2012 
relative importance of each labor-related cost category. Consistent 
with our proposal to update the labor-related share with the most 
recent available data, the labor-related share for this proposed rule 
reflects IGI's first quarter 2011 forecast of the proposed FY 2008-
based RPL market basket. Table VII.D-6 below shows the proposed FY 2012 
relative importance labor-related share using the proposed FY 2008-
based RPL market basket and the FY 2011 relative importance labor-
related share using the FY 2002-based RPL market basket.
[GRAPHIC] [TIFF OMITTED] TP05MY11.087

    The proposed labor-related share for FY 2012 is the sum of the 
proposed FY 2012 relative importance of each labor-related cost 
category, and would reflect the different rates of price change for 
these cost categories between the base year (FY 2008) and FY 2012. The 
sum of the proposed relative importance for FY 2012 for operating costs 
(Wages and Salaries, Employee Benefits, Professional Fees: Labor-
Related, Administrative and Business Support Services, and All Other: 
Labor-related Services) would be 66.689 percent, as shown in Table 
VII.D-6 above. We are proposing that the portion of Capital that is 
influenced by the local labor market is estimated to be 46 percent, 
which is the same percentage applied to the FY 2002-based RPL market 
basket. Because the relative importance for Capital-Related Costs would 
be 7.923 percent of the proposed FY 2008-based RPL market basket in FY 
2012, we are proposing to take 46 percent of 7.923 percent to determine 
the proposed labor-related share of Capital for FY 2012. The result 
would be 3.645 percent, which we are proposing to add to 66.689 percent 
for the operating cost amount to determine the total proposed labor-
related share for FY 2012. Thus, the labor-related share that we are 
proposing to use for LTCH PPS in FY 2012 would be 70.344 percent. This 
proposed labor-related share is determined using the same methodology 
as employed in calculating all previous LTCH labor-related shares.

[[Page 26005]]

E. Proposed Changes to the LTCH Payment Rates and Other Proposed 
Changes to the FY 2012 LTCH PPS

1. Overview of Development of the LTCH Payment Rates
    The LTCH PPS was effective beginning with a LTCH's first cost 
reporting period beginning on or after October 1, 2002. Therefore, 
beginning with their FY 2003 cost reporting period, LTCHs were paid, 
during a 5-year transition period, a total LTCH prospective payment 
that was comprised of an increasing proportion of the LTCH PPS Federal 
rate and a decreasing proportion based on reasonable cost-based 
principles, unless the hospital made a one-time election to receive 
payment based on 100 percent of the Federal rate, as specified in Sec.  
412.533. New LTCHs (as defined at Sec.  412.23(e)(4)) were paid based 
on 100 percent of the Federal rate, with no phase-in transition 
payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth at Sec.  412.515 through Sec.  412.536. In 
this section, we discuss the factors that we are proposing to use to 
update the LTCH PPS standard Federal rate for FY 2012, that is, 
effective for LTCH discharges occurring on or after October 1, 2011 
through September 30, 2012.
    For further details on the development of the FY 2003 standard 
Federal rate, we refer readers to the August 30, 2002 LTCH PPS final 
rule (67 FR 56027 through 56037). For subsequent updates to the LTCH 
PPS Federal rate, we refer readers to the following final rules: RY 
2004 LTCH PPS final rule (68 FR 34134 through 34140); RY 2005 LTCH PPS 
final rule (68 FR 25682 through 25684); RY 2006 LTCH PPS final rule (70 
FR 24179 through 24180); RY 2007 LTCH PPS final rule (71 FR 27819 
through 27827); RY 2008 LTCH PPS final rule (72 FR 26870 through 
27029); RY 2009 LTCH PPS final rule (73 FR 26800 through 26804); RY 
2010 LTCH PPS final rule (74 FR 44021 through 44030); and FY 2011 IPPS/
LTCH PPS final rule (75 FR 50443 through 50444).
    The proposed update to the LTCH PPS standard Federal rate for FY 
2012 is presented in section V.A. of the Addendum to this proposed 
rule. The components of the proposed annual market basket update to the 
LTCH PPS standard Federal rate for FY 2012 are discussed below. In 
addition, as discussed below in section VII.E.3. of this preamble, 
beginning in FY 2012, in addition to the proposed update factor, we are 
proposing to make an adjustment to the standard Federal rate to account 
for the estimated effect of any proposed changes to the area wage level 
adjustment on estimated aggregate LTCH PPS payments.
2. Proposed FY 2012 LTCH PPS Annual Market Basket Update
a. Overview
    Historically, the Medicare program has used a market basket to 
account for price increases in the services furnished by providers. The 
market basket used for the LTCH PPS includes both operating and 
capital-related costs of LTCHs because the LTCH PPS uses a single 
payment rate for both operating and capital-related costs. With the 
initial implementation of the LTCH PPS for FY 2003, we established the 
use of the excluded hospital with capital market basket as the LTCH PPS 
market basket (67 FR 56016 through 56017). (For further details on the 
development of the excluded hospital with capital market basket, we 
refer readers to the RY 2004 LTCH PPS final rule (68 FR 34134 through 
34137).) The development of the initial LTCH PPS standard Federal rate 
for FY 2003, using the excluded hospital with capital market basket, is 
discussed in further detail in the August 30, 2002 LTCH PPS final rule 
(67 FR 56027 through 56033).
    Beginning in RY 2007, we adopted the rehabilitation, psychiatric, 
long-term care (RPL) hospital market basket based on FY 2002 data as 
the appropriate market basket of goods and services under the LTCH PPS 
for discharges occurring on or after July 1, 2006. As discussed in the 
RY 2007 LTCH PPS final rule (71 FR 27810), based on our research, we 
did not develop a market basket specific to LTCH services. We were 
unable to create a separate market basket specifically for LTCHs at 
that time due to the small number of facilities and the limited amount 
of data that was reported. (For further details on the development of 
the FY 2002-based RPL market basket, we refer readers to the RY 2007 
LTCH PPS final rule (71 FR 27810 through 27817).)
    As discussed in greater detail in section VII.D. of this preamble, 
we are proposing to revise and rebase the market basket used under the 
LTCH PPS for FY 2012. Specifically, we are proposing to adopt a newly 
created FY 2008-based RPL market basket (described in section VII.D. of 
this preamble). Also, in section VII.D. of this preamble, we discuss 
our continued interest in exploring the possibility of creating a 
stand-alone LTCH market basket that reflects the cost structures of 
only LTCH providers.
b. Revision of Certain Market Basket Updates as Required by the 
Affordable Care Act
    Several provisions of the Affordable Care Act affect the policies 
and payment rates under the LTCH PPS. Section 1886(m)(3)(A) of the Act, 
as added by section 3401(c) of the Affordable Care Act, specifies that, 
for rate year 2010 and each subsequent rate year through 2019, any 
annual update to the standard Federal rate shall be reduced:
     For rate year 2010 through 2019, by the other adjustment 
specified in sections 1886(m)(3)(A)(ii) and (m)(4) of the Act; and
     For rate year 2012 and each subsequent year, by the 
productivity adjustment (which we refer to as ``the multifactor 
productivity (MFP) adjustment'' as discussed in section VII.E.2.d. of 
this preamble) described in section 1886(b)(3)(B)(xi)(II) of the Act.
    Section 1886(m)(3)(B) of the Act provides that the application of 
paragraph (3) of section 1886(m) of the Act may result in the annual 
update being less than zero for a rate year, and may result in payment 
rates for a rate year being less than such payment rates for the 
preceding rate year. We note that because the annual update to the LTCH 
PPS policies, rates, and factors now occurs on October 1, we have 
adopted the term ``fiscal year'' (FY) rather than ``rate year'' (RY) 
under the LTCH PPS beginning October 1, 2010, to conform with the 
standard definition of the Federal fiscal year (October 1 through 
September 30) used by other PPSs, such as the IPPS (75 FR 50396 through 
50397). Although the language of sections 3401(c), 10319, and 1105(b) 
of the Affordable Care Act refers to years 2010 and thereafter under 
the LTCH PPS as ``rate year,'' consistent with our change in the 
terminology used under the LTCH PPS from ``rate year'' to ``fiscal 
year,'' for purposes of clarity, when discussing the annual update for 
the LTCH PPS, including the provisions of the Affordable Care Act, we 
employ ``fiscal year'' rather than ``rate year'' for 2011 and 
subsequent years.
c. Proposed Market Basket Under the LTCH PPS for FY 2012
    As noted above and as discussed in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50389), when we initially created the FY 2002-based RPL 
market basket, we were unable to create a separate market basket 
specifically for LTCHs due, in part, to the small number of facilities 
and the limited data that were provided in the Medicare cost reports. 
Over the last several years, however, the number of LTCHs submitting 
valid

[[Page 26006]]

Medicare cost report data has increased. Based on this development, as 
well as our desire to move from one RPL market basket to three stand-
alone and provider-specific market baskets (for IRFs, IPFs, and LTCHs, 
respectively), we have begun to explore the viability of creating these 
market baskets for future use. However, as we discussed in the RY 2010 
LTCH PPS final rule (74 FR 43967 through 43968), we are conducting 
further research to assist us in understanding the reasons for the 
variations in costs and cost structure between freestanding IRFs and 
hospital-based IRFs. We also are researching the reasons for similar 
variations in costs and cost structure between freestanding IPFs and 
hospital-based IPFs. Therefore, we do not believe it is appropriate at 
this time to propose stand-alone market baskets for IRFs, IPFs, and 
LTCHs, and we believe that it is appropriate to continue to use the RPL 
market basket for LTCHs, IRFs, and IPFs under their respective PPSs.
    We continue to believe that the RPL market basket appropriately 
reflects the cost structure of LTCHs, for the reasons discussed when we 
adopted the RPL market basket for use under the LTCH PPS in the RY 2007 
LTCH PPS final rule (71 FR 27810 through 27817). For the reasons 
explained above, we are proposing to continue to use the RPL market 
basket under the LTCH PPS for FY 2012. However, as discussed in greater 
detail in section VII.D. of this preamble, we are proposing to rebase 
and revise the FY 2002-based RPL market basket by creating a proposed 
FY 2008-based RPL market basket. Currently, we are exploring the 
viability of creating two separate market baskets from the current RPL 
market basket: One market basket would include freestanding IRFs and 
freestanding IPFs and would be used to update payments under both the 
IPF and IRF payment systems. The other market basket would be a stand-
alone LTCH market basket. Depending on the outcome of our research, we 
may propose a stand-alone LTCH market basket in the next LTCH PPS 
update cycle. We invite public comment on the possibility of using this 
type of market basket to update LTCH payments in the future.
    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we are proposing to use the proposed FY 
2008-based RPL market basket (described in section VII.D. of this 
preamble) under the LTCH PPS for FY 2012, which we continue to believe 
appropriately reflects the cost structure of LTCHs.
d. Productivity Adjustment
    Section 1886(m)(3)(A)(i) of the Act specifies that, for FY 2012 and 
subsequent years, any annual update to the standard Federal rate shall 
be reduced by the productivity adjustment described in section 
1886(b)(3)(B)(xi)(II) of the Act. Section 1886(b)(3)(B)(xi)(II) of the 
Act, as added by section 3401(a) of the Affordable Care Act, defines 
the productivity adjustment as equal to the 10-year moving average of 
changes in annual economy-wide, private nonfarm business multifactor 
productivity (MFP) (as projected by the Secretary for the 10-year 
period ending with the applicable fiscal year, calendar year, cost 
reporting period, or other annual period) (the ``MFP adjustment''). The 
Bureau of Labor Statistics (BLS) is the agency that publishes the 
official measure of private non-farm business MFP. We refer readers to 
the BLS Web site at http://www.bls.gov/mfp to obtain the BLS historical 
published MFP data.
    The proposed MFP adjustment that would be applied in determining 
any annual update to the LTCH PPS standard Federal rate is the same 
adjustment that is required to be applied in determining the applicable 
percentage increase under the IPPS under section 1886(b)(3)(B)(i) of 
the Act. As described in section IV.K.3. of this preamble, we are 
proposing to derive the FY 2012 MFP adjustment applied to the operating 
IPPS applicable percentage increase using a projection of MFP that is 
currently produced by IHS Global Insight, Inc. (IGI). For a detailed 
description of the model currently used by IGI to project MFP, as well 
as a description of how the proposed MFP adjustment is calculated for 
FY 2012, we refer readers to section IV.K.3 of this preamble. The 
current estimate of the proposed MFP adjustment for FY 2012 based on 
IGI's first quarter 2011 forecast is 1.2 percent. Consistent with the 
statute, we are proposing to reduce the proposed FY 2012 market basket 
update of the LTCH PPS standard Federal rate using this same proposed 
FY 2012 MFP adjustment.
    To determine the proposed market basket update for LTCHs for FY 
2012, as reduced by the MFP adjustment, consistent with the approach 
proposed under the IPPS for FY 2012 (discussed in section IV.K.3. of 
this preamble), we are proposing that the proposed FY 2012 MFP 
percentage adjustment be subtracted from the proposed FY 2012 market 
basket update. We are proposing that if more recent data are 
subsequently available (for example, a more recent estimate of the 
market basket and MFP adjustment), we would use such data, if 
appropriate, to determine the FY 2012 market basket update and MFP 
adjustment in the final rule. Following application of the productivity 
adjustment, the proposed adjusted market basket update (that is, the 
full market basket increase less the MFP adjustment) is then reduced by 
the ``other adjustment'' as required by sections 1886(m)(3)(A)(ii) and 
1886(m)(4) of the Act. The proposed market basket update for FY 2012, 
which reflects both the proposed MFP adjustment and the ``other 
adjustment'' as required by sections 1886(m)(3)(A)(ii) and 1886(m)(4) 
of the Act, is described in section VII.E.2.e. of this preamble.
e. Proposed Annual Market Basket Update for LTCHs for FY 2012
    Consistent with our historical practice, we are proposing to 
estimate the proposed market basket update based on IGI's forecast 
using the most recent available data.Based on IGI's first quarter 2011 
forecast, the proposed FY 2012 market basket estimate for the LTCH PPS 
using the proposed FY 2008-based RPL market basket is 2.8 percent. 
Consistent with our historical practice of using market basket 
estimates based on the most recent available data, we are proposing 
that if more recent data are available when we develop the final rule, 
we would use such data, if appropriate.
    Section 1886(m)(3)(A)(i) of the Act specifies that, for FY 2012 
(and subsequent years), any annual update to the standard Federal rate 
shall be reduced by the productivity adjustment (referred to as ``the 
MFP adjustment'') described in section 1886(b)(3)(B)(xi)(II) of the 
Act. Furthermore, section 1886(m)(3)(A)(ii) of the Act specifies that, 
for each of RYs 2010 through 2019, any annual update to the standard 
Federal rate shall be reduced by the other adjustment specified in 
section 1886(m)(4) of the Act. Specifically, section 1886(m)(4)(C) of 
the Act requires a 0.1 percentage point reduction to the annual update 
to the LTCH PPS standard Federal rate for FY 2012.
    In accordance with section 1886(m)(3)(A)(i) of the Act, we are 
proposing to reduce the proposed FY 2012 full market basket estimate of 
2.8 percent (based on the first quarter 2011 forecast of the proposed 
FY 2008-based RPL market basket) by the proposed FY 2012 MFP adjustment 
(that is, the 10-year moving average of MFP for the period ending FY 
2012, as described in section VII.E.2.d of this preamble) of 1.2 
percent (based on IGI's first quarter 2011 forecast). Following 
application of the productivity adjustment, the proposed adjusted 
market basket update of 1.6

[[Page 26007]]

percent (2.8 percent minus 1.2 percentage points) is then reduced by 
0.1 percentage point, as required by sections 1886(m)(3)(A)(ii) and 
1886(m)(4)(C) of the Act.
    Therefore, in this proposed rule, we are proposing to establish an 
annual market basket update under the LTCH PPS for FY 2012 of 1.5 
percent (that is, the most recent estimate of the proposed LTCH PPS 
market basket update at this time of 2.8 percent less the proposed MFP 
adjustment of 1.2 percentage points less the 0.1 percentage point 
required under section 1886(m)(4)(C) of the Act). Accordingly, we are 
proposing to revise Sec.  412.523(c)(3) by adding a new paragraph 
(viii), which would specify that the standard Federal rate for FY 2012 
is the standard Federal rate for the previous long-term care hospital 
prospective payment system fiscal year updated by 1.5 percent. Again, 
consistent with our historical practice of using the most recent 
available data, we are proposing that if more recent data are available 
when we develop the final rule, we would use such data, if appropriate, 
in determining the final market basket update under the LTCH PPS for FY 
2012. (We note that in section VII.E.3. of this preamble, for FY 2012, 
we are proposing to adjust the standard Federal rate by an area wage 
level budget neutrality factor of 0.99723 in accordance with proposed 
Sec.  412.523(d)(4).)
3. Proposed Budget Neutrality Adjustment for the Changes to the Area 
Wage Level Adjustment
    As described in section V.B. of the Addendum to this proposed rule, 
when the LTCH PPS was implemented, under the authority of section 123 
of the BBRA as amended by section 307(b) of the BIPA, we established an 
adjustment to the LTCH PPS standard Federal rate to account for 
differences in LTCH area wage levels at Sec.  412.525(c). The labor-
related share of the LTCH PPS standard Federal rate is adjusted to 
account for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index. The applicable LTCH PPS wage index is 
computed using wage data from inpatient acute care hospitals without 
regard to reclassification under section 1886(d)(8) or section 
1886(d)(10) of the Act. Historically, in general, the LTCH PPS wage 
index and labor-related share are updated annually based on the latest 
available data. However, there are currently no statutory or regulatory 
requirements that state that any updates or adjustments to the LTCH PPS 
area wage level adjustment (that is, the wage index or the labor-
related share) be budget neutral, such that estimated aggregate LTCH 
PPS payments would be neither greater than nor less than estimated 
aggregate LTCH PPS payments without such changes to the area wage level 
adjustment.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 
56015), when we implemented the LTCH PPS, we established a 5-year 
transition to the full area wage level adjustment. The area wage level 
adjustment was completely phased-in for cost reporting periods 
beginning in FY 2007. Therefore, for cost reporting periods beginning 
on or after October 1, 2006, the applicable full LTCH PPS wage index 
values are used to make payments under the LTCH PPS. As discussed in 
section VII.D. of this preamble, we are proposing to revise and rebase 
the market basket used under the LTCH PPS for FY 2012, and we are also 
proposing to update the labor-related share for FY 2012 based on this 
proposed market basket. We are taking this opportunity to revisit our 
approach for annually updating the area wage level adjustment. In order 
to mitigate estimated yearly fluctuations in estimated aggregate LTCH 
PPS payments, as have been suggested in the past, we have given further 
consideration to the issue of establishing a budget neutrality 
requirement for any changes to the area wage level adjustment. 
Therefore, in this proposed rule, under the broad authority conferred 
upon the Secretary under section 123 of the BBRA, as amended by section 
307(b) of the BIPA, to develop the LTCH PPS, we are proposing that, 
beginning with the proposed adjustment for area wage levels for FY 2012 
(discussed in section V.B. of the Addendum to this proposed rule), any 
changes to the wage index values or labor-related share would be made 
in a budget neutral manner such that estimated aggregate LTCH PPS 
payments would be unaffected, that is, would be neither greater than 
nor less than the estimated aggregate LTCH PPS payments that would have 
been made without such changes to the area wage level adjustment. 
Accordingly, under Sec.  412.525(c), we are proposing to specify that, 
beginning in FY 2012, any adjustments or updates made to the area wage 
level adjustment under this section will be made in a budget neutral 
manner such that estimated aggregate LTCH PPS payments are not 
affected.
    Under this proposal, we would determine an area wage level 
adjustment budget neutrality factor that would be applied to the 
standard Federal rate to ensure that any changes to the area wage level 
adjustment would be budget neutral such that any changes to the wage 
index values or labor-related share would not result in any change 
(increase or decrease) in estimated aggregate LTCH PPS payments. 
Specifically, we are proposing to use the following steps to determine 
a proposed area wage level adjustment budget neutrality factor that 
would be applied to the standard Federal rate that would ensure that 
the proposed FY 2012 update to the wage index values and to the labor-
related share are adopted in a budget neutral manner.
     Step 1--We would simulate estimated aggregate LTCH PPS 
payments using the FY 2011 wage index values as established in Tables 
12A and 12B of the Addendum to the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50627 through 50646) and the FY 2011 labor-related share of 75.271 
percent as established in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50391 and 50445).
     Step 2--We would simulate estimated aggregate LTCH PPS 
payments using the proposed FY 2012 wage index values as shown in 
Tables 12A and 12B of the Addendum to this proposed rule and the 
proposed FY 2012 labor-related share of 70.334 percent as discussed in 
section VII.D.3.f. of this proposed rule.
     Step 3--We would calculate the ratio of these estimated 
total LTCH PPS payments by dividing the estimated total LTCH PPS 
payments using the FY 2011 area wage level adjustments (calculated in 
Step 1) by the estimated total LTCH PPS payments using the proposed FY 
2012 area wage level adjustments (calculated in Step 2) to determine 
the area wage level adjustment budget neutrality factor.
     Step 4--We would then apply the proposed FY 2012 area wage 
level adjustment budget neutrality factor from Step 3 to determine the 
proposed FY 2012 LTCH PPS standard Federal rate after the application 
of the proposed FY 2012 annual update (discussed in section V.A.2. of 
the Addendum to this proposed rule). We are proposing to revise the 
existing regulations at Sec.  412.523(d) to add a new paragraph (4), 
which would specify that, beginning in FY 2012, we would adjust the 
standard Federal rate by a factor that accounts for the estimated 
effect of any adjustments or updates to the area wage level adjustment 
under Sec.  412.525(c)(1) on estimated aggregate LTCH PPS payments. In 
this proposed rule, we also are proposing to revise existing Sec.  
412.525(c) to reflect our current policy of updating the labor-related 
share annually.
    For this proposed rule, using the steps in the proposed methodology 
described above, we have determined a proposed

[[Page 26008]]

FY 2012 area wage level adjustment budget neutrality factor of 0.99723. 
Accordingly, in section V.A.2. of the Addendum to this proposed rule, 
to determine the proposed FY 2012 LTCH PPS standard Federal rate, we 
are proposing to apply an area wage level adjustment budget neutrality 
factor of 0.99723, in accordance with proposed Sec.  412.523(d)(4), and 
therefore, the proposed FY 2012 LTCH PPS standard Federal rate shown in 
Table 1E reflects this proposed adjustment.
4. Greater Than 25-Day Average Length of Stay Requirement for LTCHs
    Section 1886(d)(1)(B) of the Act lists hospitals that are excluded 
from the IPPS. Section 1886(d)(1)(B)(iv) of the Act specifies the 
exclusion from the IPPS for ``a hospital which has an average inpatient 
length of stay (as determined by the Secretary) of greater than 25 
days.'' The average length of stay requirement was established as the 
sole prerequisite for a hospital seeking to be excluded from the IPPS 
under this provider category. Section 114(a) of the MMSEA of 2007 
amended section 1861 of the Act by adding a new subsection (ccc), which 
further defined LTCHs. Thus, a hospital's classification as an LTCH has 
depended, in large part, upon whether an acute care hospital met the 
greater than 25 days average length of stay requirement. Once the 
hospital was classified as such under this criterion, the ability for 
the hospital to continue its exclusion from the IPPS and be paid as an 
LTCH depended, in part, upon its continuing to meet that criterion.
    The regulations at 42 CFR 412.23(e)(1) and (e)(2) set forth the 
requirements a hospital must meet in order to be excluded from the IPPS 
and be paid as an LTCH. Specifically, Sec.  412.23(e)(1) requires that 
a hospital must have a provider agreement under 42 CFR Part 489 to 
participate as a Medicare hospital, and Sec.  412.23(e)(2) provides 
that a hospital must meet the LTCH average length of stay of greater 
than 25 days policy. The methodology for calculating the average length 
of stay is specified at Sec.  412.23(e)(3). A detailed explanation of 
the procedural features of the average length of stay policy was 
included in the FY 2003 LTCH PPS final rule, which implemented the LTCH 
PPS (67 FR 55970 through 55974)).
    In this proposed rule, we are proposing to clarify two existing CMS 
policies related to the greater than 25 days average length of stay 
requirement policy: (1) the determination of the average length of stay 
for a hospital seeking exclusion under the IPPS to be paid as an LTCH 
or an existing LTCH undergoes a change of ownership; and (2) the 
inclusion of Medicare Advantage days in calculating the average length 
of stay.
a. Determination of the Average Length of Stay When There is a Change 
of Ownership
    Under Sec.  412.23(e)(3)(iv) of the regulations, we implemented a 
policy regarding the application of the average length of stay 
methodology, where a hospital (that is either seeking LTCH status, or 
is an existing LTCH) has undergone a change of ownership. Specifically, 
in the event of a change of ownership, the regulation provides:
    ``If a hospital has undergone a change of ownership (as described 
in Sec.  489.18 of this chapter) at the start of a cost reporting 
period or at any time within the period of at least 5 months of the 
preceding 6-month period, the hospital may be excluded from the 
prospective payment system as a long-term care hospital for a cost 
reporting period if, for the period of at least 5 months of the 6 
months immediately preceding the start of the period (including time 
before the change of ownership), the hospital has the required average 
length of stay, continuously operated as a hospital, and continuously 
participated as a hospital in Medicare.''
    Section 412.23(e)(3)(iv) institutes a procedure by which the 
average length of stay of a hospital seeking LTCH status or an existing 
LTCH is evaluated by its fiscal intermediary or MAC to determine 
whether or not the facility that is being sold meets the requirements 
for LTCH status. Because the sale of the facility, in effect, ends the 
seller's cost reporting period (Sec.  413.24(f)(1)), and triggers the 
beginning of the purchaser's first cost reporting period, the period of 
time that is evaluated is the ``at least 5 months of the 6 months 
immediately preceding the period (including time before the change of 
ownership'' to determine the average length of stay that will result in 
the hospital that meets the requirements for LTCH status. If the 
average length of stay data indicates that, for this period of time, 
the hospital met the required average length of stay of greater than 25 
days, then the new owner's hospital will achieve IPPS exclusion and 
LTCH status. On the other hand, if the data indicate that the hospital 
does not meet the required average length of stay, the hospital will 
instead be paid under the IPPS under its new ownership. We understand 
that there has been some confusion in the provider community regarding 
the specific applicability of this regulation to a change of ownership 
of an existing LTCH. Accordingly, in this proposed rule, we are 
proposing to clarify this policy in regulation text by revising Sec.  
412.23(e)(3)(iv) to specifically address the circumstance of a hospital 
that has not as yet been classified as an LTCH and wishes to be 
classified as an LTCH based on data from the hospital's discharges 
occurring both before and after the change of ownership. Moreover, in 
an effort to provide greater clarity, we are also proposing to 
establish a separate provision in the regulations (proposed paragraph 
(e)(3)(v) under Sec.  412.23) to directly address LTCH status where 
there is a change of ownership of an existing LTCH. The sale of an 
existing LTCH, which triggers the beginning of a new cost reporting 
period under the new owner (413.24(f)(1)), is a situation where we 
believe it is appropriate to review whether the hospital that is being 
sold has been functioning as an LTCH, that is, has been treating 
patients for on average length of stay of greater than 25 days, before 
allowing the new owner to continue to be paid for services provided at 
the hospital under the LTCH PPS. Therefore, we are proposing that where 
there has been a change of ownership of an existing LTCH, the hospital 
will continue to be excluded from the inpatient prospective payment 
system as a long-term care hospital for the cost reporting period 
beginning with the change of ownership only if for the period of at 
least 5 months of the 6 months immediately preceding the change of 
ownership, the hospital meets the required average length of stay. We 
note that, conversely, under this proposed policy, if the hospital 
fails to meet the required average length of stay criterion, after this 
evaluation, and if it is an acute-care hospital, it will be paid 
instead under the IPPS effective with the day of the change of 
ownership, that is, the start of the new owner's cost reporting period.
    Accordingly, we are proposing to clarify our existing policy as 
described above by (1) revising existing Sec.  412.23(e)(3)(iv), to 
specifically address LTCH status in instances where a hospital is 
seeking IPPS exclusion and payment under the LTCH PPS but a change of 
ownership has occurred, and (2) proposing to establish a new Sec.  
412.23(e)(3)(v) to specifically address the issue of LTCH status for 
existing LTCHs undergoing a change of ownership.
b. Inclusion of Medicare Advantage (MA) Days in the Average Length of 
Stay Calculation
    With the passage of the Balanced Budget Act of 1997, Medicare 
beneficiaries were given the option to receive their Medicare benefits 
through private health insurance plans instead

[[Page 26009]]

of through the original Medicare plan (Parts A and B). These programs 
were known as Medicare+Choice or Part C plans (Section 1851 through 
1859 of the Act, implemented in 42 CFR part 422). Pursuant to the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 
the compensation and business practices changed for insurers that offer 
these plans, and ``Medicare+Choice'' plans became known as Medicare 
Advantage (MA) plans.
    When CMS implemented the LTCH PPS beginning in FY 2003, we revised 
the then-existing policy for calculating the average length of stay for 
LTCHs described at then Sec.  412.23(e)(2)(i). Under the TEFRA payment 
system, the average length of stay was determined by ``* * * dividing 
the number of total inpatient days * * * by the total discharges for 
the hospital's most recent complete cost reporting period * * *'' 
However, beginning with FY 2003, under the newly implemented LTCH PPS, 
the calculation was based on ``dividing the total number of covered and 
noncovered days of stay of Medicare inpatients * * * by the total 
Medicare discharges for the hospital's most recent complete cost 
reporting period'' (Sec.  412.23(e)(3)(i)). The rationale for this 
change, as noted in the preamble to the FY 2003 LTCH PPS final rule, is 
that ``LTCHs exist as a provider type in order to treat Medicare 
patients requiring complex long-term hospital-level care. We believe 
that a hospital's right to qualify for payments under the prospective 
payment system for LTCHs should result from the actual provision of 
clinically appropriate care to Medicare LTCH patients * * *'' (67 FR 
55971).
    Although the policy since the start of the LTCH PPS has been for 
all LTCH patients being paid for by Medicare to be included in the 
average length of stay calculation, until recently, we were unable to 
include data for Medicare Advantage (MA) patients in our calculations 
because our database did not capture discharge data on claims paid by 
an MA plan. (In contrast, patients who still had private insurance as 
their primary health coverage and for whom Medicare was a secondary 
payer, were included in the calculations because the portion of their 
claims covered by Medicare was paid by Part A and was therefore 
included in our database.)
    On July 20, 2007, we issued Change Request 5647 that required the 
submission by hospitals (IPPS, IRFs, and LTCHs) of ``information only'' 
(not for payment) bills for their MA patients to their fiscal 
intermediaries or MACs beginning with FY 2007. The stated goal of 
capturing these MA data was that the data were needed for 
disproportionate share payments (DSH) under the IPPS, low-income 
patient (LIP) payments under the IRF PPS, and for short-stay outlier 
(SSO) payments under the LTCH PPS. An additional one-time notification, 
Change Request 6821, issued on June 7, 2010, reiterated the 
requirements of Change Request 5647 for the reporting of MA days for 
DHS and LIP data and also noted ``[i]n addition, this data is used for 
other purposes such as determining LTCH short stay outlier payments and 
evaluating the greater than 25 days length of stay requirement of 
Medicare patients for LTCHs.''
    Although the inclusion of MA days in the average length of stay 
calculation has been CMS' policy under the LTCH PPS because, at the 
outset of the LTCH PPS, we specified that the average length of stay 
calculation was based on ``all covered'' and on ``all covered days of 
stay of Medicare patients'' (Sec.  412.23(e)(2)). We acknowledge that, 
in practice, MA days were not included due to limitations in our 
ability to capture the data. We have been informed by some members of 
the provider community that it was not their understanding that MA data 
should be included in determining a LTCH's average length of stay, and 
that, in some cases, the inclusion of these data could substantially 
lower their average length of stay, thus threatening their status as 
LTCHs. Therefore, we are proposing to clarify our existing policy at 42 
CFR 412.23(e)(3) on the calculation of the average length of stay to 
specify that all data on all Medicare inpatient days, including MA 
days, shall be included in the average length of stay calculation.

F. Proposed Application of LTCH Moratorium on the Increase in Beds at 
Section 114(d)(1)(B) of Public Law 110-173 (MMSEA) to LTCHs and LTCH 
Satellite Facilities Established or Classified as Such Under Section 
114(d)(2) of Public Law 110-173

    Under section 114(d) of the Medicare, Medicaid, and SCHIP Extension 
Act of 2007 (MMSEA) (Pub. L. 110-173), Congress established one 
moratorium on the establishment or classification of new LTCHs and LTCH 
satellite facilities and a second moratorium on the increase in the 
number of LTCH beds in ``existing hospitals and satellite facilities.'' 
This section 114(d) provision was amended by section 4302(b) of the 
American Recovery and Reinvestment Act of 2009 (ARRA) (Pub. L. 111-5) 
and implemented in interim final rules issued in the Federal Register 
on May 22, 2008, and August 27, 2009 (73 FR 29704 through 29707 and 74 
FR 43990 through 43992, respectively), and finalized in the FY 2010 and 
FY 2011 IPPS/LTCH PPS final rules (74 FR 43985 through 43990 and 75 FR 
50397 through 50399, respectively). With the passage of the Affordable 
Care Act on March 23, 2010, these moratoria were extended under 
sections 3016 and 10312 for an additional 2 years, through December 29, 
2012, and implemented in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50400).
    Specific exceptions to each moratorium are included in the statute 
and permit both the continued establishment or classification of an 
LTCH or LTCH satellite facility and an increase in LTCH beds at a 
statutorily defined ``existing'' hospital or satellite facility, 
respectively. Under section 114(d)(2) of the MMSEA, as of December 29, 
2007, the preclusion on the establishment or classification of a new 
LTCH or LTCH satellite facility would not apply if the circumstance met 
one of the following three exceptions:
     The LTCH began its qualifying period for payment as a LTCH 
under 42 CFR 412.23(e) on or before the date of enactment of the MMSEA 
(section 114(d)(2)(A)).
     The LTCH has a binding written agreement with an outside, 
unrelated party for the actual construction, renovation, lease, or 
demolition for a LTCH and had expended before December 29, 2007, at 
least 10 percent of the estimated cost of the project or, if less, $2.5 
million (section 114(d)(2)(B)).
     The LTCH has obtained an approved certificate of need 
(CON) in a State where one is required on or before December 29, 2007 
(section 114(d)(2)(C)).
    Section 114(d)(3) of the MMSEA, as originally enacted, provided an 
exception to the moratorium on increase in beds at an existing LTCH or 
LTCH satellite facility, if an existing LTCH or satellite facility is 
located in a State where there is only one other LTCH; and the LTCH or 
satellite facility requests an increase in beds following the closure 
or decrease in the number of beds of another LTCH in the State. Section 
4302(b) of the ARRA amended this MMSEA provision to specify an 
additional exception to the moratorium on the increase in bed number if 
the hospital or facility obtained a certificate of need for an increase 
in beds that is in a State for which such certificate of need is 
required and that was issued on or after April 1, 2005, and before 
December 29, 2007.

[[Page 26010]]

    In implementing these two moratorium provisions, we required that 
each hospital or entity submit details of its individual circumstance 
for evaluation by CMS regional offices and contractors in order to 
determine whether a specific statutory exception was applicable to the 
particular situation (74 FR 43985 through 43990). We note that, based 
upon these exceptions (73 FR 29707), CMS records indicate that, as of 
January 1, 2011, 50 new LTCHs and 8 new LTCH satellites have been 
established or classified after December 29, 2007, the date MMSEA was 
enacted. (Data on additional beds developed in existing LTCHs and LTCH 
satellite facilities under the CON exception provided by section 
4302(b) of the ARRA are maintained by States.)
    Sections 3106 and 10312 of the Affordable Care Act provided a 2-
year extension of both moratoria initially established by section 
114(d)(1) of the MMSEA (which provided for an original 3-year 
application), indicating that Congress continues to believe that it is 
appropriate to continue to stem the increase in the number of LTCHs and 
LTCH satellite facilities and LTCH beds.
    As noted above, section 114(d)(1)(B) of the MMSEA established a 
moratorium on the increase of LTCH beds in existing LTCHs or satellite 
facilities. Section 114(d)(4) of the MMSEA defines ``an existing 
hospital or satellite facility'' as a hospital or satellite facility 
that received payment under the LTCH PPS as of December 29, 2007, the 
date of enactment of the MMSEA. By definition, LTCHs or satellite 
facilities that were established or classified as such under an 
exception at section 114(d)(2) to the moratorium under section 
114(d)(1)(A) first received payments under the LTCH PPS after December 
29, 2007, and therefore, would not fall under the definition of ``an 
existing hospital or satellite facility'' to whom the moratorium on the 
increase in bed numbers at section 114(d)(1)(B) applies. However, we do 
not believe that it was Congress' intent to allow this subset of 
hospitals and satellite facilities established or classified after the 
enactment of MMSEA unlimited bed growth and expansion. Continued 
Congressional concern regarding the increase in the number of LTCHs and 
satellite facilities and LTCH beds is indicated in the 2-year extension 
of the moratorium provided by sections 3106 and 10312 of the Affordable 
Care Act.
    Section 123 of the Medicare, Medicaid, and SCHIP [State Children's 
Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA 
of 1999) (Pub. L. 106-113), as amended by section 307 (b) of the 
Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. 
L. 106-554), confers upon the Secretary discretion in creating the LTCH 
PPS as the payment system for LTCHs beginning in FY 2003. Furthermore, 
the Secretary has authority, under the general rulemaking authority of 
sections 1102(a) and 1871(a) of the Act, to establish rules and 
regulations as necessary to administer the Medicare program and for the 
efficient administration of the Medicare program. Consistent with these 
authorities, therefore, we are proposing that, effective October 1, 
2011, the moratorium established under section 114(d)(1)(B) of the 
MMSEA, and implemented at 42 CFR 412.23(e)(7) be applied to those LTCHs 
and LTCH satellite facilities established or classified as such 
pursuant to the exceptions at section 114(d)(2) to the moratorium 
specified under section 114(d)(1)(B) of the MMSEA, as implemented at 42 
CFR 412.23(e)(6). Specifically, we are proposing to limit the number of 
beds in these facilities to the number of beds that were certified by 
Medicare at the LTCH or satellite facility when it was first paid under 
the LTCH PPS. We are proposing to amend Sec.  412.23 by adding a new 
paragraph (e)(8) to specify this proposed policy. We believe that this 
proposed policy captures the essence of the original statutory 
moratoria--which was to limit growth in the number of LTCHs and LTCH 
satellite facilities and LTCH beds payable under Medicare--while 
recognizing the inherent fairness in allowing those projects already 
underway that represented substantial investment, planning, and State 
commitment to be completed.

VIII. MedPAC Recommendations

    Under section 1886(e)(4)(B) of the Act, the Secretary must consider 
MedPAC's recommendations regarding hospital inpatient payments. Under 
section 1886(e)(5) of the Act, the Secretary must publish in the annual 
proposed and final IPPS rules the Secretary's recommendations regarding 
MedPAC's recommendations. We have reviewed MedPAC's March 2011 ``Report 
to the Congress: Medicare Payment Policy'' and have given the 
recommendations in the report consideration in conjunction with the 
policies set forth in this proposed rule. MedPAC recommendations for 
the IPPS for FY 2012 are addressed in Appendix B to this proposed rule.
    For further information relating specifically to the MedPAC reports 
or to obtain a copy of the reports, contact MedPAC at (202) 653-7226, 
or visit MedPAC's Web site at: http://www.medpac.gov.

IX. Other Required Information

A. Requests for Data From the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have established a process under 
which commenters can gain access to raw data on an expedited basis. 
Generally, the data are now available on compact disc (CD) format. 
However, many of the files are available on the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS. Data files and the cost for each 
file, if applicable, are listed below. Anyone wishing to purchase data 
tapes, cartridges, or diskettes should submit a written request along 
with a company check or money order (payable to CMS-PUF) to cover the 
cost of the following address: Centers for Medicare & Medicaid 
Services, Public Use Files, Accounting Division, P.O. Box 7520, 
Baltimore, MD 21207-0520, (410) 786-3691. Files on the Internet may be 
downloaded without charge.
1. CMS Wage Data Public Use File
    This file contains the hospital hours and salaries from Worksheet 
S-3, Parts II and III from FY 2008 Medicare cost reports used to create 
the proposed FY 2012 prospective payment system wage index. Multiple 
versions of this file are created each year. For a complete schedule on 
the release of different versions of this file, we refer readers to the 
wage index schedule in section III.K. of the preamble of this proposed 
rule.

[[Page 26011]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.088

    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Periods Available: FY 2007 through FY 2012 IPPS Update.
2. CMS Occupational Mix Data Public Use File
    This file contains the 2007-2008 occupational mix survey data to be 
used to compute the occupational mix adjustment wage indexes. Multiple 
versions of this file are created each year. For a complete schedule on 
the release of different versions of this file, we refer readers to the 
wage index schedule in section III.K. of the preamble of this proposed 
rule.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Period Available: FY 2012 IPPS Update.
3. Provider Occupational Mix Adjustment Factors for Each Occupational 
Category Public Use File
    This file contains each hospital's occupational mix adjustment 
factors by occupational category. Two versions of these files are 
created each year. They support the following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Period Available: FY 2012 IPPS Update.
4. Other Wage Index Files
    CMS releases other wage index analysis files after each proposed 
and final rule.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Periods Available: FY 2005 through FY 2012 IPPS Update.
5. FY 2012 IPPS SSA/FIPS CBSA State and County Crosswalk
    This file contains a crosswalk of State and county codes used by 
the Social Security Administration (SSA) and the Federal Information 
Processing Standards (FIPS), county name, and a historical list of 
Metropolitan Statistical Areas (MSAs).
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Period Available: FY 2012 IPPS Update.
6. HCRIS Cost Report Data
    The data included in this file contain cost reports with fiscal 
years ending on or after September 30, 1996. These data files contain 
the highest level of cost report status.
    Media: Internet at:
    http://www.cms.hhs.gov/CostReports/02_HospitalCostReport.asp and 
Compact Disc (CD).
    File Cost: $100.00 per year.
7. Provider-Specific File
    This file is a component of the PRICER program used in the fiscal 
intermediary's or the MAC's system to compute DRG/MS-DRG payments for 
individual bills. The file contains records for all prospective payment 
system eligible hospitals, including hospitals in waiver States, and 
data elements used in the prospective payment system recalibration 
processes and related activities. Beginning with December 1988, the 
individual records were enlarged to include pass-through per diems and 
other elements.
    Media: Internet at: http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/03_psf_text.asp
    Period Available: Quarterly Update.
8. CMS Medicare Case-Mix Index File
    This file contains the Medicare case-mix index by provider number 
as published in each year's update of the Medicare hospital inpatient 
prospective payment system. The case-mix index is a measure of the 
costliness of cases treated by a hospital relative to the cost of the 
national average of all Medicare hospital cases, using DRG/MS-DRG 
weights as a measure of relative costliness of cases. Two versions of 
this file are created each year. They support the following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage
    Periods Available: FY 1985 through FY 2012.
9. MS-DRG Relative Weights (Also Table 5--MS-DRGs)
    This file contains a listing of MS-DRGs, MS-DRG narrative 
descriptions, relative weights, and geometric and arithmetic mean 
lengths of stay as published in the Federal Register. There are two 
versions of this file as published in the Federal Register.
     Notice of proposed rulemaking.
     Final rule.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage
    Periods Available: FY 2005 through 2012 IPPS Update.
10. IPPS Payment Impact File
    This file contains data used to estimate payments under Medicare's 
hospital impatient prospective payment systems for operating and 
capital-related costs. The data are taken from various sources, 
including the Provider-Specific File, Minimum Data Sets, and prior 
impact files. The data set is abstracted from an internal file used for 
the impact analysis of the changes to the prospective payment systems 
published in the Federal Register. Two versions of this file are 
created each year. They support the following:
     Notice of proposed rulemaking.
     Final rule.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage and http://www.cms.hhs.gov/AcuteInpatientPPS/HIF/list.asp#TopOfPage
    Periods Available: FY 1994 through FY 2012 IPPS Update.
11. AOR/BOR Tables
    This file contains data used to develop the MS-DRG relative 
weights. It contains mean, maximum, minimum, standard deviation, and 
coefficient of variation statistics by MS-DRG for length of stay and 
standardized charges. The BOR tables are ``Before Outliers

[[Page 26012]]

Removed'' and the AOR is ``After Outliers Removed.'' (Outliers refer to 
statistical outliers, not payment outliers.)
    Two versions of this file are created each year. They support the 
following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Periods Available: FY 2006 through FY 2012 IPPS Update.
12. Prospective Payment System (PPS) Standardizing File
    This file contains information that standardizes the charges used 
to calculate relative weights to determine payments under the hospital 
inpatient operating and capital prospective payment systems. Variables 
include wage index, cost-of-living adjustment (COLA), case-mix index, 
indirect medical education (IME) adjustment, disproportionate share, 
and the Core-based Statistical Area (CBSA). The file supports the 
following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Period Available: FY 2012 IPPS Update.
    For further information concerning these data tapes, contact the 
CMS Public Use Files Hotline at (410) 786-3691.
    Commenters interested in discussing any data used in constructing 
this proposed rule should contact Nisha Bhat at (410) 786-5320.

B. Collection of Information Requirements

1. Legislative Requirement for Solicitation of Comments
    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs).
2. ICRs for Add-On Payments for New Services and Technologies
    Section II.I.1. of the preamble of this proposed rule discusses 
add-on payments for new services and technologies. Specifically, this 
section states that applicants for add-on payments for new medical 
services or technologies for FY 2012 must submit a formal request. A 
formal request includes a full description of the clinical applications 
of the medical service or technology and the results of any clinical 
evaluations demonstrating that the new medical service or technology 
represents a substantial clinical improvement. In addition, the request 
must contain a significant sample of the data to demonstrate that the 
medical service or technology meets the high-cost threshold. We 
detailed the burden associated with this requirement in the September 
7, 2001, IPPS final rule (66 FR 46902). As stated in that final rule, 
collection of the information for this requirement is conducted on an 
individual case-by-case basis. We believe the associated burden is 
thereby exempt from the PRA as stipulated under 5 CFR 1320.3(h)(6). 
Similarly, we also believe the burden associated with this requirement 
is exempt from the PRA under 5 CFR 1320.3(c), which defines the agency 
collection of information subject to the requirements of the PRA as 
information collection imposed on 10 or more persons within any 12-
month period. This information collection does not impact 10 or more 
entities in a 12-month period. In FYs 2008, 2009, 2010, 2011, and 2012, 
we received 1, 4, 5, 3, and 3 applications, respectively.
3. ICRs for the Hospital Inpatient Quality Reporting (IQR) Program
    The Hospital Inpatient Quality Reporting (IQR) Program (formerly 
referred to as the Reporting Hospital Quality Data for Annual Payment 
(RHQDAPU) Program) was originally established to implement section 
501(b) of the MMA, Public Law 108-173. This Program expanded our 
voluntary Hospital Quality Initiative. The Hospital IQR Program 
originally consisted of a ``starter set'' of 10 quality measures. OMB 
approved the collection of information associated with the original 
starter set of quality measures under OMB control number 0938-0918.
    We added additional quality measures to the Hospital IQR Program 
and submitted the information collection request to OMB for approval. 
This expansion of the Hospital IQR measures was part of our 
implementation of section 5001(a) of the DRA. New section 
1886(b)(3)(B)(viii)(III) of the Act, added by section 5001(a) of the 
DRA, requires that the Secretary expand the ``starter set'' of 10 
quality measures that were established by the Secretary as of November 
1, 2003, to include measures ``that the Secretary determines to be 
appropriate for the measurement of the quality of care furnished by 
hospitals in inpatient settings.'' The burden associated with these 
reporting requirements is currently approved under OMB control number 
0938-1022. For the FY 2014 and FY 2015 payment updates, we intend to 
seek OMB approval for a revised information collection request using 
the same OMB control number (0938-1022). In the revised request, we 
will add five measures that we adopted in the FY 2011 IPPS/LTCH PPS 
final rule (four chart-abstracted measures and an HAI measure (Surgical 
Site Infection (SSI)) to be collected via NSHN for the FY 2014 payment 
determination. In addition, we are proposing to add two HAI measures 
(CLIP and CAUTI) also to be collected via NHSN, one structural measure 
and one claims-based measure that we are proposing in this proposed 
rule to adopt for the FY 2014 payment determination. We estimate that 
the proposed changes to our FY 2014 payment determination measure set 
would increase the collection burden on hospitals by approximately 
4,250,175 hours per year. Because the currently approved CDC 
information collection request for the NHSN (OCN: 0920-0666) does not 
include all of the respondents associated with the IQR program, we 
intend to request a separate OMB control number for the NHSN proposal.
    With respect to the four new chart-abstracted measures for the FY 
2014 payment determination, hospitals would be required to submit data 
on patients who receive inpatient acute care hospital services. 
Specifically, with respect to the two EDT measures and two Global 
Immunization measures, hospitals would need to collect information on 
patients who receive inpatient acute care hospital services regarding 
EDT, as well as flu and pneumonia vaccinations information for all 
inpatients for which hospitals currently collect only for patients

[[Page 26013]]

admitted for pneumonia. We estimate that hospitals would incur an 
additional 3,500,000 burden hours resulting from the addition of these 
four measures for the FY 2014 payment determination. We estimate that 
hospitals would submit approximately 3,500,000 cases annually for these 
4 measures, and the information needed to calculate these measures 
requires an average of 1 hour to abstract from medical records for each 
case.
    The HAI measure (Surgical Site Infection (SSI)) that we adopted in 
the FY 2011 IPPS/LTCH PPS final rule for the FY 2014 payment 
determination and the two HAI measures that we are proposing to add for 
the FY 2014 payment determination (CLIP and CAUTI) are structured to 
keep additional burden to a minimum because they are to be collected 
via NHSN. More than 4,000 hospitals in 29 States are already using NHSN 
to comply with State-mandated reporting. Although this will add burden 
for hospitals, we believe that the additional burden will be lessened 
because hospitals will already be using NHSN to report the CLABSI 
measure for the FY 2013 payment determination. In addition, as 
mentioned above, not all hospitals will experience any additional 
burden because many hospitals already submit data to this system either 
voluntarily or as part of mandatory State reporting requirements for 
HAIs. The burden associated with these proposals is the time and effort 
associated with collecting and submitting the additional data. We 
estimate that hospitals will need about 750,000 additional hours to 
report Surgical Site Infection (SSI), CLIP, and CAUTI event data and 
denominator information into the system.
    The structural measure we are proposing to add for the FY 2014 
payment determination would require hospitals to indicate whether they 
are participating in a systematic qualified clinical database for 
registry for General Surgery and, if so, to identify the registry. If 
this measure is finalized, we estimate that 3,500 hospitals will spend 
about 5 minutes each to answer this question each year, resulting in an 
estimated total increase of 175 hours in terms of the total burden to 
hospitals each year.
    We are also proposing to add one new claims-based measure for the 
FY 2014 payment determination. We do not believe that this proposed 
claims-based measure, if finalized, will create any additional burden 
for hospitals because it would be collected and calculated by CMS based 
on the Medicare FFS claims the hospitals have already submitted to CMS.
    We believe that the overall burden on hospitals will be reduced to 
some extent by the policy we finalized in the FY 2011 IPPS/LTCH PPS 
final rule to retire two measures (PN-2 and PN-7) beginning with the FY 
2014 payment determination. Burden will be further reduced by our 
proposal in this proposed rule to retire eight additional measures 
(AMI-1 Aspirin at Arrival, AMI-3 ACE/ARB, AMI-4 Smoking Cessation, AMI-
5 Beta-Blocker at Discharge, HF-4 Smoking Cessation, PN-4 Smoking 
Cessation, PN-5c Antibiotic within 6 Hours of Arrival and SCIP Inf-6 
Appropriate Hair Removal) beginning with the FY 2014 payment 
determination. We estimate that if we finalize these proposals, the 
burden to hospitals will be reduced by a total of 740,000 hours as a 
result of retiring these eight measures, including reductions of 
170,000 hours for abstracting AMI measures, 220,000 hours for 
abstracting PN measures, 50,000 hours for abstracting HF measures, and 
300,000 hours for abstracting SCIP measures.
    We also are proposing to add two new chart-abstracted measure sets 
to the Hospital IQR Program for FY 2015: Stroke (eight measures) and 
Venous Thromboembolism (VTE) (six measures). Both measure sets are of 
great importance to the Medicare population, with stroke affecting 
about 795,000 people each year (American Stroke Association). Both 
stroke and VTE measures are currently collected by the Joint Commission 
for accreditation and certification purposes. Both measure sets use 
complimentary data elements to our current SCIP, VTE, and AMI measure 
sets, thus reducing the chart-abstraction burden. The burden associated 
with this proposal is the time and effort associated with collecting 
and submitting the additional data. We estimate that each proposed 
chart abstracted measure set will require about 1 hour to abstract. We 
anticipate the number of subsection (d) hospitals participating in the 
Hospital IQR Program to be approximately 3,500. The number of charts to 
be abstracted by all participating hospitals is estimated to be 180,000 
per year for the proposed Stroke measure set, and 6,000,000 per year 
for the proposed VTE measure set. In total, our proposal to add Stroke 
and VTE measures is estimated to increase the burden to hospitals by 
6,180,000 hours per year.
    We also are proposing to add three new HAI measures to be collected 
via NHSN to the Hospital IQR Program for FY 2015: (1) Methicillin-
resistant Staphylococcus aureus (MRSA) Bacteremia measure; (2) C. 
Difficile SIR measure; and (3) Healthcare Personnel Influenza 
vaccination measure. The information needed for these measures would be 
collected via NHSN, and, therefore, is structured to keep additional 
burden to a minimum because more than 4,000 hospitals in 29 States are 
already using NHSN to comply with State-mandated reporting. Although 
this will add burden to hospitals, the initial setup and acclimation to 
the NHSN system will have already occurred with the adoption of the 
CLABSI measure for all hospital IQR for the FY 2013 payment 
determination. In addition, as mentioned above, not all hospitals will 
experience any additional burden since many hospitals already submit 
data to this system either voluntarily or as part of mandatory State 
reporting requirements for HAIs. The burden associated with this 
section is the time and effort associated with collecting and 
submitting the additional data. With respect to the new HAI proposed 
measures for the FY 2015 payment determination, we estimate that an 
additional 1,500,000 burden hours per year (500,000 hours per measure) 
would be incurred by hospitals to report data on these measures.
    We estimate that our proposed changes to our FY 2015 Hospital IQR 
Program measure set will increase the collection burden to hospitals by 
approximately 6,780,000 hours per year.
    We have stated our intention to explore mechanisms for data 
submission using electronic health records (EHRs) (73 FR 48614; 74 FR 
43866, 43892; 75 FR 50189). Establishing such a system will require 
interoperability between EHRs and CMS data collection systems, 
additional infrastructure development on the part of hospitals and CMS, 
and the adoption of standards for capturing, formatting, and 
transmitting the data elements that make up the measures. However, once 
these activities are accomplished, the adoption of measures that rely 
on data obtained directly from EHRs will enable us to expand the 
Hospital IQR Program measure set with less cost and burden to 
hospitals. We believe that automatic collection and reporting of data 
through EHRs will greatly simplify and streamline reporting for various 
CMS quality reporting programs, and that at a future date, such as FY 
2015, hospitals will be able to switch solely to EHR-based reporting of 
data that are currently manually chart-abstracted and submitted to CMS 
for the Hospital IQR Program.

[[Page 26014]]

4. ICRs for the Occupational Mix Adjustment to the Proposed FY 2012 
Index (Hospital Wage Index Occupational Mix Survey)
    Section II.D. of the preamble of this proposed rule discusses the 
occupational mix adjustment to the proposed FY 2012 wage index. While 
the preamble does not contain any new ICRs, it is important to note 
that there is an OMB approved information collection request associated 
with the hospital wage index.
    Section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E) 
of the Act to require CMS to collect data at least once every 3 years 
on the occupational mix of employees for each short-term, acute care 
hospital participating in the Medicare program in order to construct an 
occupational mix adjustment to the wage index. We collect the data via 
the occupational mix survey.
    The burden associated with this information collection requirement 
is the time and effort required to collect and submit the data in the 
Hospital Wage Index Occupational Mix Survey to CMS. The aforementioned 
burden is subject to the PRA; however, it is currently approved under 
OMB control number 0938-0907, with an expiration date of February 28, 
2013.
5. Hospital Applications for Geographic Reclassifications by the MGCRB
    Section III.I.3. of the preamble of this final rule discusses 
revisions to the wage index based on hospital redesignations. As stated 
in that section, under section 1886(d)(10) of the Act, the MGCRB has 
the authority to accept short-term IPPS hospital applications 
requesting geographic reclassification for wage index or standardized 
payment amounts and to issue decisions on these requests by hospitals 
for geographic reclassification for purposes of payment under the IPPS.
    The burden associated with this application process is the time and 
effort necessary for an IPPS hospital to complete and submit an 
application for reclassification to the MGCRB. While this requirement 
is subject to the PRA, the associated burden is currently approved 
under OMB control number 0938-0573, with an expiration date of December 
31, 2011.
6. ICRs for the Proposed Quality Reporting Program for LTCHs
    In section VII.C. of this preamble, we are proposing three quality 
reporting measures for LTCHs for FY 2014: (1) Catheter Associated 
Urinary Tract Infections (CAUTI); (2) Central Line Associated Blood 
Stream Infection Event (CLABSI); and (3) Pressure Ulcers that are New 
or Have Worsened.
    We are proposing to collect the proposed HAI CLABSI and CAUTI 
quality measures through the use of the CDC/NHSN (http://www.cdc.gov/nhsn/). We will require that LTCH facilities report data on each 
patient in their facility who has been diagnosed with either a catheter 
associated urinary tract infection or a central line associated 
bloodstream infection.
    The NHSN is a secure, Internet-based surveillance system which is 
maintained and managed by CDC. Many LTCHs already submit data to the 
NHSN either voluntarily or as part of mandatory State reporting 
requirements for HAIs. There are currently 435 LTCHs in operation in 
the United States and, according to CDC, 80 of these LTCHs already 
submit HAI data to NHSN. For these LTCHs, the burden of complying with 
the requirements of the proposed quality reporting program will be 
reduced because of familiarity with the NHSN submission process.
    We require IPPS hospitals to report data regarding certain HAIs via 
NHSN as part of the Hospital IQR Program. We adopted the CLABSI quality 
measure under the Hospital IQR Program for the FY 2013 payment 
determination and are proposing to adopt the CAUTI measure for the FY 
2014 payment determination. In addition, hospitals in 29 States are 
already using NHSN, and CDC supports more than 4,000 hospitals that are 
already using NHSN. Many LTCHs are integrated into or are part of large 
inpatient hospital systems. We believe that these hospital systems have 
gained the requisite knowledge and experience with the submission of 
data about HAIs via NHSN, under the Hospital IQR Program, State law, or 
voluntarily. Therefore, the transition to reporting HAIs via the NHSN 
for these LTCHs may be less burdensome.
    The burden associated with these proposed quality measures is the 
time and effort associated with collecting and submitting the data 
concerning CAUTI and CLABSI to NHSN for LTCHs that are not currently 
reporting such data. For LTCHs that already submit data regarding these 
HAIs to NHSN, there should be little, if any, additional burden. For 
LTCHs who submit data to NHSN for other HAIs, but not CAUTI and CLABSI 
data, then there may be some burden. However, we believe that this 
burden will be significantly decreased because these LTCHs are already 
enrolled in the NHSN system and are already familiar with the NHSN data 
submission process.
    There are currently 435 LTCHs in the United States paid under the 
LTCH PPS. We estimate that each LTCH would submit approximately 12 NHSN 
submissions (6 CAUTI and 6 CLABSI) per month (144 per LTCH annually). 
This equates to a total of approximately 62,640 submissions of HAI data 
to NHSN from all LTCHs per year. We estimate that each NHSN assessment 
will take approximately 25 minutes to complete. This time estimate 
consists of 10 minutes of clinical (for example, nursing time) needed 
to collect the clinical data and 15 minutes of clerical time necessary 
to enter the data into the NHSN data base. Based on this estimate, we 
expect each LTCH would expend 300 minutes (5 hours) per month and 60 
hours per year reporting to NHSN. Therefore, the total estimated annual 
hourly burden to all LTCHs in the U.S. for reporting to NHSN is 26,100 
hours. The estimated cost per submission is estimated at $12.07. These 
costs are estimated using an hourly wage for a Registered Nurse of 
$41.59 and a Medical Billing Clerk/Data Entry person of $20.57 (U.S. 
Bureau of Labor Statistics data). Therefore, we estimate that the 
annual cost per each LTCH provider would be $1,739 and the total yearly 
cost to all LTCHs for the submission of CAUTI and CLABSI data to NHSN 
would be $760,676.\60\ While the aforementioned requirements are 
subject to the PRA, we believe the associated burden hours are 
accounted for in the information collection request currently approved 
OCN 0920-0666.
---------------------------------------------------------------------------

    \60\ Nursing Time--24 hours @ $41.59 per hour = $998.16/$998.16 
x 435 LTCHs = $434,200. Admin Time--36 hours @ $20.57 per hour = 
$740.52/$740.52 x 435 LTCHs = $326,476. TOTAL = $434,200 + $326,476 
= $760,676.
---------------------------------------------------------------------------

    With respect to the proposed pressure ulcer measure, we are 
proposing that we would post the specification for the pressure ulcer 
measure on our Web site along with the specific data elements necessary 
to be collected. We expect that the specific data items needed are part 
of the Continuity Assessment Record & Evaluation (CARE) instrument. We 
developed the CARE as required by section 5008 of the Deficit Reduction 
Act of 2005. CARE is a standardized assessment instrument that could be 
used across all postacute care sites to measure functional status and 
other factors during treatment and at discharge from each provider.
    Because the CMS CARE pressure ulcer data set has not previously 
been introduced in the LTCH setting, there will be some initial burdens 
associated with the introduction of this data assessment tool. These 
initial costs would mainly be incurred in the

[[Page 26015]]

training of the facility staff. However, there should be little, if 
any, additional education required, in regards to the collection of the 
data, because pressure ulcer assessment should be a vital part of good 
patient care and daily in-house patient chart documentation.
    We are proposing to require that the CARE pressure ulcer assessment 
be performed on each patient in a LTCH upon admission and again upon 
discharge. We believe that it is necessary to obtain admission and 
discharge pressure ulcer assessments on all patients admitted to LTCH 
facilities in order to obtain full and complete statistical data 
regarding the quality of care provided by the facility to the patients 
receiving care in that facility. The delivery of high quality care in 
the LTCH setting is imperative. We believe that collecting quality data 
on all patients in the LTCH setting supports CMS' mission to insure 
quality care for Medicare beneficiaries. Collecting data on all 
patients provides the most robust and accurate reflection of quality in 
the LTCH setting. Accurate representation of quality provided in LTCHs 
is best conveyed using data related to pressure ulcers on all LTCH 
patients regardless of payor, using a subset of the CARE data set. An 
admission assessment is necessary in order to assess for either the 
presence or absence of pressure ulcers upon admission. If pressure 
ulcers are detected upon admission, then they must be properly 
assessed, staged and documented. Upon discharge, an assessment is 
needed to determine if any worsening of the pressure ulcers occurred 
during the LTCH stay. If no pressure ulcers had been noted on the 
admission assessment, then a discharge pressure ulcer assessment would 
be necessary in order to assess whether the patient had developed any 
new pressure ulcers during the LTCH stay.
    At this time, CMS has not completed development of the information 
collection instrument that LTCHs would have to submit to comply with 
the aforementioned reporting requirements regarding the CARE pressure 
ulcer assessment. Because the forms are still under development, we 
cannot assign a complete burden estimate at this time. Once the forms 
are available, we will publish the required 60-day and 30-day Federal 
Register notices to solicit public comments on the instrument and to 
announce the submission of the information collection request to OMB 
for its review and approval.
    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Officer, 
CMS-1518-P, Fax: (202) 395-6974; or E-mail: [email protected].

C. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

List of Subjects

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 Part 476

    Health care, Health professional, Health record, Peer Review 
Organization (PRO), Penalties, Privacy, Reporting and recordkeeping 
requirements.

    For the reasons stated in the preamble of this proposed rule, the 
Centers for Medicare & Medicaid Services is proposing to amend 42 CFR 
Chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

    Authority:  Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh), and sec. 124 of Pub. L. 106-113 (113 Stat. 
1501A-332).

    2. Section 412.23 is amended by--
    a. In paragraph (e)(3)(i), removing the cross-reference ``paragraph 
(e)(3)(ii) through (e)(3)(iv) of this section'' and adding in its place 
the cross-reference ``paragraphs (e)(3)(ii) through (e)(3)(v) of this 
section''.
    b. Revising paragraph (e)(3)(iv).
    c. Adding a new paragraph (e)(3)(v).
    d. Adding a new paragraph (e)(8).
    The revision and additions read as follows:

Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (e) * * *
    (3) * * *
    (iv) If a hospital seeks exclusion from the inpatient prospective 
payment system as a long-term care hospital and a change of ownership 
(as described in Sec.  489.18 of this chapter) occurs within the period 
of at least 5 months of the 6-month period preceding its petition for 
long-term care hospital status, the hospital may be excluded from the 
inpatient prospective payment system as a long-term care hospital for 
the next cost reporting period if, for the period of at least 5 months 
of the 6 months immediately preceding the start of the cost reporting 
period for which the hospital is seeking exclusion from the inpatient 
prospective payment system as a long-term care hospital (including time 
before the change of ownership), the hospital has met the required 
average length of stay, has continuously operated as a hospital, and 
has continuously participated as a hospital in Medicare.
    (v) For periods beginning on or after October 1, 2011, a hospital 
that is excluded from the prospective payment system as a long-term 
care hospital that plans to undergo a change of ownership (as described 
in Sec.  489.18 of this chapter) must notify its fiscal intermediary or 
MAC within 30 days of the effective date of such change of ownership, 
as specified in Sec.  424.516(d)(1)(i) of this subchapter. The hospital 
will continue to be excluded from the inpatient prospective payment 
system as a long-term care hospital for the cost reporting period 
following the change of ownership only if, for the period of at least 5 
months of the 6 months immediately preceding the start of the 
hospital's next cost reporting period before the change of ownership, 
the hospital meets the required average length of stay (calculated in 
accordance with paragraph (e)(3)(i) of this section).
* * * * *
    (8) Application of LTCH moratorium on the increase in beds at 
section 114(d)(1)(B) of Public Law 110-173 to LTCHs and LTCH satellite 
facilities established or classified as such under section 114(d)(2) of 
Public Law 110-173. Effective for the period beginning October 1, 2011, 
and ending December 28, 2012, for long-term care hospitals and long-
term care hospital satellite facilities established under paragraph 
(e)(6)((ii) of this section for the period beginning December 29, 2007, 
and

[[Page 26016]]

ending September 30, 2011, the moratorium at paragraph (e)(7) applies 
and the number of Medicare-certified beds must not be increased beyond 
the initial number of Medicare-certified beds established under 
paragraph (e)(6)(ii) of this section.
* * * * *
    3. Section 412.64 is amended by adding a new paragraph (d)(1)(iv) 
to read as follows:

Sec.  412.64  Federal rates for inpatient operating costs for Federal 
fiscal year 2005 and subsequent fiscal years.

* * * * *
    (d) * * *
    (1) * * *
    (iv) For fiscal year 2012, the percentage increase in the market 
basket index less a multifactor productivity adjustment (as determined 
by CMS) and less 0.1 percentage points for prospective payment 
hospitals (as defined in Sec.  413.40(a) of this subchapter) for 
hospitals in all areas.
* * * * *
    4. Section 412.105 is amended by revising paragraph (b)(4) to read 
as follows:

Sec.  412.105  Special treatment: Hospitals that incur indirect costs 
for graduate medical education programs.

* * * * *
    (b) * * *
    (4) Beds otherwise countable under this section used for outpatient 
observation services, skilled nursing swing-bed services, ancillary 
labor/delivery services, or inpatient hospice services;
* * * * *
    5. Section 412.106 is amended by revising paragraph (a)(1)(ii)(B) 
to read as follows:

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

    (a) * * *
    (1) * * *
    (ii) * * *
    (B) Beds otherwise countable under this section used for outpatient 
observation services, skilled nursing swing-bed services, or inpatient 
hospice services;
* * * * *
    6. A new Sec.  412.140 is added to Subpart H to read as follows:

Sec.  412.140  Participation, data submission, and validation 
requirements under the Hospital Inpatient Quality Review (IQR) Program.

    (a) Participation in the Hospital IQR Program. In order to 
participate in the Hospital IQR Program, a subsection (d) hospital 
must--
    (1) Register onQualityNet.org, before it begins to report data;
    (2) Identify and register a QualityNet Administrator as part of the 
registration process under paragraph (a)(1) of this section; and
    (3) Submit a completed Notice of Participation Form to CMS if the 
hospital is participating in the program for the first time, has 
previously withdrawn from the program and would like to participate 
again, or has received a new CMS Certification Number (CNN).
    (i) A hospital that would like to participate in the program for 
the first time (and to which paragraph (a)(3)(ii) of this section does 
not apply), or that previously withdrew from the program and would now 
like to participate again, must submit to CMS a completed Notice of 
Participation Form by December 31 of the fiscal year preceding the 
fiscal year in which it wishes to participate.
    (ii) A hospital that has received a new CCN and would like to 
participate in the program must submit a completed Notice of 
Participation Form to CMS no later than 180 days from the date 
identified as the open date on the approved CMS OSCAR system.
    (b) Withdrawal from the Hospital IQR Program. CMS will accept 
Hospital IQR Program withdrawal forms from hospitals on or before 
August 15 of the fiscal year preceding the fiscal year for which a 
Hospital IQR payment determination will be made.
    (c) Submission and validation of Hospital IQR Program data.
    (1) General rule. Except as provided in paragraph (c)(2) of this 
section, subsection (d) hospitals that participate in the Hospital IQR 
Program must submit to CMS data on measures selected under section 
1886(b)(3)(B)(viii) of the Act in a form and manner, and at a time, 
specified by CMS. A hospital must begin submitting data on the first 
day of the quarter following the date that the hospital submits a 
completed Notice of Participation form under paragraph (a)(3) of this 
section.
    (2) Exception. Upon request by a hospital, CMS may grant an 
extension or waiver of one or more data submission deadlines in the 
event of extraordinary circumstances beyond the control of the 
hospital. Specific requirements for submission of a request for an 
extension or waiver are available onQualityNet.org.
    (d) Validation of Hospital IQR Program data. CMS may validate one 
or more measures selected under section 1886(b)(3)(B)(viii) of the Act 
by reviewing patient charts submitted by selected participating 
hospitals.
    (1) Upon written request by CMS or its contractor, a hospital must 
submit to CMS a sample of patient charts that the hospital used for 
purposes of data submission under the program. The specific sample that 
a hospital must submit will be identified in the written request. A 
hospital must submit the patient charts to CMS or its contractor within 
30 days of the date identified on the written request.
    (2) A hospital meets the validation requirement with respect to a 
fiscal year if it achieves a 75-percent score, as determined by CMS.
    (e) Reconsiderations and appeals of Hospital IQR Program decisions.
    (1) A hospital may request reconsideration of a decision by CMS 
that the hospital has not met the requirements of the Hospital IQR 
Program for a particular fiscal year. Except as provided in paragraph 
(c)(2) of this section, a hospital must submit a reconsideration 
request to CMS no later than 30 days from the date identified on the 
Hospital Inpatient Quality Reporting Program Annual Payment Update 
Notification Letter provided to the hospital.
    (2) A reconsideration request must contain the following 
information:
    (i) The hospital's CMS Certification Number (CCN);
    (ii) The name of the hospital;
    (iii) Contact information for the hospital's chief executive 
officer and QualityNet system administrator, including each 
individual's name, e-mail address, telephone number, and physical 
mailing address;
    (iv) A summary of the reason(s), as set forth in the Hospital 
Inpatient Quality Reporting Program Annual Payment Update Notification 
Letter, that CMS concluded the hospital did not meet the requirements 
of the Hospital IQR Program;
    (v) A detailed explanation of why the hospital believes that it 
complied with the requirements of the Hospital IQR Program for the 
applicable fiscal year;
    (vi) Any evidence that supports the hospital's reconsideration 
request, including copies of patient charts, e-mails and other 
documents; and
    (vii) If the hospital has requested reconsideration on the basis 
that CMS concluded it did not meet the validation requirement set forth 
in paragraph (d) of this section, the reconsideration request must 
contain the following additional information:
    (A) A copy of each patient chart that the hospital timely submitted 
to CMS or its contractor in response to a request made under paragraph 
(d)(1) of this section; and

[[Page 26017]]

    (B) A detailed explanation identifying which data the hospital 
believes was improperly validated by CMS and why the hospital believes 
that such data are correct.
    (3) A hospital that is dissatisfied with a decision made by CMS on 
its reconsideration request may file an appeal with the Provider 
Reimbursement Review Board under Part 405, Subpart R of this chapter.
    7. Section 412.211 is amended by adding a new paragraph (c)(4) to 
read as follows:

Sec.  412.211  Puerto Rico rates for Federal fiscal year 2004 and 
subsequent fiscal years.

* * * * *
    (c) * * *
    (4) For fiscal year 2012 and subsequent fiscal years, the 
applicable percentage increase specified in Sec.  412.64(d).
* * * * *
    8. Section 412.523 is amended by--
    a. Adding a new paragraph (c)(3)(viii).
    b. Adding a new paragraph (d)(4).
    The additions to read as follows:

Sec.  412.523  Methodology for calculating the Federal prospective 
payment rates.

* * * * *
    (c) * * *
    (3) * * *
    (viii) For long-term care hospital prospective payment system 
fiscal year beginning October 1, 2011, and ending September 30, 2012. 
The standard Federal rate for the long-term care hospital prospective 
payment system beginning October 1, 2011, and ending September 30, 
2012, is the standard Federal rate for the previous long-term care 
hospital prospective payment system fiscal year updated by 1.5 percent. 
The standard Federal rate is adjusted, as appropriate, as described in 
paragraph (d) of this section.
* * * * *
    (d) * * *
    (4) Changes to the adjustment for area wage levels. Beginning in FY 
2012, CMS adjusts the standard Federal rate by a factor that accounts 
for the estimated effect of any adjustments or updates to the area wage 
level adjustment under Sec.  412.525(c)(1) on estimated aggregate LTCH 
PPS payments.
* * * * *
    9. Section 412.525 is amended by revising paragraph (c) to read as 
follows:

Sec.  412.525  Adjustments to the Federal prospective payment.

* * * * *
    (c) Adjustments for area wage levels. (1) The labor portion of a 
long-term care hospital's Federal prospective payment is adjusted to 
account for geographical differences in the area wage levels using an 
appropriate wage index (established by CMS), which reflects the 
relative level of hospital wages and wage-related costs in the 
geographic area (that is, urban or rural area as determined in 
accordance with the definitions set forth in Sec.  412.503) of the 
hospital compared to the national average level of hospital wages and 
wage-related costs. The appropriate wage index that is established by 
CMS is updated annually. The labor portion of a long-term care 
hospital's Federal prospective payment is established by CMS and is 
updated annually.
    (2) Beginning in FY 2012, any adjustments or updates to the area 
wage level adjustment under this paragraph (c) will be made in a budget 
neutral manner such that estimated aggregate LTCH PPS payments are not 
affected.
* * * * *

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

    10. The authority citation for Part 413 continues to read as 
follows:

    Authority:  Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), 
and (n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security 
Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and 
(n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of 
Pub. L. 106-133 (113 Stat. 1501A-332).

    11. Section 413.70 is amended by--
    a. Revising paragraph (b)(5)(i)(B).
    b. Adding a new paragraph (b)(5)(i)(C).
    The revision and addition read as follows:

Sec.  413.70  Payment for services of a CAH.

* * * * *
    (b) * * *
    (5) * * *
    (i) * * *
    (B) Effective for cost reporting periods beginning on or after 
January 1, 2004 and on or before September 30, 2011, payment for 
ambulance services furnished by a CAH or an entity that is owned and 
operated by a CAH is 101 percent of the reasonable costs of the CAH or 
the entity in furnishing those services, but only if the CAH or the 
entity is the only provider or supplier of ambulance services located 
within a 35-mile drive of the CAH or the entity.
    (C) Effective for cost reporting periods beginning on or after 
October 1, 2011, payment for ambulance services furnished by a CAH or 
an entity that is owned and operated by a CAH is 101 percent of the 
reasonable costs of the CAH or the entity in furnishing those services, 
but only if the CAH or the entity is the only provider or supplier of 
ambulance services located within a 35-mile drive of the CAH. If there 
is no provider or supplier of ambulance services located within a 35-
mile drive of the CAH and there is an entity that is owned and operated 
by a CAH that is more than a 35-mile drive from the CAH, payment for 
ambulance services furnished by that entity is 101 percent of the 
reasonable costs of the entity in furnishing those services, but only 
if the entity is the closest provider or supplier of ambulance services 
to the CAH.
* * * * *

PART 476--UTILIZATION AND QUALITY CONTROL REVIEW

    12. The authority citation for Part 476 continues to read as 
follows:

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

    13. Section 476.78 is amended by--
    a. In paragraph (a), removing the reference ``Sec.  466.71'' and 
adding in its place the reference ``Sec.  476.71''.
    b. Revising paragraph (b).
    The revision reads as follows:

Sec.  476.78  Responsibilities of health care facilities.

* * * * *
    (b) Cooperation with QIOs. Health care providers that submit 
Medicare claims must cooperate in the assumption and conduct of QIO 
review.
    (1) Providers must allocate adequate space to the QIO for its 
conduct of review at the times the QIO is conducting review.
    (2) Providers must provide patient care data and other pertinent 
data to the QIO at the time the QIO is collecting review information 
that is required for the QIO to make its determinations. QIOs pay 
providers paid under the prospective payment system for the costs of 
photocopying records requested by the QIO in accordance with the 
payment rate determined under the methodology described in paragraph 
(c) of this section and for first class postage for mailing the records 
to the QIO. When the QIO does postadmission, preprocedure review, the 
facility must provide the necessary information before the procedure is 
performed, unless it must be performed on an emergency basis. Providers 
must--

[[Page 26018]]

    (i) Photocopy and deliver to the QIO all required information 
within 30 calendar days of a request;
    (ii) Deliver all required medical information to the QIO within 21 
calendar days from the date of the request in those situations where a 
potential ``serious reportable event'' has been identified or where 
other circumstances as deemed by the QIO warrant earlier receipt of all 
required medical information. For purposes of this paragraph, a serious 
reportable event is defined as a preventable, serious, and unambiguous 
adverse event that should never occur.
    (3) Providers must inform Medicare beneficiaries at the time of 
admission, in writing, that the care for which Medicare payment is 
sought will be subject to QIO review and indicate the potential 
outcomes of that review. Furnishing this information to the patient 
does not constitute notice, under Sec.  405.332(a) of this chapter, 
that can support a finding that the beneficiary knew the services were 
not covered.
    (4) When the provider has issued a written determination in 
accordance with Sec.  412.42(c)(3) of this chapter that a beneficiary 
no longer requires inpatient hospital care, it must submit a copy of 
its determination to the QIO within 3 working days.
    (5) Providers must assure, in accordance with the provisions of 
their agreements with the QIO, that each case subject to preadmission 
review has been reviewed and approved by the QIO before admission to 
the hospital or a timely request has been made for QIO review.
    (6)(i) Providers must agree to accept financial liability for any 
admission subject to preadmission review that was not reviewed by the 
QIO and is subsequently determined to be inappropriate or not medically 
necessary.
    (ii) The provisions of paragraph (b)(6)(i) of this section do not 
apply if a provider, in accordance with its agreement with a QIO, makes 
a timely request for preadmission review and the QIO does not review 
the case timely. Cases of this type are subject to retrospective 
prepayment review under paragraph (b)(7) of this section.
    (7) Hospitals must agree that, if the hospital admits a case 
subject to preadmission review without certification, the case must 
receive retrospective prepayment review, according to the review 
priority established by the QIO.
* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare--
Hospital Insurance; Program No. 93.774, Medicare--Supplementary Medical 
Insurance Program; and Program No. 93.778, Medical Assistance)

    Dated: April 7, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: April 15, 2011.
Kathleen Sebelius,
Secretary.

    Note: The following Addendum and Appendixes will not appear in 
the Code of Federal Regulations.

Addendum--Proposed Schedule of Standardized Amounts, Update Factors, 
and Rate-of-Increase Percentages Effective With Cost Reporting Periods 
Beginning on or After October 1, 2011

I. Summary and Background

    In this Addendum, we are setting forth a description of the 
methods and data we used to determine the proposed prospective 
payment rates for Medicare hospital inpatient operating costs and 
Medicare hospital inpatient capital-related costs for FY 2012 for 
acute care hospitals. We also are setting forth the proposed rate-
of-increase percentages for updating the target amounts for certain 
hospitals excluded from the IPPS for FY 2012. We note that, because 
certain hospitals excluded from the IPPS are paid on a reasonable 
cost basis subject to a rate-of-increase ceiling (and not by the 
IPPS), these hospitals are not affected by the figures for the 
standardized amounts, offsets, and budget neutrality factors. 
Therefore, in this proposed rule, we are proposing the rate-of-
increase percentages for updating the target amounts for certain 
hospitals excluded from the IPPS that are effective for cost 
reporting periods beginning on or after October 1, 2011.
    In addition, we are setting forth a description of the methods 
and data we used to determine the proposed standard Federal rate 
that will be applicable to Medicare LTCHs for FY 2012.
    In general, except for SCHs, MDHs, and hospitals located in 
Puerto Rico, each hospital's payment per discharge under the IPPS is 
based on 100 percent of the Federal national rate, also known as the 
national adjusted standardized amount. This amount reflects the 
national average hospital cost per case from a base year, updated 
for inflation.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: The Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; the updated hospital-specific rate based on FY 1996 
costs per discharge; or the updated hospital-specific rate based on 
the FY 2006 costs per discharge.
    Under section 1886(d)(5)(G) of the Act, MDHs historically have 
been paid based on the Federal national rate or, if higher, the 
Federal national rate plus 50 percent of the difference between the 
Federal national rate and the updated hospital-specific rate based 
on FY 1982 or FY 1987 costs per discharge, whichever was higher. 
However, section 5003(a)(1) of Pub. L. 109-171 extended and modified 
the MDH special payment provision that was previously set to expire 
on October 1, 2006, to include discharges occurring on or after 
October 1, 2006, but before October 1, 2011. Section 3124(a) of the 
Affordable Care Act amended sections 1886(d)(5)(G)(i) and 
1886(d)(5)(G)(ii)(II) of the Act to extend the MDH program and 
payment methodology from the end of FY 2011 to the end of FY 2012, 
by striking ``October 1, 2011'' and inserting ``October 1, 2012''. 
Section 3124(b) of the Affordable Care Act also made conforming 
amendments to sections 1886(b)(3)(D) and 1886(b)(3)(D)(iv) of the 
Act. Section 3124(b)(2) of the Affordable Care Act also amended 
section 13501(e)(2) of OBRA 1993 to extend the provision permitting 
hospitals to decline reclassification as an MDH through FY 2012. 
Under section 5003(b) of Public Law 109-171, if the change results 
in an increase to an MDH's target amount, we must rebase an MDH's 
hospital-specific rates based on its FY 2002 cost report. Section 
5003(c) of Public Law 109-171 further required that MDHs be paid 
based on the Federal national rate or, if higher, the Federal 
national rate plus 75 percent of the difference between the Federal 
national rate and the updated hospital-specific rate. Further, based 
on the provisions of section 5003(d) of Public Law 109-171, MDHs are 
no longer subject to the 12-percent cap on their DSH payment 
adjustment factor.
    For hospitals located in Puerto Rico, the payment per discharge 
is based on the sum of 25 percent of an updated Puerto Rico-specific 
rate based on average costs per case of Puerto Rico hospitals for 
the base year and 75 percent of the Federal national rate. (We refer 
readers to section II.D.3. of this Addendum for a complete 
description.)
    As discussed below in section II. of this Addendum, we are 
proposing to make changes in the determination of the prospective 
payment rates for Medicare inpatient operating costs for acute care 
hospitals for FY 2012. In section III. of this Addendum, we discuss 
our proposed policy changes for determining the prospective payment 
rates for Medicare inpatient capital-related costs for FY 2012. In 
section IV. of this Addendum, we are setting forth our proposed 
changes for determining the rate-of-increase limits for certain 
hospitals excluded from the IPPS for FY 2012. In section V. of this 
Addendum, we are proposing to make changes in the determination of 
the standard Federal rate for LTCHs under the LTCH PPS for FY 2012. 
The tables to which we refer in the preamble of this proposed rule 
are listed in section VI. of this Addendum and are available via the 
Internet.

II. Proposed Changes to Prospective Payment Rates for Hospital 
Inpatient Operating Costs for Acute Care Hospitals for FY 2012

    The basic methodology for determining prospective payment rates 
for hospital inpatient operating costs for acute care hospitals for 
FY 2005 and subsequent fiscal

[[Page 26019]]

years is set forth at Sec.  412.64. The basic methodology for 
determining the prospective payment rates for hospital inpatient 
operating costs for hospitals located in Puerto Rico for FY 2005 and 
subsequent fiscal years is set forth at Sec. Sec.  412.211 and 
412.212. Below we discuss the factors used for determining the 
proposed prospective payment rates for FY 2012.
    In summary, the proposed standardized amounts set forth in 
Tables 1A, 1B, and 1C that are listed and published in section VI. 
of this Addendum (and available via the Internet) reflect--
     Equalization of the standardized amounts for urban and 
other areas at the level computed for large urban hospitals during 
FY 2004 and onward, as provided for under section 
1886(d)(3)(A)(iv)(II) of the Act.
     The labor-related share that is applied to the 
standardized amounts and Puerto Rico-specific standardized amounts 
to give the hospital the highest payment, as provided for under 
sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act.
     Proposed updates of 1.5 percent for all areas (that is, 
the FY 2012 estimate of the market basket rate-of-increase of 2.8 
percent less an adjustment of 1.2 percentage points for multifactor 
productivity and less 0.1 percentage point), as required by section 
1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) 
and10319(a) of the Affordable Care Act. For hospitals that fail to 
submit data, in a form and manner, and at the time, specified by the 
Secretary relating to the quality of inpatient care furnished by the 
hospital, pursuant to section 1886(b)(3)(B)(viii) of the Act, the 
proposed update is -0.5 percent (that is, the FY 2012 estimate of 
the market basket rate-of-increase of 2.8 percent, less 2.0 
percentage points for failure to submit data under the Hospital IQR 
Program, less an adjustment of 1.2 percentage points for multifactor 
productivity, and less 0.1 percentage point).
     A proposed update of 1.5 percent to the Puerto Rico-
specific standardized amount (that is, the FY 2012 estimate of the 
market basket rate-of-increase of 2.8 percent less an adjustment of 
1.2 percentage points for multifactor productivity and less 0.1 
percentage point), in accordance with section 1886(d)(9)(C)(i) of 
the Act, as amended by section 401(c) of Public Law 108-173, which 
sets the update to the Puerto Rico-specific standardized amount 
equal to the applicable percentage increase set forth in section 
1886(b)(3)(B)(i) of the Act.
     An adjustment to the standardized amount to ensure 
budget neutrality for DRG recalibration and reclassification, as 
provided for under section 1886(d)(4)(C)(iii) of the Act.
     An adjustment to ensure the wage index changes are 
budget neutral, as provided for under section 1886(d)(3)(E)(i) of 
the Act. We note that section 1886(d)(3)(E)(i) of the Act requires 
that when we compute such budget neutrality, we assume that the 
provisions of section 1886(d)(3)(E)(ii) of the Act (requiring a 62 
percent labor-related share in certain circumstances) had not been 
enacted.
     An adjustment to ensure the effects of geographic 
reclassification are budget neutral, as provided for in section 
1886(d)(8)(D) of the Act, by removing the FY 2011 budget neutrality 
factor and applying a revised factor.
     An adjustment to ensure the effects of the rural 
community hospital demonstration required under section 410A of 
Public Law 108-173, as amended by sections 3123 and 10313 of Public 
Law 111-148, which extended the demonstration for an additional 5 
years are budget neutral, as required under section 410A(c)(2) of 
Public Law 108-173.
     An adjustment in light of the court's decision in Cape 
Cod v. Sebelius (630 F.3d 203 (D.C. Cir. 2011)).
     An adjustment to remove the FY 2011 outlier offset and 
apply an offset for FY 2012, as provided for in section 
1886(d)(3)(B) of the Act.
     As discussed below and in section II.D. of the preamble 
to this proposed rule, an adjustment to meet the requirements of 
sections 7(b)(1)(A) and 7(b)(1)(B) of Pub. L. 110-90 to adjust the 
standardized amounts to offset the estimated amount of the increase 
in aggregate payments (including interest) due to the effect of 
documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 and FY 2009.
    Beginning in FY 2008, we applied the budget neutrality 
adjustment for the rural floor to the hospital wage indices rather 
than the standardized amount. As we did for FY 2011, for FY 2012, we 
are proposing to continue to apply the rural floor budget neutrality 
adjustment to hospital wage indices rather than the standardized 
amount. Consistent with section 3141 of the Affordable Care Act, 
instead of applying a State level rural floor budget neutrality 
adjustment on the wage index, we are proposing to apply a uniform, 
national budget neutrality adjustment to the FY 2012 wage index for 
the rural floor. We note that, as proposed in section III.F.2 of the 
preamble of this proposed rule, we are not proposing to extend the 
imputed floor as this policy is set to expire with the FY 2011 wage 
index. Thus, the imputed floor is not reflected in the proposed FY 
2012 wage index.

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

    In general, the national standardized amount is based on per 
discharge averages of adjusted hospital costs from a base period 
(section 1886(d)(2)(A) of the Act), updated and otherwise adjusted 
in accordance with the provisions of section 1886(d) of the Act. For 
Puerto Rico hospitals, the Puerto Rico-specific standardized amount 
is based on per discharge averages of adjusted target amounts from a 
base period (section 1886(d)(9)(B)(i) of the Act), updated and 
otherwise adjusted in accordance with the provisions of section 
1886(d)(9) of the Act. The September 1, 1983 interim final rule (48 
FR 39763) contained a detailed explanation of how base-year cost 
data (from cost reporting periods ending during FY 1981) were 
established for urban and rural hospitals in the initial development 
of standardized amounts for the IPPS. The September 1, 1987 final 
rule (52 FR 33043 and 33066) contains a detailed explanation of how 
the target amounts were determined and how they are used in 
computing the Puerto Rico rates.
    Sections 1886(d)(2)(B) and 1886(d)(2)(C) of the Act require us 
to update base-year per discharge costs for FY 1984 and then 
standardize the cost data in order to remove the effects of certain 
sources of cost variations among hospitals. These effects include 
case-mix, differences in area wage levels, cost-of-living 
adjustments for Alaska and Hawaii, IME costs, and costs to hospitals 
serving a disproportionate share of low-income patients.
    In accordance with section 1886(d)(3)(E) of the Act, the 
Secretary estimates, from time-to-time, the proportion of hospitals' 
costs that are attributable to wages and wage-related costs. In 
general, the standardized amount is divided into labor-related and 
nonlabor-related amounts; only the proportion considered to be the 
labor-related amount is adjusted by the wage index. Section 
1886(d)(3)(E) of the Act requires that 62 percent of the 
standardized amount be adjusted by the wage index, unless doing so 
would result in lower payments to a hospital than would otherwise be 
made. (Section 1886(d)(9)(C)(iv)(II) of the Act extends this 
provision to the labor-related share for hospitals located in Puerto 
Rico.)
    For FY 2012, we are proposing to continue to use a labor-related 
share of 68.8 percent for discharges occurring on or after October 
1, 2011, for the national standardized amounts and 62.1 percent for 
the Puerto Rico-specific standardized amount. Consistent with 
section 1886(d)(3)(E) of the Act, we are applying the wage index to 
a labor-related share of 62 percent for all IPPS hospitals whose 
wage index values are less than or equal to 1.0000. For all IPPS 
hospitals whose wage indices are greater than 1.0000, we are 
applying the wage index to a labor-related share of 68.8 percent of 
the national standardized amount. For FY 2012, all Puerto Rico 
hospitals have a wage index less than 1.0. Therefore, the national 
labor-related share will always be 62 percent because the wage index 
for all Puerto Rico hospitals is less than 1.0.
    For hospitals located in Puerto Rico, we are applying a labor-
related share of 62.1 percent if its Puerto Rico-specific wage index 
is greater than 1.0000. For hospitals located in Puerto Rico whose 
Puerto-Rico specific wage index values are less than or equal to 
1.0000, we are applying a labor share of 62 percent.
    The proposed standardized amounts for operating costs appear in 
Table 1A, 1B, and 1C that are listed and published in section VI. of 
the Addendum to this proposed rule and are available via the 
Internet.

2. Computing the Average Standardized Amount

    Section 1886(d)(3)(A)(iv)(II) of the Act requires that, 
beginning with FY 2004 and thereafter, an equal standardized amount 
be computed for all hospitals at the level computed for large urban 
hospitals during FY 2003, updated by the applicable percentage 
update. Section 1886(d)(9)(A)(ii)(II) of the Act equalizes the 
Puerto Rico-specific urban and rural area rates. Accordingly, we are 
proposing to calculate the FY 2012 national and Puerto Rico 
standardized amounts

[[Page 26020]]

irrespective of whether a hospital is located in an urban or rural 
location.

3. Updating the Average Standardized Amount

    Section 1886(b)(3)(B) of the Act specifies the applicable 
percentage increase used to update the standardized amount for 
payment for inpatient hospital operating costs. As discussed in 
section IV.K.3. of the preamble of this proposed rule, in accordance 
with section 1886(b)(3)(B) of the Act, as amended by section 3401(a) 
of the Affordable Care Act, we are proposing to reduce the FY 2012 
applicable percentage increase (which is based on the first quarter 
2011 forecast of the FY 2006-based IPPS market basket) by the 
multifactor productivity (MFP) adjustment (the 10-year moving 
average of MFP for the period ending FY 2012) of 1.2 percent, which 
is calculated based on IHS Global Insight, Inc.'s (IGI's) first 
quarter 2011 forecast. In addition, in accordance with section 
1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and 
10319(a) of the Affordable Care Act, we are proposing to further 
update the standardized amount for FY 2012 by the estimated market 
basket percentage increase less 0.1 percentage point for hospitals 
in all areas. Sections 1886(b)(3)(B)(xi) and (xii) of Act, as added 
and amended by sections 3401(a) and 10319(a) of the Affordable Care 
Act, further state that these adjustments may result in the 
applicable percentage increase being less than zero. The percentage 
increase in the market basket reflects the average change in the 
price of goods and services comprising routine, ancillary, and 
special care unit hospital inpatient services. Based on IGI's 2011 
first quarter forecast of the hospital market basket increase (as 
discussed in Appendix B of this proposed rule), the most recent 
forecast of the hospital market basket increase for FY 2012 is 2.8 
percent. Thus, for FY 2012, the proposed update to the average 
standardized amount is 1.5 percent for hospitals in all areas (that 
is, the FY 2012 estimate of the market basket rate-of-increase of 
2.8 percent less an adjustment of 1.2 percentage points for 
multifactor productivity and less 0.1 percentage point). For 
hospitals that do not submit quality data pursuant to section 
1886(b)(3)(B)(viii), the estimated update to the operating 
standardized amount is -0.5 percent (that is, the FY 2012 estimate 
of the market basket rate-of-increase of 2.8 percent, less 2.0 
percentage points for failure to submit data under the IQR program, 
less an adjustment of 1.2 percentage points for multifactor 
productivity, and less 0.1 percentage point). The proposed 
standardized amounts in Tables 1A through 1C that are published in 
section VI. of this Addendum and available via the Internet reflect 
these differential amounts.
    Section 401(c) of Public Law 108-173 amended section 
1886(d)(9)(C)(i) of the Act and states that, for discharges 
occurring in a fiscal year (beginning with FY 2004), the Secretary 
shall compute an average standardized amount for hospitals located 
in any area of Puerto Rico that is equal to the average standardized 
amount computed under subclause (I) for FY 2003 for hospitals in a 
large urban area (or, beginning with FY 2005, for all hospitals in 
the previous fiscal year) increased by the applicable percentage 
increase under subsection (b)(3)(B) for the fiscal year involved. 
Therefore, the update to the Puerto Rico-specific operating 
standardized amount is subject to the applicable percentage increase 
set forth in section 1886(b)(3)(B)(i) of the Act, as amended by 
sections 3401(a) and 10319(a) of the Affordable Care Act (that is, 
the same update factor as for all other hospitals subject to the 
IPPS). Accordingly, we are proposing an applicable percentage 
increase to the Puerto Rico-specific standardized amount of 1.5 
percent.
    Although the update factors for FY 2012 are set by law, we are 
required by section 1886(e)(4) of the Act to recommend, taking into 
account MedPAC's recommendations, appropriate update factors for FY 
2012 for both IPPS hospitals and hospitals and hospital units 
excluded from the IPPS. Section 1886(e)(5)(A) of the Act requires 
that we publish our proposed recommendations in the Federal Register 
for public comment. Our recommendation on the update factors is set 
forth in Appendix B of this proposed rule.

4. Other Adjustments to the Average Standardized Amount

    As in the past, we are proposing to adjust the FY 2012 
standardized amount to remove the effects of the FY 2011 geographic 
reclassifications and outlier payments before applying the FY 2012 
updates. We then apply budget neutrality offsets for outliers and 
geographic reclassifications to the standardized amount based on FY 
2012 payment policies.
    We do not remove the prior year's budget neutrality adjustments 
for reclassification and recalibration of the DRG weights and for 
updated wage data because, in accordance with sections 
1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, estimated aggregate 
payments after updates in the DRG relative weights and wage index 
should equal estimated aggregate payments prior to the changes. If 
we removed the prior year's adjustment, we would not satisfy these 
conditions.
    Budget neutrality is determined by comparing aggregate IPPS 
payments before and after making changes that are required to be 
budget neutral (for example, changes to DRG classifications, 
recalibration of the DRG relative weights, updates to the wage 
index, and different geographic reclassifications). We include 
outlier payments in the simulations because they may be affected by 
changes in these parameters.
    Consistent with our methodology established in the FY 2011 IPPS/
LTCH final rule (75 FR 50422 through 50433), because IME Medicare 
Advantage payments are made to IPPS hospitals under section 1886(d) 
of the Act, we believe these payments must be part of these budget 
neutrality calculations. However, we note that it is not necessary 
to include Medicare Advantage IME payments in the outlier threshold 
calculation or the outlier offset to the standardized amount because 
the statute requires that outlier payments be not less than 5 
percent nor more than 6 percent of total ``operating DRG payments,'' 
which does not include IME and DSH payments. In order to account for 
these Medicare Advantage IME payments in determining the budget 
neutrality adjustments for this final rule, we identified Medicare 
Advantage claims from IPPS teaching hospitals in the MedPAR data. 
Consistent with our methodology established in the FY 2011 IPPS/LTCH 
final rule (75 FR 50422-50423), we first searched the MedPAR file 
for all claims with an IME payment greater than zero. We then 
filtered these claims for a subset of claims with a GHO Paid 
indicator with a value of ``1'' or if the IME payment field was 
equal to the DRG payment field. The GHO Paid indicator with a value 
of ``1'' in the MedPAR file indicates that the claim was paid by a 
Medicare Advantage plan (other than the IPPS IME payment specified 
at Sec.  412.105(g)). For these Medicare Advantage claims from IPPS 
teaching hospitals, we computed a transfer-adjusted CMI by provider 
based on the FY 2011 MS-DRG GROUPER Version 28.0 assignment and 
relative weights. We also computed a transfer-adjusted CMI for these 
Medicare Advantage claims from IPPS teaching hospitals based on the 
proposed FY 2012 MS-DRG GROUPER Version 29.0 assignments and 
relative weights. These transfer-adjusted CMIs (and corresponding 
case counts) were used to calculate an IME teaching add-on payment 
in accordance with Sec.  412.105(g). The total Medicare Advantage 
IME payment amount was then added to the total Federal payment 
amount for each provider (where applicable) in order to account for 
the Medicare Advantage IME payment in determining the budget 
neutrality adjustments. We note that we did not include Medicare 
Advantage IME claims when estimating outlier payments for providers 
because Medicare Advantage claims are not eligible for outlier 
payments under the IPPS.
    Additionally, consistent with our methodology established in the 
FY 2011 IPPS/LTCH final rule (75 FR 50422-50423), we examined the 
MedPAR and removed pharmacy charges for antihemophilic blood factor 
(which are paid separately under the IPPS) with an indicator of 
``3'' for blood clotting with a revenue code of ``0636''from the 
covered charge field for the budget neutrality adjustments. We also 
removed organ acquisition charges from the covered charge field for 
the budget neutrality adjustments because organ acquisition is a 
pass-through payment not paid under the IPPS.

a. Proposed Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment

    Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning 
in FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that 
aggregate payments to hospitals are not affected. As discussed in 
section II. of the preamble of this proposed rule, we normalized the 
recalibrated DRG weights by an adjustment factor so that the average 
case weight after recalibration is equal to the average case weight 
prior to recalibration. However, 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

[[Page 26021]]

because payments to hospitals are affected by factors other than 
average case weight. Therefore, as we have done in past years, we 
are proposing to make a budget neutrality adjustment to ensure that 
the requirement of section 1886(d)(4)(C)(iii) of the Act is met.
    Section 1886(d)(3)(E)(i) of the Act requires us to update the 
hospital wage index on an annual basis beginning October 1, 1993. 
This provision also requires us to make any updates or adjustments 
to the wage index in a manner that ensures that aggregate payments 
to hospitals are not affected by the change in the wage index. 
Section 1886(d)(3)(E)(i) of the Act requires that we implement the 
wage index adjustment in a budget neutral manner. However, section 
1886(d)(3)(E)(ii) of the Act sets the labor-related share at 62 
percent for hospitals with a wage index less than or equal to 1.0, 
and section 1886(d)(3)(E)(i) of the Act provides that the Secretary 
shall calculate the budget neutrality adjustment for the adjustments 
or updates made under that provision as if section 1886(d)(3)(E)(ii) 
of the Act had not been enacted. In other words, this section of the 
statute requires that we implement the updates to the wage index in 
a budget neutral manner, but that our budget neutrality adjustment 
should not take into account the requirement that we set the labor-
related share for hospitals with indices less than or equal to 1.0 
at the more advantageous level of 62 percent. Therefore, for 
purposes of this budget neutrality adjustment, section 
1886(d)(3)(E)(i) of the Act prohibits us from taking into account 
the fact that hospitals with a wage index less than or equal to 1.0 
are paid using a labor-related share of 62 percent. Consistent with 
current policy, for FY 2012, we are proposing to adjust 100 percent 
of the wage index factor for occupational mix. We describe the 
occupational mix adjustment in section III.C. of the preamble of 
this proposed rule.
    For FY 2012, to comply with the requirement that DRG 
reclassification and recalibration of the relative weights be budget 
neutral for the Puerto Rico standardized amount and the hospital-
specific rates, we used FY 2010 discharge data to simulate payments 
and compared aggregate payments using the FY 2011 labor-related 
share percentages, the FY 2011 relative weights, and the FY 2011 
pre-reclassified wage data to aggregate payments using the FY 2011 
labor-related share percentages, the proposed FY 2012 relative 
weights, and the FY 2011 pre-reclassified wage data. Based on this 
comparison, we computed a budget neutrality adjustment factor equal 
to 0.998419. As discussed in section IV. of this Addendum, we also 
would apply the proposed DRG reclassification and recalibration 
budget neutrality factor of 0.998419 to the hospital-specific rates 
that are to be effective for cost reporting periods beginning on or 
after October 1, 2011.
    In order to meet the statutory requirements that we do not take 
into account the labor-related share of 62 percent when computing 
wage index budget neutrality, it was necessary to use a three-step 
process to comply with the requirements that DRG reclassification 
and recalibration of the relative weights and the updated wage index 
and labor-related share have no effect on aggregate payments for 
IPPS hospitals. We first determined a proposed DRG reclassification 
and recalibration budget neutrality factor of 0.998419 by using the 
same methodology described above to determine the proposed DRG 
reclassification and recalibration budget neutrality factor for the 
Puerto Rico standardized amount and hospital-specific rates. 
Secondly, to compute a budget neutrality factor for wage index and 
labor-related share changes, we used FY 2010 discharge data to 
simulate payments and compared aggregate payments using proposed FY 
2012 relative weights and FY 2011 pre-reclassified wage indices, and 
applied the FY 2011 labor-related share of 68.8 percent to all 
hospitals (regardless of whether the hospital's wage index was above 
or below 1.0) to aggregate payments using the proposed FY 2012 
relative weights and the proposed FY 2012 pre-reclassified wage 
indices, and applied the proposed labor-related share for FY 2012 of 
68.8 percent to all hospitals (regardless of whether the hospital's 
wage index was above or below 1.0). In addition, we applied the 
proposed DRG reclassification and recalibration budget neutrality 
factor (derived in the first step) to the rates that were used to 
simulate payments for this comparison of aggregate payments from FY 
2011 to FY 2012. By applying this methodology, we determined a 
proposed budget neutrality factor of 1.000113 for changes to the 
wage index. Finally, we multiplied the proposed DRG reclassification 
and recalibration budget neutrality factor of 0.998419 (derived in 
the first step) by the proposed budget neutrality factor of 1.000113 
for changes to the wage index (derived in the second step) to 
determine the proposed DRG reclassification and recalibration and 
updated wage index budget neutrality factor of 0.998532.

b. Reclassified Hospitals--Proposed Budget Neutrality Adjustment

    Section 1886(d)(8)(B) of the Act provides that, effective with 
discharges occurring on or after October 1, 1988, certain rural 
hospitals are deemed urban. In addition, section 1886(d)(10) of the 
Act provides for the reclassification of hospitals based on 
determinations by the MGCRB. Under section 1886(d)(10) of the Act, a 
hospital may be reclassified for purposes of the wage index.
    Under section 1886(d)(8)(D) of the Act, the Secretary is 
required to adjust the standardized amount to ensure that aggregate 
payments under the IPPS after implementation of the provisions of 
sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal 
to the aggregate prospective payments that would have been made 
absent these provisions. We note that the wage index adjustments 
provided under section 1886(d)(13) of the Act are not budget 
neutral. Section 1886(d)(13)(H) of the Act provides that any 
increase in a wage index under section 1886(d)(13) shall not be 
taken into account ``in applying any budget neutrality adjustment 
with respect to such index'' under section 1886(d)(8)(D) of the Act. 
To calculate the proposed budget neutrality factor for FY 2012, we 
used FY 2010 discharge data to simulate payments and compared total 
IPPS payments with proposed FY 2012 relative weights, FY 2012 labor-
related share percentages, and proposed FY 2012 wage data prior to 
any reclassifications under sections 1886(d)(8)(B) and (C) and 
1886(d)(10) of the Act to total IPPS payments with proposed FY 2012 
relative weights, FY 2012 labor-related share percentages, and 
proposed FY 2012 wage data after such reclassifications. Based on 
these simulations, we calculated a proposed adjustment factor of 
0.991528 to ensure that the effects of these provisions are budget 
neutral, consistent with the statute.
    The proposed FY 2012 budget neutrality adjustment factor is 
applied to the standardized amount after removing the effects of the 
FY 2011 budget neutrality adjustment factor. We note that the 
proposed FY 2012 budget neutrality adjustment reflects proposed FY 
2012 wage index reclassifications approved by the MGCRB or the 
Administrator. We note that, for this proposed rule, as discussed in 
section III.B. of the preamble to this proposed rule, section 
3137(c) of the Affordable Care Act resulted in some additional 
hospitals receiving reclassifications, or some hospitals receiving 
reclassifications to a different area. These reclassifications are 
included in the calculation of reclassification budget neutrality.

c. Proposed Rural Floor Budget Neutrality Adjustment

    We make an adjustment to the wage index to ensure that aggregate 
payments to hospitals after implementation of the rural floor under 
section 4410 of the BBA (Pub. L. 105-33) are not affected. As 
discussed in section III.F. of the preamble of this proposed rule, 
consistent with section 3141 of the Affordable Care Act, the budget 
neutrality adjustment for the rural and imputed floors is a national 
adjustment to the wage index.
    As discussed in section III.F.2. of the preamble of this 
proposed rule, for the FY 2012 wage index, there are wage data for 
one new hospital in rural Puerto Rico when previously there were 
none. Therefore, for FY 2012, we are proposing to calculate a 
national rural Puerto Rico wage index (used to adjust the labor-
related share of the national standardized amount for hospitals in 
Puerto Rico which receive 75 percent of the national standardized 
amount) and a rural Puerto Rico-specific wage index (which will be 
used to adjust the labor-related share of the Puerto Rico-specific 
standardized amount for hospitals in Puerto Rico which receive 25 
percent of the Puerto Rico-specific standardized amount). Our 
calculation is based on the policy adopted in the FY 2008 IPPS final 
rule with comment period (72 FR 47323). A complete discussion on the 
computation of the rural Puerto Rico wage index can be found in 
section III.G. of the preamble of this proposed rule. In past fiscal 
years, when there was no rural Puerto Rico wage index, we applied 
the national rural floor budget neutrality wage index factor to the 
national wage indices used to adjust the labor-related share for the 
national standardized amount (including the national Puerto Rico 
wage indexes) but did not apply this factor to the Puerto Rico-
specific wage indices. We did not apply the national rural floor 
budget neutrality wage index factor to

[[Page 26022]]

the Puerto Rico-specific wage indices (nor did we compute a Puerto 
Rico-specific rural floor budget neutrality wage index factor) 
because there were no rural hospitals in Puerto Rico. As mentioned 
above, for FY 2012, there is now one rural Puerto Rico hospital and, 
therefore, it is necessary to compute and propose a Puerto Rico-
specific rural floor budget neutrality wage index factor (in 
addition to the national factor).
    To calculate both the national and Puerto Rico-specific rural 
floor budget neutrality adjustment factors, we used FY 2010 
discharge data and proposed FY 2012 post-reclassified national and 
Puerto Rico-specific wage indices to simulate IPPS payments. First, 
we compared the national and Puerto Rico-specific simulated payments 
without the national and Puerto Rico-specific rural floor applied to 
national and Puerto Rico-specific simulated payments with the 
national and Puerto Rico-specific rural floor applied to determine 
the proposed national rural budget neutrality adjustment factor of 
0.993834 and the proposed Puerto Rico-specific budget neutrality 
adjustment factor of 0.989226. The proposed national adjustment was 
applied to the national wage indices to produce a national rural 
floor budget neutral wage index and the proposed Puerto Rico-
specific adjustment was then applied to the Puerto Rico-specific 
wage indices to produce a Puerto Rico-specific rural floor budget 
neutral wage index.

d. Proposed Adjustment in Light of Court Decision in Cape Cod v. 
Sebelius

    We are proposing a 1.1 percent adjustment to the standardized 
amount in recognition of the decision of Cape Cod v. Sebelius (630 
F.3d 203 (D.C. Cir. 2011)), (here after referred to as ``Cape 
Cod''). However, we emphasize that remand proceedings in that case 
are not complete and this proposal reflects the timing of the 
development of this proposed rule and not a final decision as to how 
the remand will proceed. In Cape Cod, the plaintiff hospitals 
challenged the rural floor budget neutrality adjustments for FY 2007 
and FY 2008. In its opinion, the D.C. Circuit Court found that 
section 4410 of the Balanced Budget Act of 1997 (BBA) Public Law 
105-33, which authorized both the rural floor and rural floor budget 
neutrality, would not permit CMS to ignore prior year errors in 
calculating rural floor budget neutrality adjustments. The case has 
now been remanded to CMS for further proceedings consistent with the 
DC Circuit Court's opinion.
    While Cape Cod involved only FYs 2007 and 2008, the decision may 
have implications for FY 2012 payment rates, depending on the 
ultimate result of the remand proceedings. In light of that opinion 
and the timing of the rulemaking development process, we are 
proposing to restore to the FY 2012 standardized amount the offset 
for the rural floor and imputed floor on the standardized amount 
over FY 1998 through 2006. By making this proposal for FY 2012, all 
affected parties will have an opportunity to consider and comment on 
this proposed adjustment. Given that the court has remanded the case 
to the Secretary for FYs 2007 and 2008 and those remand proceedings 
are not yet complete, we may decide to take a different approach in 
the final rule, depending on public comments or developments in the 
remand proceedings.
    To assess the overall impact of applying the rural floor budget 
neutrality adjustment to the standardized amount for the years 
between FY 1998 and FY 2006, we remodeled the recalibration/wage 
index budget neutrality factor for the years at issue (for which 
data were available), excluding the effect of the rural floor 
adjustment. For example, to compute the revised recalibration/wage 
index budget neutrality factor for FY 2000, we compared the FY 1999 
pre-reclassified wage data with no rural floor to FY 2000 pre-
reclassified wage data with no rural floor. We then compared the 
revised factor to the wage/recalibration budget neutrality factor 
derived under the original modeling logic; that is, where the 
current year's pre-reclassified wage data had a rural floor applied. 
The percent change in these two factors was then calculated for each 
remodeled year.
    Remodeled years from FY 1998 to FY 2004 showed an approximate 
0.1 percentage point increase between the factors for each year. 
This increase results in a total 0.7 percentage points, which, based 
on the court's comments, we believe should be returned to the 
standardized amount. Beginning with FY 2005 through FY 2006, the 
number of States for which a floor wage index was available was 
extended via the imputed floor policy. With additional States 
receiving increases in payment due to the application of the imputed 
floor, we estimated the combined effects of the rural and imputed 
floor to be approximately 0.2 percentage points per year. This 
resulted in a total of 0.4 percentage points, which we believe 
should be returned to the standardized amount. Therefore, to remove 
the effects of the rural floor from the standardized amount for FY 
1998 through FY 2006, we are proposing to apply a onetime adjustment 
of 1.1 percentage points, which would increase the standardized 
amount (0.7 percentage points plus 0.4 percentage points for a 
factor of 1.011). We note that, in the FY 2008 IPPS final rule with 
comment period, we applied a onetime adjustment of 1.002214 to the 
FY 2008 standardized amount to address a single year transition 
(from FY 2007 to FY 2008) to a noncumulative system of the rural 
floor budget neutrality adjustment. This adjustment of 1.002214 to 
the FY 2008 standardized amount reflected the increase to the rates 
to remove the effects of the rural floor budget neutrality 
adjustment from FY 2007. Because this 1.002214 factor remains on the 
rate, we are not including an adjustment for FY 2007 in our 
calculation above.

e. Proposed Case-Mix Budget Neutrality Adjustment

(1) Proposed Adjustment to the FY 2012 IPPS Standardized Amount for the 
Prospective Adjustment for FY 2010 and Subsequent Years Authorized by 
Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(A)(vi) 
of the Act

    As stated earlier, beginning in FY 2008, we adopted the MS-DRG 
patient classification system for the IPPS to better recognize 
patients' severity of illness in Medicare payment rates. In the FY 
2008 IPPS final rule with comment period (73 FR 47175 through 
47186), we indicated that we believe the adoption of the MS-DRGs had 
the potential to lead to increases in aggregate payments without a 
corresponding increase in actual patient severity of illness due to 
the incentives for changes in documentation and coding. In that 
final rule, using the Secretary's authority under section 
1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by 
adjusting the national standardized amounts to eliminate the effect 
of changes in documentation and coding that do not reflect real 
change in case-mix, we established prospective documentation and 
coding adjustments of -1.2 percent for FY 2008, -1.8 percent for FY 
2009, and -1.8 percent for FY 2010 (for a total adjustment of -4.8 
percent). On September 29, 2007, Public Law 110-90 was enacted. 
Section 7 of Public Law 110-90 included a provision that reduces the 
documentation and coding adjustment for the MS-DRG system that we 
adopted in the FY 2008 IPPS final rule with comment period to -0.6 
percent for FY 2008 and -0.9 percent for FY 2009. To comply with the 
provision of section 7(a) of Public Law 110-90, in a final rule that 
appeared in the Federal Register on November 27, 2007 (72 FR 66886), 
we changed the IPPS documentation and coding adjustment for FY 2008 
to -0.6 percent, and revised the FY 2008 national standardized 
amounts (as well as other payment factors and thresholds) 
accordingly, with these revisions being effective as of October 1, 
2007. For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -
1.8 percent adjustment specified in the FY 2008 IPPS final rule with 
comment period. As required by statute, we applied a documentation 
and coding adjustment of -0.9 percent to the FY 2009 IPPS national 
standardized amounts. The documentation and coding adjustments 
established in the FY 2008 IPPS final rule with comment period are 
cumulative. As a result, the -0.9 percent documentation and coding 
adjustment in FY 2009 was in addition to the -0.6 percent adjustment 
in FY 2008, yielding a combined effect of -1.5 percent.
    In the FY 2010 IPPS proposed and final rules (74 FR 24092 
through 24101 and 43768 through 43772), we discussed our analysis of 
FY 2008 claims data and did not apply any additional documentation 
and coding adjustments to the average standardized amounts under 
section 1886(d) of the Act. We refer readers to these rules for a 
detailed description of our analysis, responses to comments, and 
final policy respectively. After analysis of the FY 2009 claims data 
for the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 through 
50073), we found a total prospective documentation and coding effect 
of 1.054. After accounting for the -0.6 percent and the -0.9 percent 
documentation and coding adjustments in FYs 2008 and 2009, we found 
a remaining documentation and coding effect of 3.9 percent. 
Therefore, an additional cumulative adjustment of -3.9 percent would 
be necessary to meet the requirements of section 7(b)(1)(A) of Pub. 
L. 110-90 to make an adjustment to the average

[[Page 26023]]

standardized amounts in order to eliminate the full effect of the 
documentation and coding changes on future payments. As we discussed 
in the FY 2011 IPPS/LTCH PPS final rule, we did not propose a 
prospective adjustment under section 7(b)(1)(A) of Public Law 110-90 
for FY 2011 (75 FR 23868 through 23870). We note that, as a result, 
payments in FY 2011 (and in each future year until we implement the 
requisite adjustment) were 3.9 percent higher than they would have 
been if we had implemented an adjustment under section 7(b)(1)(A) of 
Public Law 110-90. Our actuaries estimate that this 3.9 percentage 
point increase will result in an aggregate payment of approximately 
$4 billion. We refer readers to the FY 2011 IPPS/LTCH PPS final rule 
for a detailed description of our analysis, responses to comments, 
and final policy (75 FR 50057 through 50073).
    Because further delay of this prospective adjustment will result 
in a continued accrual of unrecoverable overpayments, we consider it 
imperative that CMS propose a prospective adjustment for FY 2012, 
while recognizing CMS' continued desire to mitigate the effects of 
any significant downward adjustments to hospitals. Therefore, we are 
proposing a -3.15 percent prospective adjustment to the standardized 
amount to partially eliminate the full effect of the documentation 
and coding changes on future payments. Due to the offsetting nature 
of the remaining recoupment adjustment under section 7(b)(1)(B) of 
Public Law 110-90 (described below), and after considering other 
positive payment adjustments to FY 2012 rates proposed elsewhere in 
this proposed rule, we believe that the proposed -3.15 percent 
adjustment would allow for a significant reduction in potential 
unrecoverable overpayments, yet will maintain a comparable 
adjustment level between FY 2011 and FY 2012, reflecting the 
applicable percentage increase with a documentation and coding 
adjustment. This proposal recognized that an additional adjustment 
of -0.75 percent (3.9 minus 3.15) will be required in future 
rulemaking to complete the statutory requirement under section 
7(b)(1)(A) of Public Law 110-90. At this time, we are not proposing 
a timeline to implement the remainder of this adjustment. We refer 
the reader to section II.D. of the preamble of this proposed rule 
for more discussion. In addition, for a complete discussion on our 
proposed documentation and coding adjustment to the hospital-
specific rates, we refer readers to section II.D.2.c. of this 
Addendum.

(2) Proposed Adjustment to the FY 2012 IPPS Standardized Amount for the 
Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 
7(b)(1)(B) of Public Law 110-90

    As indicated in section II.D.4. in the preamble to this proposed 
rule, the change due to documentation and coding that did not 
reflect real changes in case-mix for discharges occurring during FY 
2008 and FY 2009 exceeded the -0.6 and -0.9 percent prospective 
documentation and coding adjustment applied under section 7(a) of 
Public Law 110-90 for those 2 years respectively by 1.9 percentage 
points in FY 2008 and 3.9 percentage points in FY 2009. In total, 
this change exceeded the cumulative prospective adjustments by 5.8 
percentage points. Our actuaries estimated that this 5.8 percentage 
point increase resulted in an increase in aggregate payments of 
approximately $6.9 billion. In the FY 2011 IPPS/LTCH PPS final rule, 
we determined that an aggregate adjustment of -5.8 percent in FYs 
2011 and 2012, subject to actuarial adjustment to reflect 
accumulated interest, would be necessary in order to meet the 
requirements of section 7(b)(1)(B) of Public Law 110-90 to adjust 
the standardized amounts for discharges occurring in FYs 2010, 2011, 
and/or 2012 to offset the estimated amount of the increase in 
aggregate payments (including interest) in FYs 2008 and 2009.
    It is often our practice to phase in rate adjustments over more 
than one year in order to moderate the effect on rates in any one 
year. Therefore, as we specified in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50425), we made an adjustment in FY 2011 to the 
standardized amount of -2.9 percent, representing half of the 
aggregate adjustment required under section 7(b)(1)(B) of Public Law 
110-90, for FY 2011. As we have previously noted, unlike the 
prospective adjustment to the standardized amounts under section 
7(b)(1)(A) of Public Law 110-90 described earlier, the recoupment or 
repayment adjustment to the standardized amounts under section 
7(b)(1)(B) of Public Law 110-90 is not cumulative, but would be 
removed for subsequent fiscal years once we have offset the increase 
in aggregate payments for discharges for FY 2008 expenditures and FY 
2009 expenditures. We refer readers to the FY 2011 IPPS/LTCH PPS 
final rule for a detailed description of our analysis, responses to 
comments, and final policy (75 FR 50057 through 50073).
    While we stated in the FY 2011 IPPS/LTCH PPS final rule the need 
to potentially adjust the remaining -2.9 percent estimate to account 
for accumulated interest, our actuaries have determined that there 
has been no significant interest accumulation and that no additional 
adjustment will be required. Therefore, we are proposing to complete 
the recoupment adjustment according to the timeframes set forth by 
section 7(b)(1)(B) of Public Law 110-90 by implementing the 
remaining -2.9 percent adjustment, in addition to removing the 
effect of the -2.9 percent adjustment to the standardized amount 
finalized in FY 2011. Because these adjustments will, in effect, 
balance out, there will be no year-to-year change in the 
standardized amount due to this recoupment adjustment. As this 
adjustment will complete the required recoupment for overpayments 
due to documentation and coding effects on discharges occurring in 
FYs 2008 and 2009, we anticipate removing the effect of this 
adjustment by adding 2.9 percent to the standardized amount in FY 
2013. We continue to believe that this is a reasonable and fair 
approach that satisfies the requirements of the statute while 
substantially moderating the financial impact on hospitals. We refer 
the reader to section II.D. of the preamble to this proposed rule 
for more discussion.

(3) Proposed Adjustment to the FY 2012 Puerto Rico Standardized Amount

    As discussed in section II.D.9. of the preamble of this proposed 
rule, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 through 
50073), using the same methodology we applied to estimate 
documentation and coding changes under IPPS for non-Puerto Rico 
hospitals, our best estimate, based on the then most recently 
available data (FY 2009 claims paid through March 2010), was that 
for documentation and coding changes that occurred over FY 2008 and 
FY 2009, a cumulative adjustment of -2.6 percent was required to 
eliminate the full effect of the documentation and coding changes on 
future payments from the Puerto Rico-specific rate. In FY 2011, as 
finalized in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 
through 50073), we applied an adjustment of -2.6 percent to the 
Puerto Rico-specific rate. Therefore, because the Puerto Rico-
specific rate received a full prospective adjustment of -2.6 percent 
in FY 2011, we are proposing no further adjustment in this proposed 
rule for FY 2012. For a complete discussion on this proposal, we 
refer readers to section II.D.9. of the preamble of this proposed 
rule.

f. Rural Community Hospital Demonstration Program Adjustment

    As discussed in section IV.N. of the preamble to this proposed 
rule, section 410A of Public Law 108-173 originally required the 
Secretary to establish a demonstration that modifies reimbursement 
for inpatient services for up to 15 small rural hospitals. Section 
410A(c)(2) of Public Law 108-173 requires that ``[i]n conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.''
    Sections 3123 and 10313 of the Affordable Care Act extended the 
demonstration for an additional 5-year period, and allow up to 30 
hospitals to participate in 20 States with low population densities 
determined by the Secretary. (In determining which States to include 
in the expansion, the Secretary is required to use the same criteria 
and data that the Secretary used to determine the States for 
purposes of the initial 5-year period.) In the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50426), in order to achieve budget neutrality, we 
adjusted the national IPPS rates by an amount sufficient to account 
for the added costs of this demonstration as described in section 
IV.K. of that final rule. In other words, we applied budget 
neutrality across the payment system as a whole rather than merely 
across the participants of this demonstration, consistent with past 
practice. We stated that we believe that the language of the 
statutory budget neutrality requirement permits the agency to 
implement the budget neutrality provision in this manner. The 
statutory language requires that ``aggregate payments made by the 
Secretary do not exceed the amount which the Secretary would have 
paid if the demonstration * * * was not implemented,'' but does not 
identify the range across which aggregate payments must be held 
equal.

[[Page 26024]]

    For FY 2012, we are proposing the estimated amount for the 
adjustment to the national IPPS rates for FY 2012 to be $52,642,213. 
Accordingly, to account for the estimated costs of the demonstration 
for the specific time periods as explained in detail in section 
IV.N. of the preamble of this proposed rule, for FY 2012, we 
computed a proposed factor of 0.999479 for the rural community 
hospital demonstration program budget neutrality adjustment that 
would be applied to the IPPS standardized rate.
    We note that because the settlement process for the 
demonstration hospitals' third and fourth year cost reports, that 
is, for cost reporting periods starting in FYs 2007 and 2008, has 
experienced a delay, for this proposed rule, we are unable to state 
the costs of the demonstration corresponding to FYs 2007 and 2008 
for purposes of determining the amount by which the costs of the 
demonstration corresponding to FYs 2007 and 2008 exceeded the amount 
offset by the budget neutrality adjustments for FYs and 2008. As a 
result, we are unable to propose the specific numeric adjustment 
representing this offsetting process that would be a component of 
the budget neutrality adjustment and that would be applied to the 
national IPPS rates. Therefore, the estimated budget neutrality 
adjustment to the national IPPS rate in this proposed rule does not 
include a component to account for these costs. We anticipate that 
this information may be available for the FY 2012 IPPS/LTCH PPS 
final rule, at which time, if data from settled cost reports are 
available, under our proposal, we would incorporate a component into 
the budget neutrality adjustment to the national IPPS rates to 
account for the amount by which the demonstration costs 
corresponding to FY 2007 and FY 2008 exceeded the amount offset by 
the budget neutrality adjustments for FYs 2007 and 2008.

g. Proposed Outlier Payments

    Section 1886(d)(5)(A) of the Act provides for payments in 
addition to the basic prospective payments for ``outlier'' cases 
involving extraordinarily high costs. To qualify for outlier 
payments, a case must have costs greater than the sum of the 
prospective payment rate for the DRG, any IME and DSH payments, any 
new technology add-on payments, and the ``outlier threshold'' or 
``fixed-loss'' amount (a dollar amount by which the costs of a case 
must exceed payments in order to qualify for an outlier payment). We 
refer to the sum of the prospective payment rate for the DRG, any 
IME and DSH payments, any new technology add-on payments, and the 
outlier threshold as the outlier ``fixed-loss cost threshold.'' To 
determine whether the costs of a case exceed the fixed-loss cost 
threshold, a hospital's CCR is applied to the total covered charges 
for the case to convert the charges to estimated costs. Payments for 
eligible cases are then made based on a marginal cost factor, which 
is a percentage of the estimated costs above the fixed-loss cost 
threshold. The marginal cost factor for FY 2012 is 80 percent, the 
same marginal cost factor we have used since FY 1995 (59 FR 45367).
    In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier 
payments for any year are projected to be not less than 5 percent 
nor more than 6 percent of total operating DRG payments plus outlier 
payments. We note that the statute requires outlier payments to be 
not less than 5 percent nor more than 6 percent of total ``operating 
DRG payments'' (which does not include IME and DSH payments) plus 
outlier payments. When setting the outlier threshold, we compute the 
5.1 percent target by dividing the total operating outlier payments 
by the total operating DRG payments plus outlier payments. We do not 
include any other payments such as IME and DSH within the outlier 
target amount. Therefore, it is not necessary to include Medicare 
Advantage IME payments in the outlier threshold calculation. Section 
1886(d)(3)(B) of the Act requires the Secretary to reduce the 
average standardized amount by a factor to account for the estimated 
proportion of total DRG payments made to outlier cases. Similarly, 
section 1886(d)(9)(B)(iv) of the Act requires the Secretary to 
reduce the average standardized amount applicable to hospitals 
located in Puerto Rico to account for the estimated proportion of 
total DRG payments made to outlier cases. More information on 
outlier payments may be found on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage.

(1) Proposed FY 2012 Outlier Fixed-Loss Cost Threshold

    For FY 2012, we are proposing to continue to use the same 
methodology used for FY 2009 (73 FR 48763 through 48766) to 
calculate the outlier threshold. Similar to the methodology used in 
the FY 2009 IPPS final rule, for FY 2012, we are proposing to apply 
an adjustment factor to the CCRs to account for cost and charge 
inflation (as explained below). As we have done in the past, to 
calculate the proposed FY 2012 outlier threshold, we simulated 
payments by applying proposed FY 2012 rates and policies using cases 
from the FY 2010 MedPAR files. Therefore, in order to determine the 
proposed FY 2012 outlier threshold, we inflated the charges on the 
MedPAR claims by 2 years, from FY 2010 to FY 2012.
    We are proposing to continue to use a refined methodology that 
takes into account the lower inflation in hospital charges that are 
occurring as a result of the outlier final rule (68 FR 34494), which 
changed our methodology for determining outlier payments by 
implementing the use of more current CCRs. Our refined methodology 
uses more recent data that reflect the rate-of-change in hospital 
charges under the new outlier policy.
    Using the most recent data available, we calculated the 1-year 
average annualized rate-of-change in charges per case from the last 
quarter of FY 2009 in combination with the first quarter of FY 2010 
(July 1, 2009 through December 31, 2009) to the last quarter of FY 
2010 in combination with the first quarter of FY 2011 (July 1, 2010 
through December 31, 2010). This rate-of-change was 4.43 percent 
(1.044394) or 9.07 percent (1.090759) over 2 years. As we have done 
in the past, we established the proposed FY 2012 outlier threshold 
using hospital CCRs from the December 2010 update to the Provider-
Specific File (PSF)--the most recent available data at the time of 
this proposed rule.
    As discussed in the FY 2007 IPPS final rule (71 FR 48150), we 
worked with the Office of Actuary to derive the methodology 
described below to develop the CCR adjustment factor. For FY 2012, 
we are proposing to continue to use the same methodology to 
calculate the CCR adjustment by using the FY 2010 operating cost per 
discharge increase in combination with the actual FY 2010 operating 
market basket percentage increase determined by IHS Global Insight, 
Inc. (IGI), as well as the charge inflation factor described above 
to estimate the adjustment to the CCRs. (We note that the FY 2010 
actual (otherwise referred to as ``final'') operating market basket 
percentage increase reflects historical data, whereas the published 
FY 2010 operating market basket update factor was based on IGI's 
2009 second quarter forecast with historical data through the first 
quarter of 2009. We also note that while the FY 2010 published 
operating market basket update was based on the FY 2002-based IPPS 
market basket, the actual or ``final'' market basket percentage 
increase is based on the FY 2006-based IPPS market basket. 
Similarly, the FY 2010 published capital market basket update factor 
was based on the FY 2002-based capital market basket and the actual 
or ``final'' capital market basket percentage increase is based on 
the FY 2006-based capital market basket.) By using the operating 
market basket percentage increase and the increase in the average 
cost per discharge from hospital cost reports, we are using two 
different measures of cost inflation. For FY 2012, we determined the 
adjustment by taking the percentage increase in the operating costs 
per discharge from FY 2008 to FY 2009 (1.0285) from the cost report 
and dividing it by the final operating market basket percentage 
increase from FY 2009 (1.0260). This operation removes the measure 
of pure price increase (the market basket) from the percentage 
increase in operating cost per discharge, leaving the nonprice 
factors in the cost increase (for example, quantity and changes in 
the mix of goods and services). We repeated this calculation for 2 
prior years to determine the 3-year average of the rate of adjusted 
change in costs between the operating market basket percentage 
increase and the increase in cost per case from the cost report (the 
FY 2006 to FY 2007 percentage increase of operating costs per 
discharge of 1.0465 divided by the FY 2007 final operating market 
basket percentage increase of 1.036, the FY 2007 to FY 2008 
percentage increase of operating costs per discharge of 1.0506 
divided by FY 2008 final operating market basket percentage increase 
of 1.040). For FY 2012, we averaged the differentials calculated for 
FY 2007, FY 2008, and FY 2009, which resulted in a mean ratio of 
1.0076. We multiplied the 3-year average of 1.0076 by the FY 2010 
final operating market basket percentage increase of 1.021, which 
resulted in an operating cost inflation factor of 2.87 percent or 
1.028747. We then divided the operating cost inflation factor by the 
1-year average change in charges (1.044394) and applied an 
adjustment factor of 0.985018 to the operating CCRs from the

[[Page 26025]]

PSF (calculation performed on unrounded numbers).
    As stated in the FY 2009 IPPS final rule (73 FR 48763), we 
continue to believe it is appropriate to apply only a 1-year 
adjustment factor to the CCRs. On average, it takes approximately 9 
months for a fiscal intermediary or MAC to tentatively settle a cost 
report from the fiscal year end of a hospital's cost reporting 
period. The average ``age'' of hospitals' CCRs from the time the 
fiscal intermediary or the MAC inserts the CCR in the PSF until the 
beginning of FY 2009 is approximately 1 year. Therefore, as stated 
above, we believe a 1-year adjustment factor to the CCRs is 
appropriate.
    We used the same methodology for the capital CCRs and determined 
the adjustment by taking the percentage increase in the capital 
costs per discharge from FY 2008 to FY 2009 (1.0508) from the cost 
report and dividing it by the final capital market basket percentage 
increase from FY 2009 (1.015). We repeated this calculation for 2 
prior years to determine the 3-year average of the rate of adjusted 
change in costs between the capital market basket percentage 
increase and the increase in cost per case from the cost report (the 
FY 2006 to FY 2007 percentage increase of capital costs per 
discharge of 1.0507 divided by the FY 2007 final capital market 
basket percentage increase of 1.013, the FY 2007 to FY 2008 
percentage increase of capital costs per discharge of 1.0811 divided 
by the FY 2008 final capital market basket percentage increase of 
1.015). For FY 2012, we averaged the differentials calculated for FY 
2007, FY 2008, and FY 2009, which resulted in a mean ratio of 
1.0459. We multiplied the 3-year average of 1.0459 by the FY 2010 
final capital market basket percentage increase of 1.010, which 
resulted in a capital cost inflation factor of 5.63 percent or 
1.056329. We then divided the capital cost inflation factor by the 
1-year average change in charges (1.044394) and applied an 
adjustment factor of 1.011428 to the capital CCRs from the PSF 
(calculation performed on unrounded numbers). We are proposing to 
use the same charge inflation factor for the capital CCRs that was 
used for the operating CCRs. The charge inflation factor is based on 
the overall billed charges. Therefore, we believe it is appropriate 
to apply the charge factor to both the operating and capital CCRs.
    As stated above, for FY 2012, we applied the proposed FY 2012 
rates and policies using cases from the FY 2010 MedPAR files in 
calculating the proposed outlier threshold. As discussed in section 
III.B.3. of the preamble to the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50160 and 50161) and in section III.F. of this proposed rule, in 
accordance with section 10324(a) of the Affordable Care Act, 
beginning in FY 2011, we created a wage index floor of 1.00 for all 
hospitals located in States determined to be frontier States. We 
noted that the frontier State floor adjustments will be calculated 
and applied after rural and imputed floor budget neutrality 
adjustments are calculated for all labor market areas, in order to 
ensure that no hospital in a frontier State will receive a wage 
index lesser than 1.00 due to the rural and imputed floor 
adjustment. In accordance with section 10324(a) of the Affordable 
Care Act, the frontier State adjustment will not be subject to 
budget neutrality, and will only be extended to hospitals 
geographically located within a frontier State. However, for 
purposes of estimating the proposed outlier threshold for FY 2012, 
it was necessary to apply this provision by adjusting the wage index 
of those eligible hospitals in a frontier State when calculating the 
outlier threshold that results in outlier payments being 5.1 percent 
of total payments for FY 2012. If we did not take into account this 
provision, our estimate of total FY 2012 payments would be too low, 
and, as a result, our proposed outlier threshold would be too high, 
such that estimated outlier payments would be less than our 
projected 5.1 percent of total payments.
    For this proposed rule, we are using the FY 2010 claims data to 
calculate the FY 2012 proposed outlier threshold. Our estimate of 
the cumulative effect of changes in documentation and coding due to 
the adoption of the MS-DRGs through FY 2010 is 5.4 percent, which is 
already included within the claims data (FY 2010 MedPAR files) used 
to calculate the proposed FY 2012 outlier threshold. Furthermore, we 
currently estimate that there would be no continued changes in 
documentation and coding in FYs 2011 and 2012. Therefore, the 
cumulative effect of documentation and coding that has occurred is 
already reflected within the FY 2010 MedPAR claims data, and we do 
not believe there is any need to inflate FY 2010 claims data for any 
additional case-mix growth projected to have occurred since FY 2010.
    Using this methodology, we are proposing an outlier fixed-loss 
cost threshold for FY 2012 equal to the prospective payment rate for 
the DRG, plus any IME and DSH payments, and any add-on payments for 
new technology, plus $23,375.
    As we did in establishing the FY 2009 outlier threshold (73 FR 
57891), in our projection of FY 2012 outlier payments, we are not 
proposing to make any adjustments for the possibility that 
hospitals' CCRs and outlier payments may be reconciled upon cost 
report settlement. We continue to believe that, due to the policy 
implemented in the June 9, 2003 outlier final rule (68 FR 34494), 
CCRs will no longer fluctuate significantly and, therefore, few 
hospitals will actually have these ratios reconciled upon cost 
report settlement. In addition, it is difficult to predict the 
specific hospitals that will have CCRs and outlier payments 
reconciled in any given year. We also note that reconciliation 
occurs because hospitals' actual CCRs for the cost reporting period 
are different than the interim CCRs used to calculate outlier 
payments when a bill is processed. Our simulations assume that CCRs 
accurately measure hospital costs based on information available to 
us at the time we set the outlier threshold. For these reasons, we 
are proposing not to make any assumptions about the effects of 
reconciliation on the outlier threshold calculation.

(2) Other Proposed Changes Concerning Outliers

    As stated in the FY 1994 IPPS final rule (58 FR 46348), we 
establish an outlier threshold that is applicable to both hospital 
inpatient operating costs and hospital inpatient capital-related 
costs. When we modeled the combined operating and capital outlier 
payments, we found that using a common threshold resulted in a lower 
percentage of outlier payments for capital-related costs than for 
operating costs. We project that the thresholds for FY 2012 will 
result in outlier payments that will equal 5.1 percent of operating 
DRG payments and 5.93 percent of capital payments based on the 
Federal rate.
    In accordance with section 1886(d)(3)(B) of the Act, we are 
proposing to reduce the FY 2012 standardized amount by the same 
percentage to account for the projected proportion of payments paid 
as outliers.
    The outlier adjustment factors that would be applied to the 
standardized amount based on the proposed FY 2012 outlier threshold 
are as follows:
[GRAPHIC] [TIFF OMITTED] TP05MY11.089

    We are proposing to apply the outlier adjustment factors to the 
proposed FY 2012 rates after removing the effects of the FY 2011 
outlier adjustment factors on the standardized amount.
    To determine whether a case qualifies for outlier payments, we 
apply hospital-specific CCRs to the total covered charges for the 
case. Estimated operating and capital costs for the case are 
calculated separately by applying separate operating and capital 
CCRs. These costs are then combined and compared with the outlier 
fixed-loss cost threshold.
    Under our current policy at Sec.  412.84, for hospitals for 
which the fiscal intermediary or MAC computes operating CCRs greater 
than 1.147 or capital CCRs greater than 0.158, or hospitals for 
which the fiscal intermediary or MAC is unable to calculate a CCR 
(as described at Sec.  412.84(i)(3) of our regulations),

[[Page 26026]]

we use statewide average CCRs to determine whether a hospital 
qualifies for outlier payments.\61\ Table 8A listed in section VI. 
of this Addendum (and available only via the Internet) contains the 
proposed statewide average operating CCRs for urban hospitals and 
for rural hospitals for which the fiscal intermediary or MAC is 
unable to compute a hospital-specific CCR within the above range. 
Effective for discharges occurring on or after October 1, 2011, 
these statewide average ratios would replace the ratios published in 
the IPPS final rule for FY 2011 (75 FR 50390-50392). Table 8B listed 
in section VI. of this Addendum (and available via the Internet) 
contains the proposed comparable statewide average capital CCRs. 
Again, the proposed CCRs in Tables 8A and 8B would be used during FY 
2012 when hospital-specific CCRs based on the latest settled cost 
report are either not available or are outside the range noted 
above. Table 8C listed in section VI. of this Addendum (and 
available via the Internet) contains the proposed statewide average 
total CCRs used under the LTCH PPS as discussed in section V. of 
this Addendum.
---------------------------------------------------------------------------

    \61\ These figures represent 3.0 standard deviations from the 
mean of the log distribution of CCRs for all hospitals.
---------------------------------------------------------------------------

    We finally note that we published a manual update (Change 
Request 3966) to our outlier policy on October 12, 2005, which 
updated Chapter 3, Section 20.1.2 of the Medicare Claims Processing 
Manual. The manual update covered an array of topics, including 
CCRs, reconciliation, and the time value of money. We encourage 
hospitals that are assigned the statewide average operating and/or 
capital CCRs to work with their fiscal intermediary or MAC on a 
possible alternative operating and/or capital CCR as explained in 
Change Request 3966. Use of an alternative CCR developed by the 
hospital in conjunction with the fiscal intermediary or MAC can 
avoid possible overpayments or underpayments at cost report 
settlement, thus ensuring better accuracy when making outlier 
payments and negating the need for outlier reconciliation. We also 
note that a hospital may request an alternative operating or capital 
CCR ratio at any time as long as the guidelines of Change Request 
3966 are followed. Additionally, we published an additional manual 
update (Change Request 7192) to our outlier policy on December 3, 
2010 which also updated Chapter 3, Section 20.1.2 of the Medicare 
Claims Processing Manual. The manual update outlines the outlier 
reconciliation process for hospitals and Medicare contractors. To 
download and view the manual instructions on outlier reconciliation, 
we refer readers to the CMS Web site: http://www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.

(3) FY 2010 and FY 2011 Outlier Payments

    In the FY 2011 IPPS final rule (75 FR 50431), we stated that, 
based on available data, we estimated that actual FY 2010 outlier 
payments would be approximately 4.7 percent of actual total DRG 
payments. This estimate was computed based on simulations using the 
FY 2009 MedPAR file (discharge data for FY 2009 claims). That is, 
the estimate of actual outlier payments did not reflect actual FY 
2010 claims, but instead reflected the application of FY 2010 rates 
and policies to available FY 2009 claims.
    Our current estimate, using available FY 2010 claims data, is 
that actual outlier payments for FY 2010 were approximately 4.7 
percent of actual total DRG payments. Thus, the data indicate that, 
for FY 2010, the percentage of actual outlier payments relative to 
actual total payments is lower than we projected for FY 2010. 
Consistent with the policy and statutory interpretation we have 
maintained since the inception of the IPPS, we do not plan to make 
retroactive adjustments to outlier payments to ensure that total 
outlier payments for FY 2010 are equal to 5.1 percent of total DRG 
payments.
    We currently estimate that actual outlier payments for FY 2011 
will be approximately 4.9 percent of actual total DRG payments, 
approximately 0.2 percentage points lower than the 5.1 percent we 
projected when setting the outlier policies for FY 2011. This 
estimate of 4.9 percent is based on simulations using the FY 2010 
MedPAR file (discharge data for FY 2010 claims).

5. Proposed FY 2012 Standardized Amount

    The adjusted standardized amount is divided into labor-related 
and nonlabor-related portions. Tables 1A and 1B listed and published 
in section VI. of this Addendum (and available via the Internet) 
contain the national standardized amounts that we are proposing to 
apply to all hospitals, except hospitals located in Puerto Rico, for 
FY 2012. The proposed Puerto Rico-specific amounts are shown in 
Table 1C listed and published in section VI. of this Addendum (and 
available via the Internet). The proposed amounts shown in Tables 1A 
and 1B differ only in that the labor-related share applied to the 
standardized amounts in Table 1A is the labor-related share of 68.8 
percent, and Table 1B is 62 percent. In accordance with sections 
1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act, we are applying a 
labor-related share of 62 percent, unless application of that 
percentage would result in lower payments to a hospital than would 
otherwise be made. In effect, the statutory provision means that we 
will apply a labor-related share of 62 percent for all hospitals 
(other than those in Puerto Rico) whose wage indices are less than 
or equal to 1.0000.
    In addition, Tables 1A and 1B include the proposed standardized 
amounts reflecting the proposed applicable percentage increase of 
1.5 percent for FY 2012, and a proposed update of -0.5 percent for 
hospitals that fail to submit quality data consistent with section 
1886(b)(3)(B)(viii) of the Act.
    Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion 
of the Puerto Rico payment rate is based on the discharge-weighted 
average of the national large urban standardized amount (this amount 
is set forth in Table 1A). The labor-related and nonlabor-related 
portions of the proposed national average standardized amounts for 
Puerto Rico hospitals for FY 2011 are set forth in Table 1C listed 
and published in section VI. of this Addendum (and available via the 
Internet). This table also includes the proposed Puerto Rico 
standardized amounts. The labor-related share applied to the Puerto 
Rico specific standardized amount is the labor-related share of 62.1 
percent, or 62 percent, depending on which provides higher payments 
to the hospital. (Section 1886(d)(9)(C)(iv) of the Act, as amended 
by section 403(b) of Public Law 108-173, provides that the labor-
related share for hospitals located in Puerto Rico be 62 percent, 
unless the application of that percentage would result in lower 
payments to the hospital.)
    The following table illustrates the proposed changes from the FY 
2011 national standardized amount. The second column shows the 
proposed changes from the FY 2011 standardized amounts for hospitals 
that satisfy the quality data submission requirement and therefore 
receive the full update of 1.5 percent. The third column shows the 
proposed changes for hospitals receiving the reduced update of -0.5 
percent. The first row of the table shows the proposed updated 
(through FY 2011) average standardized amount after restoring the FY 
2011 offsets for outlier payments, demonstration budget neutrality 
and the geographic reclassification budget neutrality. The DRG 
reclassification and recalibration wage index budget neutrality 
factors are cumulative. Therefore, the FY 2011 factor is not removed 
from this table.
BILLING CODE 4120-01-P

[[Page 26027]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.090

BILLING CODE 4120-01-C

B. Proposed Adjustments for Area Wage Levels and Cost-of-Living

    Tables 1A through 1C, as published in section VI. of this 
Addendum (and available via the Internet), contain the labor-related 
and nonlabor-related shares that we are proposing to use to 
calculate the prospective payment rates for hospitals located in the 
50 States, the District of Columbia, and Puerto Rico for FY 2012. 
This section addresses two types of adjustments to the standardized 
amounts that are made in determining the proposed prospective 
payment rates as described in this Addendum.

1. Proposed Adjustment for Area Wage Levels

    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require 
that we make an adjustment to the labor-related portion of the 
national and Puerto Rico prospective payment rates, respectively, to 
account for area differences in hospital wage levels. This 
adjustment is made by multiplying the labor-related portion of the 
adjusted standardized amounts by the appropriate wage index for the 
area in which the hospital is located. In section III. of the 
preamble of this proposed rule, we discuss the data and methodology 
for the proposed FY 2012 wage index.

2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii

    Section 1886(d)(5)(H) of the Act authorizes the Secretary to 
make an adjustment to take into account the unique circumstances of

[[Page 26028]]

hospitals located in Alaska and Hawaii. Higher labor-related costs 
for these two States are taken into account in the adjustment for 
area wages described above. For FY 2011 and in prior fiscal years, 
we used the most recent updated cost of living adjustment (COLA) 
factors obtained from the U.S. Office of Personnel Management (OPM) 
Web site at http://www.opm.gov/oca/cola/rates.asp. We multiply the 
nonlabor-related portion of the standardized amount by the 
applicable adjustment factor.
    Sections 1911 through 1919 of the Nonforeign Area Retirement 
Equity Assurance Act, as contained in subtitle B of title XIX of the 
National Defense Authorization Act (NDAA) for Fiscal Year 2010 (Pub. 
L. 111-84, October 28, 2009) transitions the Alaska and Hawaii COLAs 
to locality pay. Under section 1914 of Public Law 111-84, locality 
pay is being phased in over a 3-year period beginning in January 
2010 with COLA rates frozen as of the date of enactment, October 28, 
2009, and then proportionately reduced to reflect the phase-in of 
locality pay.
    We do not believe it is appropriate to propose to use either the 
2010 or 2011 reduced factors for adjusting the nonlabor-related 
portion of the standardized amount for hospitals in Alaska and 
Hawaii for Medicare payment purposes. Therefore, for FY 2012, we are 
proposing to continue to use the same COLA factors (published by 
OPM) that we used to adjust payments in FY 2011 (which are based on 
OPMs 2009 COLA factors) to adjust the nonlabor-related portion of 
the standardized amount for hospitals located in Alaska and Hawaii. 
We believe using these COLAs will appropriately adjust the nonlabor-
related portion of the standardized amount for hospitals in Alaska 
and Hawaii consistent with section 1886(d)(5)(H) of the Act. We 
invite public comments on this proposal.
    Below is a table of factors obtained from OPM that we are 
proposing for FY 2012, which are the same as the factors currently 
in use under the IPPS for FY 2011.
[GRAPHIC] [TIFF OMITTED] TP05MY11.091

C. Proposed MS-DRG Relative Weights

    As discussed in section II.H. of the preamble of this proposed 
rule, we have developed relative weights for each MS-DRG that 
reflect the resource utilization of cases in each MS-DRG relative to 
Medicare cases in other MS-DRGs. Table 5 listed in section VI. of 
this Addendum (and available via the Internet) contains the relative 
weights that we are proposing to apply to discharges occurring in FY 
2012. These factors have been recalibrated as explained in section 
II. of the preamble of this proposed rule.

D. Calculation of the Proposed Prospective Payment Rates

General Formula for Calculation of the Proposed Prospective Payment 
Rates for FY 2012

    In general, the operating prospective payment rate for all 
hospitals paid under the IPPS located outside of Puerto Rico, except 
SCHs and MDHs, for FY 2012 equals the Federal rate.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: the Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; the updated hospital-specific rate based on FY 1996 
costs per discharge; or the updated hospital-specific rate based on 
the FY 2006 costs per discharge to determine the rate that yields 
the greatest aggregate payment.
    The prospective payment rate for SCHs for FY 2012 equals the 
higher of the applicable Federal rate, or the hospital-specific rate 
as described below. The prospective payment rate for MDHs for FY 
2012 equals the higher of the Federal rate, or the Federal rate plus 
75 percent of the difference between the Federal rate and the 
hospital-specific rate as described below. For MDHs, the updated 
hospital-specific rate is based on FY 1982, FY 1987 or FY 2002 costs 
per discharge, whichever yields the greatest aggregate payment.
    The prospective payment rate for hospitals located in Puerto 
Rico for FY 2012 equals 25 percent of the Puerto Rico rate plus 75 
percent of the applicable national rate.

1. Federal Rate

    The Federal rate is determined as follows:
    Step 1--Select the applicable average standardized amount 
depending on whether the hospital submitted qualifying quality data 
(full update for hospitals submitting quality data; update including 
a -2.0 percent adjustment for hospitals that did not submit these 
data).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--For hospitals in Alaska and Hawaii, multiply the 
nonlabor-related

[[Page 26029]]

portion of the standardized amount by the applicable cost-of-living 
adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount (adjusted, if applicable, under 
Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight corresponding to the applicable MS-DRG (Table 5 listed in 
section VI. of this Addendum and available via the Internet).
    The Federal rate as determined in Step 5 may then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment. In addition, for hospitals that qualify for a low-volume 
payment adjustment under section 1886(d)(12) of the Act and 42 CFR 
412.101(b), the payment in Step 5 would be increased by the formula 
described in section IV.E. of the preamble of this proposed rule.

2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)

a. Calculation of Hospital-Specific Rate

    Section 1886(b)(3)(C) of the Act provides that currently SCHs 
are paid based on whichever of the following rates yields the 
greatest aggregate payment: the Federal rate; the updated hospital-
specific rate based on FY 1982 costs per discharge; the updated 
hospital-specific rate based on FY 1987 costs per discharge; the 
updated hospital-specific rate based on FY 1996 costs per discharge; 
or the updated hospital-specific rate based on the FY 2006 costs per 
discharge to determine the rate that yields the greatest aggregate 
payment.
    As discussed previously, currently MDHs are paid based on the 
Federal national rate or, if higher, the Federal national rate plus 
75 percent of the difference between the Federal national rate and 
the greater of the updated hospital-specific rates based on either 
FY 1982, FY 1987 or FY 2002 costs per discharge.
    Hospital-specific rates have been determined for each of these 
hospitals based on the FY 1982 costs per discharge, the FY 1987 
costs per discharge, or, for SCHs, the FY 1996 costs per discharge 
or the FY 2006 costs per discharge, and for MDHs, the FY 2002 cost 
per discharge. For a more detailed discussion of the calculation of 
the hospital-specific rates, we refer the reader to the FY 1984 IPPS 
interim final rule (48 FR 39772); the April 20, 1990 final rule with 
comment period (55 FR 15150); the FY 1991 IPPS final rule (55 FR 
35994); and the FY 2001 IPPS final rule (65 FR 47082).

b. Updating the FY 1982, FY 1987, FY 1996, FY 2002, and FY 2006 
Hospital-Specific Rates for FY 2012

    Section 1886(b)(3)(B)(iv) of the Act provides that the 
applicable percentage increase applicable to the hospital-specific 
rates for SCHs and MDHs equals the applicable percentage increase 
set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same 
update factor as for all other hospitals subject to the IPPS). 
Because the Act sets the update factor for SCHs and MDHs equal to 
the update factor for all other IPPS hospitals, the update to the 
hospital specific rates for SCHs and MDHs is subject to the 
amendments to section 1886(b)(3)(B) of the Act made by sections 
3401(a) and 10319(a) of the Affordable Care Act. Accordingly, the 
proposed applicable percentage increase to the hospital-specific 
rates applicable to SCHs and MDHs is 1.5 percent (that is, the FY 
2012 estimate of the market basket rate-of-increase of 2.8 percent 
less an adjustment of 1.2 percentage points for multifactor 
productivity and less 0.1 percentage point) for hospitals that 
submit quality data or -0.5 percent (that is, the FY 2012 estimate 
of the market basket rate-of-increase of 2.8 percent, less 2.0 
percentage points for failure to submit data under the Hospital IQR 
Program, less an adjustment of 1.2 percentage points for multifactor 
productivity, and less 0.1 percentage points) for hospitals that 
fail to submit quality data. For a complete discussion of the 
applicable percentage increase applicable to the hospital-specific 
rates for SCHs and MDHs, we refer readers to section IV.H. of the 
preamble of this proposed rule.
    In addition, because SCHs and MDHs use the same MS-DRGs as other 
hospitals when they are paid based in whole or in part on the 
hospital-specific rate, the hospital-specific rate is adjusted by a 
budget neutrality factor to ensure that changes to the DRG 
classifications and the recalibration of the DRG relative weights 
are made in a manner so that aggregate IPPS payments are unaffected. 
Therefore, for both SCHs and MDHs, the hospital-specific rate is 
adjusted by the proposed DRG reclassification and recalibration 
budget neutrality factor of 0.998419, as discussed in section III. 
of this Addendum. The resulting rate would be used in determining 
the payment rate an SCH or MDH will receive for its discharges 
beginning on or after October 1, 2011.

c. Documentation and Coding Adjustment to the FY 2012 Hospital-Specific 
Rates for SCHs and MDHs

    As discussed in section II.D. of the preamble of this proposed 
rule, because hospitals (SCHs and MDHs) paid based in whole or in 
part on the hospital-specific rate use the same MS-DRG system as 
other hospitals, we believe they have the potential to realize 
increased payments from documentation and coding changes that do not 
reflect real increases in patients' severity of illness. Under 
section 1886(d)(3)(A)(vi) of the Act, Congress stipulated that 
hospitals paid based on the standardized amount should not receive 
additional payments based on the effect of documentation and coding 
changes that do not reflect real changes in case-mix. Similarly, we 
believe that hospitals paid based on the hospital-specific rate 
should not have the potential to realize increased payments due to 
documentation and coding changes that do not reflect real increases 
in patients' severity of illness. Therefore, as discussed in the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50426) and in section II.D. of 
the preamble of this proposed rule, we believe they should be 
equally subject to a prospective budget neutrality adjustment that 
we are applying for adoption of the MS-DRGs to all other hospitals. 
While we continue to believe that section 1886(d)(3)(A)(vi) of the 
Act does not provide explicit authority for application of the 
documentation and coding adjustment to the hospital-specific rates, 
we believe that we have the authority to apply the documentation and 
coding adjustment to the hospital-specific rates using our special 
exceptions and adjustment authority under section 1886(d)(5)(I)(i) 
of the Act.
    As we discuss in section II.D. of the preamble of this proposed 
rule, our best estimate, based on the most recently available data, 
is that a cumulative adjustment of -5.4 percent is required to 
eliminate the full effect of the documentation and coding changes on 
future payments to SCHs and MDHs. Unlike the case of standardized 
amounts paid to IPPS hospitals, prior to FY 2011 we had not made any 
previous adjustments to the hospital specific rates paid to SCHs and 
MDHs to account for documentation and coding changes. Consequently, 
in order to maintain consistency as far as possible with the 
adjustments applied to IPPS hospitals, we made an adjustment of -2.9 
percent in FY 2011 to the hospital-specific rates paid to SCHs and 
MDHs.
    As discussed above, we are proposing a -3.15 percent 
documentation and coding adjustment for IPPS hospitals in FY 2012 (-
3.15 percent prospective adjustment plus a -2.9 percent recoupment 
adjustment in FY 2012, offset by the removal of the -2.9 percent 
recoupment adjustment for FY 2011). The proposed IPPS documentation 
and coding adjustment exceeds the remaining -2.5 percent 
documentation and coding adjustment for hospitals receiving a 
hospital-specific rate (that is, the entire -5.4 percent adjustment, 
minus the -2.9 percent adjustment finalized for FY 2011). We believe 
that any adjustment to the hospital-specific rate due to 
documentation and coding effect should be as similar as possible to 
adjustments to the IPPS rate. Accordingly, we are proposing a -2.5 
percent payment adjustment to the hospital-specific rate. We believe 
that proposing the entire remaining prospective adjustment of -2.5 
percent allows CMS to maintain, to the extent possible, similarity 
and consistency in payment rates for different IPPS hospitals paid 
using the MS-DRG.

d. Proposed Adjustment to Restore Prior Rural Floor Budget Neutrality 
Offsets

    As discussed in section II.A.4.d. of this Addendum, in light of 
the Cape Cod decision, we are proposing to adjust hospital-specific 
amounts by 0.9 percent to restore to these amounts the offset for 
the rural floor and imputed floor in prior years. Our rationale and 
methodology for such adjustment are explained in section II.A.4.d of 
this Addendum. As with the standardized amount, we are proposing to 
return 0.7 percentage points for FYs 1998 through 2004, and 0.2 
percentage points for FY 2005 to the hospital-specific rates. We 
note that, in the FY 2006 IPPS final rule (70 FR 47429 and 47430), 
beginning in FY 2006, we changed our methodology and began applying 
only the DRG reclassification and recalibration budget neutrality 
factor to the hospital-specific rates. Because the rural floor 
budget neutrality adjustment was not applied to the hospital-
specific rates in FYs 2006 and 2007, we are not including FY 2006 
and FY 2007

[[Page 26030]]

in our assessment. Therefore, to remove the effects of the rural 
floor from the hospital-specific rates for FYs 1998 through 2005, we 
are proposing to apply a onetime permanent adjustment of 0.9 percent 
to the hospital-specific rates (that is, a factor of 1.009).

3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning on or after October 1, 2011, 
and before October 1, 2012

    Section 1886(d)(9)(E)(iv) of the Act provides that, effective 
for discharges occurring on or after October 1, 2004, hospitals 
located in Puerto Rico are paid based on a blend of 75 percent of 
the national prospective payment rate and 25 percent of the Puerto 
Rico-specific rate.

a. Puerto Rico Rate

    The Puerto Rico prospective payment rate is determined as 
follows:
    Step 1--Select the applicable average standardized amount 
considering the applicable wage index (Table 1C published in section 
VI. of this Addendum and available via the Internet).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable Puerto Rico-specific wage index.
    Step 3--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount.
    Step 4--Multiply the amount from Step 3 by the applicable MS-DRG 
relative weight (Table 5 listed in section VI. of this Addendum and 
available via the Internet).
    Step 5--Multiply the result in Step 4 by 25 percent.

b. National Rate

    The national prospective payment rate is determined as follows:
    Step 1--Select the applicable average standardized amount.
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--Add the amount from Step 2 and the nonlabor-related 
portion of the national average standardized amount.
    Step 4--Multiply the amount from Step 3 by the applicable MS-DRG 
relative weight (Table 5 listed in section VI. of this Addendum and 
available via the Internet).
    Step 5--Multiply the result in Step 4 by 75 percent.
    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico. This rate would then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment.

III. Proposed Changes to Payment Rates for Acute Care Hospital 
Inpatient Capital-Related Costs for FY 2012

    The PPS for acute care hospital inpatient capital-related costs 
was implemented for cost reporting periods beginning on or after 
October 1, 1991. Effective with that cost reporting period, 
hospitals were paid during a 10-year transition period (which 
extended through FY 2001) to change the payment methodology for 
Medicare acute care hospital inpatient capital-related costs from a 
reasonable cost-based methodology to a prospective methodology 
(based fully on the Federal rate).
    The basic methodology for determining Federal capital 
prospective rates is set forth in the regulations at 42 CFR 412.308 
through 412.352. Below we discuss the factors that we used to 
determine the proposed capital Federal rate for FY 2012, which would 
be effective for discharges occurring on or after October 1, 2011.
    The 10-year transition period ended with hospital cost reporting 
periods beginning on or after October 1, 2001 (FY 2002). Therefore, 
for cost reporting periods beginning in FY 2002, all hospitals 
(except ``new'' hospitals under Sec.  412.304(c)(2)) are paid based 
on the capital Federal rate. For FY 1992, we computed the standard 
Federal payment rate for capital-related costs under the IPPS by 
updating the FY 1989 Medicare inpatient capital cost per case by an 
actuarial estimate of the increase in Medicare inpatient capital 
costs per case. Each year after FY 1992, we update the capital 
standard Federal rate, as provided at Sec.  412.308(c)(1), to 
account for capital input price increases and other factors. The 
regulations at Sec.  412.308(c)(2) also provide that the capital 
Federal rate be adjusted annually by a factor equal to the estimated 
proportion of outlier payments under the capital Federal rate to 
total capital payments under the capital Federal rate. In addition, 
Sec.  412.308(c)(3) requires that the capital Federal rate be 
reduced by an adjustment factor equal to the estimated proportion of 
payments for (regular and special) exceptions under Sec.  412.348. 
Section 412.308(c)(4)(ii) requires that the capital standard Federal 
rate be adjusted so that the effects of the annual DRG 
reclassification and the recalibration of DRG weights and changes in 
the geographic adjustment factor (GAF) are budget neutral.
    For FYs 1992 through 1995, Sec.  412.352 required that the 
capital Federal rate also be adjusted by a budget neutrality factor 
so that aggregate payments for inpatient hospital capital costs were 
projected to equal 90 percent of the payments that would have been 
made for capital-related costs on a reasonable cost basis during the 
respective fiscal year. That provision expired in FY 1996. Section 
412.308(b)(2) describes the 7.4 percent reduction to the capital 
Federal rate that was made in FY 1994, and Sec.  412.308(b)(3) 
describes the 0.28 percent reduction to the capital Federal rate 
made in FY 1996 as a result of the revised policy for paying for 
transfers. In FY 1998, we implemented section 4402 of Public Law 
105-33, which required that, for discharges occurring on or after 
October 1, 1997, the budget neutrality adjustment factor in effect 
as of September 30, 1995, be applied to the unadjusted capital 
standard Federal rate and the unadjusted hospital-specific rate. 
That factor was 0.8432, which was equivalent to a 15.68 percent 
reduction to the unadjusted capital payment rates. An additional 2.1 
percent reduction to the rates was effective from October 1, 1997 
through September 30, 2002, making the total reduction 17.78 
percent. As we discussed in the FY 2003 IPPS final rule (67 FR 
50102) and implemented in Sec.  412.308(b)(6), the 2.1 percent 
reduction was restored to the unadjusted capital payment rates 
effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the regular exceptions payment adjustment during the 10-year 
transition period, we developed a dynamic model of Medicare 
inpatient capital-related costs; that is, a model that projected 
changes in Medicare inpatient capital-related costs over time. With 
the expiration of the budget neutrality provision, the capital cost 
model was only used to estimate the regular exceptions payment 
adjustment and other factors during the transition period. As we 
explained in the FY 2002 IPPS final rule (66 FR 39911), beginning in 
FY 2002, an adjustment for regular exception payments is no longer 
necessary because regular exception payments were only made for cost 
reporting periods beginning on or after October 1, 1991, and before 
October 1, 2001 (see Sec.  412.348(b)). Because payments are no 
longer made under the regular exception policy effective with cost 
reporting periods beginning in FY 2002, we discontinued use of the 
capital cost model. The capital cost model and its application 
during the transition period are described in Appendix B of the FY 
2002 IPPS final rule (66 FR 40099).
    Section 412.374 provides for blended payments to hospitals 
located in Puerto Rico under the IPPS for acute care hospital 
inpatient capital-related costs. Accordingly, under the capital PPS, 
we compute a separate payment rate specific to hospitals located in 
Puerto Rico using the same methodology used to compute the national 
Federal rate for capital-related costs. In accordance with section 
1886(d)(9)(A) of the Act, under the IPPS for acute care hospital 
operating costs, hospitals located in Puerto Rico are paid for 
operating costs under a special payment formula. Prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended operating rate 
that consisted of 75 percent of the applicable standardized amount 
specific to Puerto Rico hospitals and 25 percent of the applicable 
national average standardized amount. Similarly, prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended capital rate 
that consisted of 75 percent of the applicable capital Puerto Rico-
specific rate and 25 percent of the applicable capital Federal rate. 
However, effective October 1, 1997, in accordance with section 4406 
of Public Law 105-33, the methodology for operating payments made to 
hospitals located in Puerto Rico under the IPPS was revised to make 
payments based on a blend of 50 percent of the applicable 
standardized amount specific to Puerto Rico hospitals and 50 percent 
of the applicable national average standardized amount. In 
conjunction with this change to the operating blend percentage, 
effective with discharges occurring on or after October 1, 1997, we 
also revised the methodology for computing capital payments to 
hospitals located in Puerto Rico to be based on a blend of 50 
percent of the Puerto Rico capital rate and 50 percent of the 
national capital Federal rate.
    As we discussed in the FY 2005 IPPS final rule (69 FR 49185), 
section 504 of Public Law

[[Page 26031]]

108-173 increased the national portion of the operating IPPS 
payments for hospitals located in Puerto Rico from 50 percent to 
62.5 percent and decreased the Puerto Rico portion of the operating 
IPPS payments from 50 percent to 37.5 percent for discharges 
occurring on or after April 1, 2004 through September 30, 2004 
(refer to the March 26, 2004 One-Time Notification (Change Request 
3158)). In addition, section 504 of Public Law 108-173 provided that 
the national portion of operating IPPS payments for hospitals 
located in Puerto Rico is equal to 75 percent and the Puerto Rico-
specific portion of operating IPPS payments is equal to 25 percent 
for discharges occurring on or after October 1, 2004. Consistent 
with that change in operating IPPS payments to hospitals located in 
Puerto Rico, for FY 2005 we revised the methodology for computing 
capital payments to hospitals located in Puerto Rico to be based on 
a blend of 25 percent of the Puerto Rico-specific capital rate and 
75 percent of the national capital Federal rate for discharges 
occurring on or after October 1, 2004 (69 FR 49185).

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

    In the discussion that follows, we explain the factors that we 
used to determine the proposed capital Federal rate for FY 2012. In 
particular, we explain why the proposed FY 2012 capital Federal rate 
would increase approximately 0.60 percent, compared to the FY 2011 
capital Federal rate. As discussed in the impact analysis in 
Appendix A of this proposed rule, we estimate that capital payments 
per discharge would increase 1.7 percent during that same period. 
Because capital payments constitute about 10 percent of hospital 
payments, a percent change in the capital Federal rate yields only 
about a 0.1 percent change in actual payments to hospitals.

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

    Under Sec.  412.308(c)(1), the capital standard Federal rate is 
updated on the basis of an analytical framework that takes into 
account changes in a capital input price index (CIPI) and several 
other policy adjustment factors. Specifically, we adjust the 
projected CIPI rate-of-increase as appropriate each year for case-
mix index-related changes, for intensity, and for errors in previous 
CIPI forecasts. The proposed update factor for FY 2012 under that 
framework is 1.5 percent based on the best data available at this 
time. The proposed update factor under that framework is based on a 
projected 1.5 percent increase in the CIPI, a 0.0 percent adjustment 
for intensity, a 0.0 percent adjustment for case-mix, a 0.0 percent 
adjustment for the FY 2010 DRG reclassification and recalibration, 
and a forecast error correction of 0.0 percent. As discussed below 
in section III.C. of this Addendum, we continue to believe that the 
CIPI is the most appropriate input price index for capital costs to 
measure capital price changes in a given year. We also explain the 
basis for the FY 2012 CIPI projection in that same section of this 
Addendum. We note, as discussed in section VI.E.1. of the preamble 
of this proposed rule, we are proposing to apply a -1.0 percent 
adjustment to the capital rate in FY 2012 to account for the effect 
of changes in documentation and coding under the MS-DRGs that do not 
correspond to changes in real increases in patients' severity of 
illness. Below we describe the policy adjustments that we are 
proposing to apply in the update framework for FY 2012.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the IPPS. Because the DRG weight determines the 
prospective payment for each case, any percentage increase in the 
case-mix index corresponds to an equal percentage increase in 
hospital payments.
    The case-mix index can change for any of several reasons:
     The average resource use of Medicare patients changes 
(``real'' case-mix change);
     Changes in hospital documentation and coding of patient 
records result in higher weight DRG assignments (``coding 
effects''); and
     The annual DRG reclassification and recalibration 
changes may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
documentation and coding behavior that result in assignment of cases 
to higher weighted DRGs but do not reflect higher resource 
requirements. The capital update framework includes the same case-
mix index adjustment used in the former operating IPPS update 
framework (as discussed in the May 18, 2004 IPPS proposed rule for 
FY 2005 (69 FR 28816)). (We no longer use an update framework to 
make a recommendation for updating the operating IPPS standardized 
amounts as discussed in section II. of Appendix B in the FY 2006 
IPPS final rule (70 FR 47707).)
    For FY 2012, we are projecting a 1.0 percent total increase in 
the case-mix index. We estimated that the real case-mix increase 
would also equal 1.0 percent for FY 2012. The proposed net 
adjustment for change in case-mix is the difference between the 
projected real increase in case-mix and the projected total increase 
in case-mix. Therefore, the proposed net adjustment for case-mix 
change in FY 2012 is 0.0 percentage points.
    The capital update framework also contains an adjustment for the 
effects of DRG reclassification and recalibration. This adjustment 
is intended to remove the effect on total payments of prior year's 
changes to the DRG classifications and relative weights, in order to 
retain budget neutrality for all case-mix index-related changes 
other than those due to patient severity. Due to the lag time in the 
availability of data, there is a 2-year lag in data used to 
determine the adjustment for the effects of DRG reclassification and 
recalibration. For example, we have data available to evaluate the 
effects of the FY 2010 DRG reclassification and recalibration as 
part of our update for FY 2012. To adjust for reclassification and 
recalibration effects, under our historical methodology, we would 
run the FY 2010 cases through the FY 2009 GROUPER and through the FY 
2010 GROUPER. If the resulting ratio of the case-mix indices did not 
equate to 1.0, in the update framework for FY 2012, we would propose 
to make an adjustment to account for the reclassification and 
recalibration effects in FY 2010. In the update framework for FY 
2011 (the FY 2011 IPPS final rule (75 FR 50435)), we did not adjust 
for reclassification and recalibration effects from FY 2009 because 
it was accounted for in the documentation and coding adjustment to 
the capital Federal rates for FY 2011. For FY 2012, we are proposing 
not to perform an analysis of changes in case-mix in FY 2010 due to 
the effect of documentation and coding, as this would be most 
consistent with our approach under the operating IPPS. Therefore, at 
this time, under our broad authority in section 1886(g) of the Act, 
we are proposing a 0.0 percent adjustment for reclassification and 
recalibration in the update framework. We may evaluate the effect of 
FY 2010 reclassification and recalibration if we perform an analysis 
of the documentation and coding effect in FY 2010 in future 
rulemaking.
    The capital update framework also contains an adjustment for 
forecast error. The input price index forecast is based on 
historical trends and relationships ascertainable at the time the 
update factor is established for the upcoming year. In any given 
year, there may be unanticipated price fluctuations that may result 
in differences between the actual increase in prices and the 
forecast used in calculating the update factors. In setting a 
prospective payment rate under the framework, we make an adjustment 
for forecast error only if our estimate of the change in the capital 
input price index for any year is off by 0.25 percentage point or 
more. There is a 2-year lag between the forecast and the 
availability of data to develop a measurement of the forecast error. 
A forecast error of -0.2 percentage point was calculated for the 
proposed FY 2012 update. That is, current historical data indicate 
that the forecasted FY 2010 CIPI (1.2 percent) used in calculating 
the FY 2010 update factor was 0.2 percentage point higher than the 
actual realized price increases (1.0 percent). The two primary 
contributing factors for the FY 2011 CIPI forecast being slightly 
higher than the actual FY 2011 increase in the CIPI were that the 
prices for the nonprofit and government interest cost category grew 
slower than what had been forecasted, and the prices for the other 
capital expenses cost category also grew slower than what had been 
forecasted. Because the estimation of the change in the CIPI is not 
greater than 0.25 percentage point, we are proposing to make a 0.0 
percent adjustment for forecast error in the update for FY 2012.
    Under the capital IPPS update framework, we also make an 
adjustment for changes in intensity. Historically, we calculated 
this adjustment using the same methodology and data that were used 
in the past under the framework for operating IPPS. The intensity 
factor for the operating update framework reflected how hospital 
services are utilized to produce the final product, that is, the

[[Page 26032]]

discharge. This component accounts for changes in the use of 
quality-enhancing services, for changes within DRG severity, and for 
expected modification of practice patterns to remove non-cost-
effective services. Our intensity measure is based on a 5-year 
average.
    Historically, we calculated case-mix constant intensity as the 
change in total charges per admission, adjusted for price level 
changes (the CIPI for hospital and related services) and changes in 
real case-mix. Without reliable estimates of the proportions of the 
overall annual intensity increases that are due, respectively, to 
ineffective practice patterns and the combination of quality-
enhancing new technologies and complexity within the DRG system, we 
assume that one-half of the annual increase is due to each of these 
factors. The capital update framework thus provides an add-on to the 
input price index rate of increase of one-half of the estimated 
annual increase in intensity, to allow for increases within DRG 
severity and the adoption of quality-enhancing technology.
    We developed a Medicare-specific intensity measure based on a 5-
year average. Past studies of case-mix change by the RAND 
Corporation (Has DRG Creep Crept Up? Decomposing the Case Mix Index 
Change Between 1987 and 1988 by G. M. Carter, J. P. Newhouse, and D. 
A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix 
change was not dependent on total change, but was usually a fairly 
steady increase of 1.0 to 1.5 percent per year. However, we used 1.4 
percent as the upper bound because the RAND study did not take into 
account that hospitals may have induced doctors to document medical 
records more completely in order to improve payment.
    In accordance with Sec.  412.308(c)(1)(ii), we began updating 
the capital standard Federal rate in FY 1996 using an update 
framework that takes into account, among other things, allowable 
changes in the intensity of hospital services, as noted above. For 
much of the last decade, we found that the charge data appeared to 
be skewed as a result of hospitals attempting to maximize outlier 
payments, while lessening costs, and we established a 0.0 percent 
adjustment for intensity in each of those years. Therefore, for FY 
2011, in an effort to further refine the intensity adjustment and 
more accurately reflect allowable changes in hospital intensity, we 
revised our intensity measure to use changes in hospital costs per 
discharge over a 5-year average rather than changes in hospital 
charges, which had been the basis of the intensity adjustment in 
prior years. The unique nature of capital--how and when it is 
purchased, its longevity, and how it is financed--creates a greater 
degree of variance in capital cost among hospitals than does 
operating cost. As discussed in the FY 2011 IPPS/LTCH PPS final rule 
(75 FR 50436), we believe that using changes in capital costs per 
discharge as the basis for the intensity adjustment in lieu of 
changes in charges will decrease some of the variability of this 
adjustment. In this proposed rule, for FY 2012, we are proposing to 
use an intensity measure that is based on a 5-year adjusted average 
of cost per discharge, as we did for FY 2011. Therefore, the 
proposed intensity measure for FY 2012 is based on an average of 
cost per discharge data from the 5-year period beginning with FY 
2005 and extending through FY 2009. Based on these data, we 
estimated that case-mix constant intensity declined during FYs 2005 
through 2009. In the past, when we found intensity to be declining, 
we believed a zero (rather than negative) intensity adjustment was 
appropriate. Consistent with this approach, because we estimate that 
intensity declined during that 5-year period, we believe it is 
appropriate to continue to apply a zero intensity adjustment for FY 
2012. Therefore, we are proposing to make a 0.0 percent adjustment 
for intensity in the update for FY 2012.
    Above, we described the basis of the components used to develop 
the proposed 1.5 percent capital update factor under the capital 
update framework for FY 2012 as shown in the table below.
[GRAPHIC] [TIFF OMITTED] TP05MY11.092

b. Comparison of CMS and MedPAC Update Recommendation

    In its March 2011 Report to Congress, MedPAC did not make a 
specific update recommendation for capital IPPS payments for FY 
2012. (MedPAC's Report to the Congress: Medicare Payment Policy, 
March 2011, Chapter 3.)

2. Outlier Payment Adjustment Factor

    Section 412.312(c) establishes a unified outlier payment 
methodology for inpatient operating and inpatient capital-related 
costs. A single set of thresholds is used to identify outlier cases 
for both inpatient operating and inpatient capital-related payments. 
Section 412.308(c)(2) provides that the standard Federal rate for 
inpatient capital-related costs be reduced by an adjustment factor 
equal to the estimated proportion of capital-related outlier 
payments to total inpatient capital-related PPS payments. The 
outlier thresholds are set so that operating outlier payments are 
projected to be 5.1 percent of total operating IPPS DRG payments.
    For FY 2011, we estimated that outlier payments for capital 
would equal 5.96 percent of inpatient capital-related payments based 
on the capital Federal rate in FY 2011. Based on the thresholds as 
set forth in section II.A. of this Addendum, we estimate that 
outlier payments for capital-related costs will equal 5.94 percent 
for inpatient capital-related payments based on the proposed capital 
Federal rate in FY 2012. Therefore, we are proposing to apply an 
outlier adjustment factor of 0.9406 in determining the capital 
Federal rate. Thus, we estimate that the percentage of capital 
outlier payments to total capital standard payments for FY 2012 
would be slightly lower than the percentage for FY 2011. This slight 
decrease in estimated capital outlier payments is primarily due to 
the estimated increase in capital IPPS payments per discharge. That 
is, because capital payments per discharge are projected to be 
higher in FY 2012 compared to FY 2011, as shown in Table III. in 
section VIII. of Appendix A to this proposed rule, fewer cases would 
qualify for outlier payments.
    The outlier reduction factors are not built permanently into the 
capital rates; that is, they are not applied cumulatively in

[[Page 26033]]

determining the capital Federal rate. The proposed FY 2012 outlier 
adjustment of 0.9406 is a 0.02 percent change from the FY 2011 
outlier adjustment of 0.9404. Therefore, the proposed net change in 
the outlier adjustment to the capital Federal rate for FY 2012 is 
1.0002 (0.9406/0.9404). Thus, the proposed outlier adjustment would 
increase the FY 2012 capital Federal rate by 0.02 percent compared 
with the FY 2011 outlier adjustment.

3. Proposed Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF

    Section 412.308(c)(4)(ii) requires that the capital Federal rate 
be adjusted so that aggregate payments for the fiscal year based on 
the capital Federal rate after any changes resulting from the annual 
DRG reclassification and recalibration and changes in the GAF are 
projected to equal aggregate payments that would have been made on 
the basis of the capital Federal rate without such changes. Because 
we implemented a separate GAF for Puerto Rico, we apply separate 
budget neutrality adjustments for the national GAF and the Puerto 
Rico GAF. We apply the same budget neutrality factor for DRG 
reclassifications and recalibration nationally and for Puerto Rico. 
Separate adjustments were unnecessary for FY 1998 and earlier 
because the GAF for Puerto Rico was implemented in FY 1998.
    In the past, we used the actuarial capital cost model (described 
in Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
estimate the aggregate payments that would have been made on the 
basis of the capital Federal rate with and without changes in the 
DRG classifications and weights and in the GAF to compute the 
adjustment required to maintain budget neutrality for changes in DRG 
weights and in the GAF. During the transition period, the capital 
cost model was also used to estimate the regular exception payment 
adjustment factor. As we explained in section III.A. of this 
Addendum, beginning in FY 2002, an adjustment for regular exception 
payments was no longer necessary. Therefore, we no longer use the 
capital cost model. Furthermore, as discussed below, special 
exceptions payments will no longer be made in FY 2012, and an 
exceptions payment adjustment factor will no longer be necessary, as 
there are no remaining hospitals eligible to receive special 
exceptions payments.
    To determine the proposed factors for FY 2012, we compared 
(separately for the national capital rate and the Puerto Rico 
capital rate) estimated aggregate capital Federal rate payments 
based on the FY 2011 MS-DRG classifications and relative weights and 
the FY 2011 GAF to estimated aggregate capital Federal rate payments 
based on the FY 2011 MS-DRG classifications and relative weights and 
the proposed FY 2012 GAFs. To achieve budget neutrality for the 
changes in the national GAFs, based on calculations using updated 
data, we are proposing to apply an incremental budget neutrality 
adjustment of 1.0005 for FY 2012 to the previous cumulative FY 2011 
adjustment of 0.9902, yielding an adjustment of 0.9906, through FY 
2012. For the Puerto Rico GAFs, we are proposing to apply an 
incremental budget neutrality adjustment of 1.0087 for FY 2012 to 
the previous cumulative FY 2011 adjustment of 0.9965, yielding a 
cumulative adjustment of 1.0052 through FY 2012.
    We then compared estimated aggregate capital Federal rate 
payments based on the FY 2011 DRG relative weights and the proposed 
FY 2012 GAFs to estimate aggregate capital Federal rate payments 
based on the cumulative effects of the proposed FY 2012 MS-DRG 
classifications and relative weights and the proposed FY 2012 GAFs. 
The proposed incremental adjustment for DRG classifications and 
proposed changes in relative weights is 1.0000 both nationally and 
for Puerto Rico. The proposed cumulative adjustments for MS-DRG 
classifications and proposed changes in relative weights and for 
proposed changes in the GAFs through FY 2012 are 0.9906 nationally 
and 1.0052 for Puerto Rico. We note that all the values are 
calculated with unrounded numbers. The following table summarizes 
the adjustment factors for each fiscal year:
BILLING CODE 4120-01-P

[[Page 26034]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.093

BILLING CODE 4120-01-C

[[Page 26035]]

    The methodology used to determine the recalibration and 
geographic adjustment factor (GAF/DRG) budget neutrality adjustment 
is similar to the methodology used in establishing budget neutrality 
adjustments under the IPPS for operating costs. One difference is 
that, under the operating IPPS, the budget neutrality adjustments 
for the effect of geographic reclassifications are determined 
separately from the effects of other changes in the hospital wage 
index and the DRG relative weights. Under the capital IPPS, there is 
a single GAF/DRG budget neutrality adjustment factor (the national 
capital rate and the Puerto Rico capital rate are determined 
separately) for changes in the GAF (including geographic 
reclassification) and the DRG relative weights. In addition, there 
is no adjustment for the effects that geographic reclassification 
has on the other payment parameters, such as the payments for DSH or 
IME.
    For FY 2011, we established a GAF/DRG budget neutrality factor 
of 0.9990 (75 FR 50437). For FY 2012, we are proposing to establish 
a GAF/DRG budget neutrality factor of 1.0005. The GAF/DRG budget 
neutrality factors are built permanently into the capital rates; 
that is, they are applied cumulatively in determining the capital 
Federal rate. This follows the requirement that estimated aggregate 
payments each year be no more or less than they would have been in 
the absence of the annual DRG reclassification and recalibration and 
changes in the GAFs. The incremental change in the proposed 
adjustment from FY 2011 to FY 2012 is 1.0005. The proposed 
cumulative change in the capital Federal rate due to this proposed 
adjustment is 0.9906 (the product of the incremental factors for FYs 
1995 through 2011 and the proposed incremental factor of 1.0005 for 
FY 2012). (We note that averages of the incremental factors that 
were in effect during FYs 2005 and 2006, respectively, were used in 
the calculation of the cumulative adjustment of 0.9906 for FY 2012.)
    The proposed factor accounts for the proposed MS-DRG 
reclassifications and recalibration and for proposed changes in the 
GAFs. It also incorporates the effects on the proposed GAFs of FY 
2012 geographic reclassification decisions made by the MGCRB 
compared to FY 2011 decisions. However, it does not account for 
changes in payments due to changes in the DSH and IME adjustment 
factors.

4. Exceptions Payment Adjustment Factor

    Section 412.308(c)(3) of our regulations requires that the 
capital standard Federal rate be reduced by an adjustment factor 
equal to the estimated proportion of additional payments for both 
regular exceptions and special exceptions under Sec.  412.348 
relative to total capital PPS payments. In estimating the proportion 
of regular exception payments to total capital PPS payments during 
the transition period, we used the actuarial capital cost model 
originally developed for determining budget neutrality (described in 
Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
determine the exceptions payment adjustment factor, which was 
applied to both the Federal and hospital-specific capital rates.
    Since FY 2002, an adjustment for regular exception payments was 
no longer necessary in determining the capital Federal rate because, 
in accordance with Sec.  412.348(b), regular exception payments were 
only made for cost reporting periods beginning on or after October 
1, 1991 and before October 1, 2001. Accordingly, in FY 2002 and 
subsequent fiscal years, no payments are made under the regular 
exceptions provision (66 FR 39949). Furthermore, there are no longer 
any remaining hospitals eligible to receive a special exceptions 
payment under Sec.  412.348(g) because they have reached the 
limitation on the period for exception payments under Sec.  
412.348(g)(7). A hospital qualifying for a special exceptions 
payment could receive exceptions payments for up to 10 years from 
the year in which it completed a project that met the applicable 
criteria under Sec.  412.348(g). However, the project had to be 
completed no later than the end of the hospital's last cost 
reporting period beginning before October 1, 2001. Therefore, FY 
2012 would be the final year any hospital could have received a 
special exceptions payment. However, as we indicated above, based on 
the date the projects were completed, there are no remaining 
hospitals eligible to receive a special exceptions payment in FY 
2012, which negates the need for a special exceptions adjustment for 
FY 2012. Furthermore, we note that special exceptions adjustments 
will no longer be made in subsequent years because FY 2012 is the 
final year payments could have been made to eligible hospitals in 
accordance with Sec.  412.348(g)(7).
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50439), we 
estimated that total (special) exceptions payments for FY 2011 would 
equal 0.04 percent of aggregate payments based on the capital 
Federal rate. Therefore, we applied an exceptions adjustment factor 
of 0.9996 (1 - 0.0004) to determine the FY 2011 capital Federal 
rate. As we stated above, because there are no special exceptions 
payments in FY 2012, we are proposing to no longer apply an 
exceptions payment adjustment factor to the proposed capital Federal 
rate for FY 2012. However, the exceptions reduction factors were not 
built permanently into the capital rates; that is, the factors were 
not applied cumulatively in determining the capital Federal rate. 
Therefore, we are proposing to apply a factor of 1.0004 (1/0.9996) 
in determining the proposed FY 2012 capital Federal rate to restore 
the reduction that resulted from the 0.9996 exceptions adjustment 
factor that was applied in determining the FY 2011 capital Federal 
rate.

5. Proposed Capital Standard Federal Rate for FY 2012

    For FY 2011, we established a capital Federal rate of $420.01 
(75 FR 50439). We are proposing to establish an update of 1.5 
percent in determining the proposed FY 2012 capital Federal rate for 
all hospitals. However, as discussed in greater detail in section 
V.E. of the preamble of this proposed rule, under the statutory 
authority at section 1886(g) of the Act, consistent with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, 
we are proposing to make an additional 1.0 percent reduction to the 
national capital Federal payment rate in FY 2012 to account for the 
effect of changes in case-mix resulting from documentation and 
coding changes that do not reflect real changes in the case-mix in 
light of the adoption of MS-DRGs. Accordingly, we are proposing to 
apply a cumulative documentation and coding adjustment factor of 
0.9479 in determining the proposed FY 2012 capital Federal rate 
(that is, the existing -0.6 percent adjustment in FY 2008 plus the -
0.9 percent adjustment in FY 2009, plus the -2.9 percent adjustment 
for FY 2011, plus the proposed -1.0 percent adjustment for FY 2012, 
computed as 1 divided by (1.006 x 1.009 x 1.029 x 1.010). (We note 
that we did not apply a documentation and coding adjustment to the 
capital Federal rate in FY 2010 (74 FR 43927).) As a result of the 
proposed 1.5 percent update and other budget neutrality factors 
discussed above, we are proposing to establish a national capital 
Federal rate of $422.54 for FY 2012. The proposed national capital 
Federal rate for FY 2012 was calculated as follows:
     The proposed FY 2012 update factor is 1.0150, that is, 
the proposed update is 1.5 percent.
     The proposed FY 2012 budget neutrality adjustment 
factor that is applied to the capital standard Federal payment rate 
for proposed changes in the MS-DRG classifications and relative 
weights and proposed changes in the GAFs is 1.0005.
     The proposed FY 2012 outlier adjustment factor is 
0.9406.
     The proposed FY 2012 (special) exceptions payment 
adjustment factor is 1.0000 because we project that there will be no 
exceptions payments made in FY 2012 as discussed above in section 
III.A. of this Addendum. However, we are proposing to apply a factor 
of 1.0004 (1/0.9996) in determining the proposed FY 2012 capital 
Federal rate to restore the reduction that resulted from the 0.9996 
exceptions adjustment factor applied in determining the FY 2011 
capital Federal rate.
     The proposed cumulative adjustment factor for FY 2012 
applied to the national capital Federal rate for proposed changes in 
documentation and coding under the MS-DRGs is 0.9479.
    Because the proposed capital Federal rate has already been 
adjusted for differences in case-mix, wages, cost-of-living, 
indirect medical education costs, and payments to hospitals serving 
a disproportionate share of low-income patients, we are not 
proposing to make additional adjustments in the capital standard 
Federal rate for these factors, other than the proposed budget 
neutrality factor for proposed changes in the MS-DRG classifications 
and relative weights and for proposed changes in the GAFs.
    We are providing the following chart that shows how each of the 
proposed factors and adjustments for FY 2012 affects the computation 
of the proposed FY 2012 national capital Federal rate in comparison 
to the FY 2011 national capital Federal rate. The proposed FY 2012 
update factor has the effect of increasing the capital Federal rate 
by 1.5 percent compared to the FY 2011 capital Federal rate. The 
proposed GAF/DRG budget neutrality factor of 1.0005 has the effect 
of

[[Page 26036]]

increasing the capital Federal rate by 0.05 percent. The proposed FY 
2012 outlier adjustment factor has the effect of increasing the 
capital Federal rate by 0.02 percent compared to the FY 2011 capital 
Federal rate. The proposed FY 2012 special exceptions payment 
adjustment factor to restore the FY 2011 exceptions adjustment 
factor of 0.9996 has the net effect of increasing the proposed FY 
2012 national capital Federal rate by 0.04 percent as compared to 
the FY 2011 national capital Federal rate. The combined effect of 
all the proposed changes would increase the proposed national 
capital Federal rate by approximately 0.60 percent compared to the 
FY 2011 national capital Federal rate.
[GRAPHIC] [TIFF OMITTED] TP05MY11.094

6. Proposed Special Capital Rate for Puerto Rico Hospitals

    Section 412.374 provides for the use of a blended payment system 
for payments to hospitals located in Puerto Rico under the PPS for 
acute care hospital inpatient capital-related costs. Accordingly, 
under the capital PPS, we compute a separate payment rate specific 
to hospitals located in Puerto Rico using the same methodology used 
to compute the national Federal rate for capital-related costs. 
Under the broad authority of section 1886(g) of the Act, as 
discussed in section V. of the preamble of this proposed rule, 
beginning with discharges occurring on or after October 1, 2004, 
capital payments to hospitals located in Puerto Rico are based on a 
blend of 25 percent of the Puerto Rico capital rate and 75 percent 
of the capital Federal rate. The Puerto Rico capital rate is derived 
from the costs of Puerto Rico hospitals only, while the capital 
Federal rate is derived from the costs of all acute care hospitals 
participating in the IPPS (including Puerto Rico).
    To adjust hospitals' capital payments for geographic variations 
in capital costs, we apply a GAF to both portions of the blended 
capital rate. The GAF is calculated using the operating IPPS wage 
index, and varies depending on the labor market area or rural area 
in which the hospital is located. We use the Puerto Rico wage index 
to determine the GAF for the Puerto Rico part of the capital-blended 
rate and the national wage index to determine the GAF for the 
national part of the blended capital rate.
    Because we implemented a separate GAF for Puerto Rico in FY 
1998, we also apply separate budget neutrality adjustments for the 
national GAF and for the Puerto Rico GAF. However, we apply the same 
budget neutrality factor for DRG reclassifications and recalibration 
nationally and for Puerto Rico. The proposed national GAF budget 
neutrality factor is 1.0088 and the proposed DRG adjustment is 
1.0000, for a combined proposed cumulative adjustment of 1.0052 for 
FY 2012.
    In computing the payment for a particular Puerto Rico hospital, 
the Puerto Rico portion of the capital rate (25 percent) is 
multiplied by the Puerto Rico-specific GAF for the labor market area 
in which the hospital is located, and the national portion of the 
capital rate (75 percent) is multiplied by the national GAF for the 
labor market area in which the hospital is located (which is 
computed from national data for all hospitals in the United States 
and Puerto Rico). In FY 1998, we implemented a 17.78 percent 
reduction to the Puerto Rico capital rate as a result of Public Law 
105-33. In FY 2003, a small part of that reduction was restored.
    For FY 2011, the special capital rate for hospitals located in 
Puerto Rico was $197.66 (75 FR 50441). Consistent with our 
adjustment to the FY 2011 Puerto Rico-specific standardized amount, 
under the Secretary's broad authority under section 1886(g) of the 
Act, we established an adjustment to the Puerto Rico-specific 
capital rate of -2.6 percent in FY 2011 for the cumulative increase 
in case-mix due to changes in documentation and coding under the MS-
DRGs for FYs 2008 and 2009. The -2.6 percent adjustment to the 
capital Puerto Rico-specific rate that we made in FY 2011 reflects 
the entire amount of our current estimate of the effects of 
documentation and coding that did not reflect real changes in

[[Page 26037]]

case-mix for discharges occurring during FYs 2008 and 2009 from 
hospitals located in Puerto Rico. Consequently, in this proposed 
rule, we are not proposing to make any additional adjustments for 
the effect of documentation and coding that did not reflect real 
changes in case-mix to the capital Puerto Rico-specific rate for FY 
2012. Therefore, with the changes we are proposing to make to the 
other factors used to determine the capital rate, the proposed FY 
2012 special capital rate for hospitals in Puerto Rico is $205.01.

B. Calculation of the Proposed Inpatient Capital-Related 
Prospective Payments for FY 2012

    Because the 10-year capital PPS transition period ended in FY 
2001, all hospitals (except ``new'' hospitals under Sec.  412.324(b) 
and under Sec.  412.304(c)(2)) are paid based on 100 percent of the 
capital Federal rate in FY 2012.
    For purposes of calculating payments for each discharge during 
FY 2012, the capital standard Federal rate is adjusted as follows: 
(Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for hospitals 
located in Alaska and Hawaii) x (1 + DSH Adjustment Factor + IME 
Adjustment Factor, if applicable). The result is the adjusted 
capital Federal rate.
    Hospitals also may receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year. 
Section 412.312(c) provides for a single set of thresholds to 
identify outlier cases for both inpatient operating and inpatient 
capital-related payments. The proposed outlier thresholds for FY 
2012 are in section II.A. of this Addendum. For FY 2012, a case 
would qualify as a cost outlier if the cost for the case plus the 
(operating) IME and DSH payments is greater than the prospective 
payment rate for the MS-DRG plus the proposed fixed-loss amount of 
$23,375.
    Currently, as provided in Sec.  412.304(c)(2), we pay a new 
hospital 85 percent of its reasonable costs during the first 2 years 
of operation unless it elects to receive payment based on 100 
percent of the capital Federal rate. Effective with the third year 
of operation, we pay the hospital based on 100 percent of the 
capital Federal rate (that is, the same methodology used to pay all 
other hospitals subject to the capital PPS).

C. Capital Input Price Index

1. Background

    Like the operating input price index, the capital input price 
index (CIPI) is a fixed-weight price index that measures the price 
changes associated with capital costs during a given year. The CIPI 
differs from the operating input price index in one important 
aspect--the CIPI reflects the vintage nature of capital, which is 
the acquisition and use of capital over time. Capital expenses in 
any given year are determined by the stock of capital in that year 
(that is, capital that remains on hand from all current and prior 
capital acquisitions). An index measuring capital price changes 
needs to reflect this vintage nature of capital. Therefore, the CIPI 
was developed to capture the vintage nature of capital by using a 
weighted-average of past capital purchase prices up to and including 
the current year.
    We periodically update the base year for the operating and 
capital input price indexes to reflect the changing composition of 
inputs for operating and capital expenses. In the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (74 FR 44021), we rebased and revised the 
CIPI to a FY 2006 base year to reflect the more current structure of 
capital costs in hospitals. A complete discussion of this rebasing 
is provided in section IV. of the preamble of that final rule.

2. Forecast of the CIPI for FY 2012

    Based on the latest forecast by IHS Global Insight, Inc. (first 
quarter of 2011), we are forecasting the FY 2006-based CIPI to 
increase 1.5 percent in FY 2012. This reflects a projected 1.9 
percent increase in vintage-weighted depreciation prices (building 
and fixed equipment, and movable equipment), and a projected 2.1 
percent increase in other capital expense prices in FY 2012, 
partially offset by a projected 0.9 percent decline in vintage-
weighted interest expenses in FY 2012. The weighted average of these 
three factors produces the 1.5 percent increase for the FY 2006-
based CIPI as a whole in FY 2012.

IV. Proposed Changes to Payment Rates for Excluded Hospitals: Rate-of-
Increase Percentages

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to 
a rate-of-increase ceiling. An annual per discharge limit (the 
target amount as defined in Sec.  413.40(a)) was set for each 
hospital or hospital unit based on the hospital's own cost 
experience in its base year, and updated annually by a rate-of-
increase percentage. The updated target amount for that period was 
multiplied by the Medicare discharges during that period and applied 
as an aggregate upper limit (the ceiling as defined in Sec.  
413.40(a)) on total inpatient operating costs for a hospital's cost 
reporting period. Prior to October 1, 1997, these payment provisions 
applied consistently to all categories of excluded providers 
(rehabilitation hospitals and units (now referred to as IRFs), 
psychiatric hospitals and units (now referred to as IPFs), LTCHs, 
children's hospitals, and cancer hospitals).
    Payments for services furnished in children's hospitals and 
cancer hospitals that are excluded from the IPPS continue to be 
subject to the rate-of-increase ceiling based on the hospital's own 
historical cost experience. (We note that, in accordance with Sec.  
403.752(a), RNHCIs are also subject to the rate-of-increase limits 
established under Sec.  413.40 of the regulations.)
    We are proposing that the FY 2012 rate-of-increase percentage 
for updating the target amounts for cancer and children's hospitals 
and RNHCIs be the estimated percentage increase in the FY 2012 IPPS 
operating market basket, estimated to be 2.8 percent, in accordance 
with applicable regulations at Sec.  413.40. We also are proposing 
to use the most recent data available to determine the estimated 
percentage increase for the FY 2012 IPPS operating market basket. 
Based on IHS Global Insight, Inc.'s first quarter 2011 forecast, 
with historical data through the 2010 fourth quarter, the IPPS 
operating market basket is 2.8 percent for FY 2012. Therefore, for 
cancer and children's hospitals and RNHCIs, the proposed FY 2012 
rate-of-increase percentage that would be applied to the FY 2011 
target amounts in order to determine the FY 2012 target amount is 
2.8 percent. (We are proposing to use more recent data when 
determining the estimated percentage increase for the FY 2012 IPPS 
operating market basket for the final rule, to the extent that these 
data are available.)
    IRFs, IPFs, and LTCHs were previously paid under the reasonable 
cost methodology. However, the statute was amended to provide for 
the implementation of prospective payment systems for IRFs, IPFs, 
and LTCHs. In general, the prospective payment systems for IRFs, 
IPFs, and LTCHs provide transitioning periods of varying lengths of 
time during which a portion of the prospective payment is based on 
cost-based reimbursement rules under 42 CFR part 413 (certain 
providers do not receive a transitioning period or may elect to 
bypass the transition as applicable under 42 CFR Part 412, Subparts 
N, O, and P.) We note that all of the various transitioning periods 
provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have 
ended. The IRF PPS, the IPF PPS, and the LTCH PPS are updated 
annually. We refer readers to section VII. of the preamble and 
section V. of the Addendum to this proposed rule for the proposed 
update changes to the Federal payment rates for LTCHs under the LTCH 
PPS for FY 2012. The annual updates for the IRF PPS and the IPF PPS 
are issued by the agency in separate Federal Register documents.

V. Proposed Changes to the Payment Rate for the LTCH PPS for FY 2012

A. Proposed LTCH PPS Standard Federal Rate for FY 2012

1. Background

    In section VII. of the preamble of this proposed rule, we 
discuss our proposed changes to the payment rates, factors, and 
specific policies under the LTCH PPS for FY 2012.
    Under Sec.  412.523(c)(3)(ii) of the regulations, for LTCH PPS 
rate years beginning RY 2004 through RY 2006, we updated the 
standard Federal rate annually by a factor to adjust for the most 
recent estimate of the increases in prices of an appropriate market 
basket of goods and services for LTCHs. We established this policy 
of annually updating the standard Federal rate because, at that 
time, we believed that was the most appropriate method for updating 
the LTCH PPS standard Federal rate for years after the initial 
implementation of the LTCH PPS in FY 2003. Thus, under Sec.  
412.523(c)(3)(ii), for RYs 2004 through 2006, the annual update to 
the LTCH PPS standard Federal rate was equal to the previous rate 
year's Federal rate updated by the most recent estimate of increases 
in the appropriate market basket of goods and services included in 
covered inpatient LTCH services.

[[Page 26038]]

    In determining the annual update to the standard Federal rate 
for RY 2007, based on our ongoing monitoring activity, we believed 
that, rather than solely using the most recent estimate of the LTCH 
PPS market basket as the basis of the annual update factor, it was 
appropriate to adjust the standard Federal rate to account for the 
effect of documentation and coding in a prior period that was 
unrelated to patients' severity of illness (71 FR 27818). 
Accordingly, we established under Sec.  412.523(c)(3)(iii) that the 
annual update to the standard Federal rate for RY 2007 was zero 
percent based on the most recent estimate of the LTCH PPS market 
basket at that time, offset by an adjustment to account for changes 
in case-mix in prior periods due to the effect of documentation and 
coding that were unrelated to patients' severity of illness. For RY 
2008 through FY 2011, we also considered the effect of documentation 
and coding that was unrelated to patients' severity of illness in 
establishing the annual update to the standard Federal rate as set 
forth in the regulations at Sec.  412.523(c)(3)(iv) through 
(c)(3)(vii).
    Several provisions of the Affordable Care Act revised the annual 
update to the standard Federal rate, beginning in RY 2010. 
Specifically, section 1886(m)(3)(A) of the Act, as added by section 
3401(c) of the Affordable Care Act, specifies that, for rate year 
2010 and each subsequent rate year, any annual update to the 
standard Federal rate shall be reduced:
     For rate year 2010 through 2019, by the other 
adjustment specified in section 1886(m)(3)(A)(ii) and (m)(4) of the 
Act; and
     For rate year 2012 and each subsequent year, by the 
productivity adjustment (which we refer to as ``the multifactor 
productivity (MFP) adjustment'' as discussed in section VII.E.2.d. 
of the preamble of this proposed rule) described in section 
1886(b)(3)(B)(xi)(II) of the Act.
    Section 1886(m)(3)(B) of the Act provides that the application 
of paragraph (3) of section 1886(m) of the Act may result in the 
annual update being less than zero for a rate year, and may result 
in payment rates for a rate year being less than such payment rates 
for the preceding rate year. (As noted in section VII.E.2.d. of the 
preamble of this proposed rule, the annual update to the LTCH PPS 
occurs on October 1 and we have adopted the term ``fiscal year'' 
(FY) rather than ``rate year'' (RY) under the LTCH PPS beginning 
October 1, 2010. Therefore, for purposes of clarity, when discussing 
the annual update for the LTCH PPS, including the provisions of the 
Affordable Care Act, we employ ``fiscal year'' rather than ``rate 
year'' for 2011 and subsequent years.)
    For FY 2011, consistent with our historical practice, we 
established an update to the LTCH PPS standard Federal rate based on 
the full estimated LTCH PPS market basket increase, including the 
0.50 percentage point reduction required by sections 
1886(m)(3)(A)(i) and (m)(4)(B) of the Act, of 2.0 percent and an 
adjustment to account for the increase in case-mix in prior periods 
(FYs 2008 and 2009) that resulted from the effect of documentation 
and coding practices of -2.5 percent. Accordingly, at Sec.  
412.523(c)(vii) of the regulations, we established an annual update 
of -0.49 percent to the standard Federal rate for FY 2011 (75 FR 
50443 through 50444).
    In this proposed rule, for FY 2012, as discussed in greater 
detail in section VII.E.2. of the preamble of this proposed rule, we 
are proposing to establish an annual update to the LTCH PPS standard 
Federal rate of 1.5 percent based on the full estimated increase in 
the proposed LTCH PPS market basket of 2.8 percent less the proposed 
MFP adjustment of 1.2 percentage points required under 
1886(m)(3)(A)(ii) of the Act and less the 0.1 percentage point 
required by sections 1886(m)(3)(A)(i) and (m)(4)(C) of the Act. As 
discussed in greater detail below, for FY 2012, we are not proposing 
to make an adjustment to account for the increase in case-mix in a 
prior period (FY 2010) resulting from the effect of documentation 
and coding.

2. Development of the Proposed FY 2012 LTCH PPS Standard Federal Rate

    We continue to believe that the annual update to the LTCH PPS 
standard Federal rate should be based on the most recent estimate of 
the increase in the LTCH PPS market basket, including any statutory 
adjustments. We also continue to believe it is appropriate that the 
standard Federal rate be offset by an adjustment to account for any 
effect of documentation and coding practices that does not reflect 
increased severity of illness. Such an adjustment protects the 
integrity of the Medicare Trust Funds by ensuring that the LTCH PPS 
payment rates better reflect the true costs of treating LTCH 
patients. Consistent with past LTCH payment policy, we have 
continued to monitor the most recent available LTCH data. Based on 
an analysis of FY 2010 LTCH claims from the December 2010 update of 
the MedPAR files, it does not appear that an adjustment for the 
effect of documentation and coding in FY 2010 is warranted. 
Therefore, in this proposed rule, we are not proposing to make an 
adjustment for the effect of documentation and coding during FY 2010 
in our proposed annual update to the LTCH PPS standard Federal rate 
for FY 2012. Furthermore, we are proposing that, consistent with our 
historical practice of using the best available data, if more recent 
data subsequently become available, we would examine such data for 
the final rule to determine if an adjustment for the effect of 
documentation and coding during FY 2010 is warranted.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50443 through 
50444), we established an annual update to the LTCH PPS standard 
Federal rate for FY 2011 based on the full estimated LTCH PPS market 
basket increase, including the 0.50 percentage point reduction 
required by sections 1886(m)(3)(A)(i), (m)(3)(A)(ii), and (m)(4)(B) 
of the Act, of 2.0 percent and an adjustment to account for the 
increase in case-mix in prior periods (FYs 2008 and 2009) that 
resulted from the effect of documentation and coding practices of -
2.5 percent. Accordingly, at Sec.  412.523(c)(vii), we established 
an annual update to the standard Federal rate for FY 2011 of -0.49 
percent. That is, we applied an update factor of 0.9951 (calculated 
as 1.020 x 1 divided by 1.025 = 0.9951 or -0.49 percent) to the RY 
2010 Federal rate of $39,794.95 (as established in the June 2, 2010 
FY 2010 IPPS/RY 2010 LTCH PPS notice (75 FR 31128 through 31129)) to 
determine the FY 2011 standard Federal rate. Consequently, we 
established a standard Federal rate for FY 2011 of $39,599.95, which 
is applicable to LTCH PPS discharges occurring on or after October 
1, 2010, through September 30, 2011.
    In this proposed rule, for FY 2012, as noted above and as 
discussed in greater detail in section VII.E.2. of the preamble of 
this proposed rule, consistent with our historical practice, we are 
proposing to establish an annual update to the LTCH PPS standard 
Federal rate of 1.5 percent, based on the full estimated increase in 
the proposed LTCH PPS market basket of 2.8 percent less the proposed 
MFP adjustment of 1.2 percentage points required under 
1886(m)(3)(A)(ii) and less the 0.1 percentage point required by 
sections 1886(m)(3)(A)(i) and(m)(4)(C) of the Act. Accordingly, the 
proposed update factor to the standard Federal rate for FY 2012 is 
1.5 percent. That is, under proposed Sec.  412.523(c)(viii), we are 
proposing to apply a factor of 1.015 to the FY 2011 standard Federal 
rate of $39,599.95 (as established in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50444)) to determine the FY 2012 standard Federal 
rate. Furthermore, as discussed in greater detail in section 
VII.E.3. of the preamble of this proposed rule, for FY 2012, we are 
proposing to apply an area wage level budget neutrality factor of 
0.99723 to the standard Federal rate to ensure that any changes to 
the area wage level adjustment (that is, the proposed annual update 
of the wage index values and labor-related share) would not result 
in any change (increase or decrease) in estimated aggregate LTCH PPS 
payments. Consequently, we are proposing to establish a standard 
Federal rate for FY 2012 of $40,082.61 (calculated as $39,599.95 x 
1.015 x 0.99723), which would be applicable to LTCH PPS discharges 
occurring on or after October 1, 2011, through September 30, 2012.

B. Proposed Adjustment for Area Wage Levels Under the LTCH PPS for 
FY 2012

1. Background

    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we established an adjustment to the LTCH 
PPS standard Federal rate to account for differences in LTCH area 
wage levels at Sec.  412.525(c). The labor-related share of the LTCH 
PPS standard Federal rate is adjusted to account for geographic 
differences in area wage levels by applying the applicable LTCH PPS 
wage index. The applicable LTCH PPS wage index is computed using 
wage data from inpatient acute care hospitals without regard to 
reclassification under section 1886(d)(8) or section 1886(d)(10) of 
the Act.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 
FR 56015), when we implemented the LTCH PPS, we established a 5-year 
transition to the full area wage index level adjustment. The area 
wage level adjustment was completely phased-in for cost reporting 
periods beginning in FY 2007. Therefore, for cost reporting periods 
beginning on or after October 1, 2006, the applicable LTCH wage 
index values are the full LTCH PPS wage index values calculated

[[Page 26039]]

based on acute care hospital inpatient wage index data without 
taking into account geographic reclassification under section 
1886(d)(8) and section 1886(d)(10) of the Act. For additional 
information on the phase-in of the area wage level adjustment under 
the LTCH PPS, we refer readers to the August 30, 2002 LTCH PPS final 
rule (67 FR 56017 through 56019) and the RY 2008 LTCH PPS final rule 
(72 FR 26891).

2. Geographic Classifications/Labor Market Area Definitions

    As discussed in the August 30, 2002 LTCH PPS final rule, which 
implemented the LTCH PPS (67 FR 56015 through 56019), in 
establishing an adjustment for area wage levels, the labor-related 
portion of a LTCH's Federal prospective payment is adjusted by using 
an appropriate wage index based on the labor market area in which 
the LTCH is located. Specifically, the application of the LTCH PPS 
area wage level adjustment at existing Sec.  412.525(c) is made on 
the basis of the location of the LTCH in either an urban area or a 
rural area as defined in Sec.  412.503. Currently under the LTCH PPS 
at Sec.  412.503, an ``urban area'' is defined as a Metropolitan 
Statistical Area (which would include a metropolitan division, where 
applicable) as defined by the Executive OMB and a ``rural area'' is 
defined as any area outside of an urban area.
    In the RY 2006 LTCH PPS final rule (70 FR 24184 through 24185), 
in regulations at Sec.  412.525(c), we revised the labor market area 
definitions used under the LTCH PPS effective for discharges 
occurring on or after July 1, 2005, based on the Executive OMB's 
CBSA designations, which are based on 2000 Census data. We made this 
revision because we believe that the CBSA-based labor market area 
definitions will ensure that the LTCH PPS wage index adjustment most 
appropriately accounts for and reflects the relative hospital wage 
levels in the geographic area of the hospital as compared to the 
national average hospital wage level. We note that these are the 
same CBSA-based designations implemented for acute care hospitals 
under the IPPS at Sec.  412.64(b), effective October 1, 2004 (69 FR 
49026 through 49034). (For further discussion of the CBSA-based 
labor market area (geographic classification) definitions currently 
used under the LTCH PPS, we refer readers to the RY 2006 LTCH PPS 
final rule (70 FR 24182 through 24191).) We have updated the LTCH 
PPS CBSA-based labor market area definitions annually since they 
were adopted for RY 2006 (73 FR 26812 through 26814, 74 FR 44023 
through 44204, and 75 FR 50444 through 50445).
    In OMB Bulletin No. 10-2, issued on December 1, 2009, OMB 
announced that the CBSA changes in that bulletin would be the final 
update prior to the 2010 Census of Population and Housing. We 
adopted those changes under the LTCH PPS in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50444 through 50445), effective beginning 
October 1, 2010, and they are also reflected in this FY 2012 
proposed rule. In 2013, OMB plans to announce new area delineations 
based on its 2010 standards (75 FR 37246) and the 2010 Census data.
    The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB--go to ``Agency Information'' and click on 
``Bulletins''.

3. Proposed LTCH PPS Labor-Related Share

    Under the adjustment for differences in area wage levels at 
Sec.  412.525(c), the labor-related share of a LTCH's PPS Federal 
prospective payment is adjusted by the applicable wage index for the 
labor market area in which the LTCH is located. The LTCH PPS labor-
related share currently represents the sum of the labor-related 
portion of operating costs (wages and salaries, employee benefits, 
professional fees, and all other labor-intensive services) and a 
labor-related portion of capital costs using the applicable LTCH PPS 
market basket. Currently, as established in the RY 2007 LTCH PPS 
final rule (71 FR 27829 through 27830), the LTCH PPS labor-related 
share is based on the relative importance of the labor-related share 
of operating costs and capital costs of the rehabilitation, 
psychiatric, and long-term care hospital (RPL) market basket based 
on FY 2002 data, as those were the best available data at that time 
that reflected the cost structure of LTCHs. For the past 4 years (RY 
2008, RY 2009, RY 2010, and FY 2011), we updated the LTCH PPS labor-
related share annually based on the latest available data for the FY 
2002-based RPL market basket. For FY 2011, in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 20445), we established a labor-related share 
of 75.271 percent based on the best available data at that time for 
the FY 2002-based RPL market basket for FY 2011. (Additional 
background information on the historical development of the labor-
related share under the LTCH PPS and the development of the RPL 
market basket can be found in the RY 2007 LTCH PPS final rule (71 FR 
27810 through 27817 and 27829 through 27830).)
    In section VII.D. of the preamble of this proposed rule, we are 
proposing to revise and rebase the market basket used under the LTCH 
PPS beginning in FY 2012. Specifically, we are proposing to adopt 
the newly created FY 2008-based RPL market basket. We are not 
proposing to change our definition of the labor-related share. 
However, we are proposing to rename our aggregate cost categories 
from ``labor-intensive'' and ``nonlabor-intensive'' services to 
``labor-related'' and ``nonlabor-related'' services (as discussed. 
in section VII.D.3.b. of the preamble of this proposed rule). As 
discussed in section VII.D.3.f. of the preamble of this proposed 
rule, we are proposing a labor-related share under the LTCH PPS for 
FY 2012 based on IHS Global Insight, Inc.'s first quarter 2011 
forecast of the proposed FY 2008-based RPL market basket for FY 
2012, as these are the most recent available data at this time that 
reflect the cost structure of LTCHs. We are also proposing that the 
labor-related share for FY 2012 is the sum of the proposed FY 2012 
relative importance of each labor-related cost category of the 
proposed FY 2008-based RPL market basket, and reflects the different 
rates of price change for these cost categories between the proposed 
base year (FY 2008) and FY 2012.
    As discussed in greater detail in section VII.D.3.f. of the 
preamble of this proposed rule, the sum of the proposed relative 
importance for FY 2012 for operating costs (Wages and Salaries, 
Employee Benefits, Professional Fees: Labor-Related, Administrative 
and Business Support Services, and All-Other: Labor-related 
Services) is 66.689 percent and the proposed labor-related share of 
capital costs is 3.645 percent. Thus, under the authority set forth 
in section 123 of the BBRA as amended by section 307(b) of the BIPA, 
we are proposing to establish a labor-related share of 70.334 
percent (66.689 percent + 3.645 percent) under the LTCH PPS for the 
FY 2012, which would be effective for discharges occurring on or 
after October 1, 2011, and through September 30, 2012. Consistent 
with our historical practice of using the best data available, we 
also are proposing that if more recent data are available to 
determine the labor-related share used under the LTCH PPS for FY 
2012, we would use these data for determining the FY 2012 LTCH PPS 
labor-related share in the final rule.

4. Proposed LTCH PPS Wage Index for FY 2012

    Historically, under the LTCH PPS, we have established LTCH PPS 
wage index values calculated from acute care IPPS hospital wage data 
without taking into account geographic reclassification under 
sections 1886(d)(8) and 1886(d)(10) of the Act (67 FR 56019). The 
area wage level adjustment established under the LTCH PPS is based 
on a LTCH's actual location without regard to the urban or rural 
designation of any related or affiliated provider.
    In the FY 2011 LTCH PPS final rule (75 FR 50445 through 50446), 
we calculated the FY 2011 LTCH PPS wage index values using the same 
data used for the FY 2011 acute care hospital IPPS (that is, data 
from cost reporting periods beginning during FY 2007), without 
taking into account geographic reclassification under sections 
1886(d)(8) and 1886(d)(10) of the Act, as these were the most recent 
complete data available at that time. In that same final rule, we 
indicated that we computed the FY 2011 LTCH PPS wage index values 
consistent with the urban and rural geographic classifications 
(labor market areas) and consistent with the pre-reclassified IPPS 
wage index policy (that is, our historical policy of not taking into 
account IPPS geographic reclassifications in determining payments 
under the LTCH PPS). We also continued to use our existing policy 
for determining wage index values in areas where there are no IPPS 
wage data.
    Consistent with our historical methodology, to determine the 
applicable wage index values under the LTCH PPS for FY 2012, under 
the broad authority conferred upon the Secretary by section 123 of 
the BBRA, as amended by section 307(b) of BIPA, to determine 
appropriate adjustments under the LTCH PPS, we are proposing to use 
wage data collected from cost reports submitted by IPPS hospitals 
for cost reporting periods beginning during FY 2008, without taking 
into account geographic reclassification under sections 1886(d)(8) 
and 1886(d)(10) of the Act. We are proposing to use FY 2008 data 
because these data are the most recent

[[Page 26040]]

complete data available. These are the same data used to compute the 
proposed FY 2012 acute care hospital inpatient wage index, as 
discussed in section III. of the preamble of this proposed rule. 
(For our rationale for using IPPS hospital wage data as a proxy for 
determining the wage index values used under the LTCH PPS, we refer 
readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 44024 
through 44025).)
    The proposed FY 2012 LTCH PPS wage index values we are 
presenting in this proposed rule are computed consistent with the 
urban and rural geographic classifications (labor market areas) 
discussed above in section V.B.2. of the Addendum to this proposed 
rule and consistent with the pre-reclassified IPPS wage index policy 
(that is, our historical policy of not taking into account IPPS 
geographic reclassifications under sections 1886(d)(8) and 
1886(d)(10) of the Act in determining payments under the LTCH PPS). 
As with the IPPS wage index, wage data for multicampus hospitals 
with campuses located in different labor market areas (CBSAs) are 
apportioned to each CBSA where the campus or campuses are located 
(as discussed in section III.F. of the preamble of this proposed 
rule). Furthermore, we are proposing that, in determining the FY 
2012 LTCH PPS wage index values in this proposed rule, we continue 
to use our existing policy for determining wage index values in 
areas where there are no IPPS wage data.
    As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50446), we established a methodology for determining LTCH PPS wage 
index values for areas that have no IPPS wage data in the RY 2009 
LTCH PPS final rule, and we are proposing to continue to use this 
methodology for FY 2012. (We refer readers to 73 FR 26817 through 
26818 for an explanation of and rationale for our policy.) Under 
this methodology, the LTCH PPS wage index value for urban CBSAs with 
no IPPS wage data is determined by using an average of all of the 
urban areas within the State. As was the case in FY 2011, there are 
currently no LTCHs located in labor areas without IPPS hospital wage 
data (or IPPS hospitals) for FY 2012. However, we calculate proposed 
LTCH PPS wage index values for these areas using our established 
methodology in the event that, in the future, a LTCH should open in 
one of those areas.
    Based on the FY 2008 IPPS wage data that we are proposing to use 
to determine the proposed FY 2012 LTCH PPS wage index values in this 
proposed rule, there are no IPPS wage data for the urban area 
Hinesville-Fort Stewart, GA (CBSA 25980). Consistent with the 
methodology discussed above, we are proposing to calculate the FY 
2012 wage index value for CBSA 25980 as the average of the proposed 
wage index values for all of the other urban areas within the State 
of Georgia (that is, CBSAs 10500, 12020, 12060, 12260, 15260, 16860, 
17980, 19140, 23580, 31420, 40660, 42340, 46660 and 47580), as shown 
in Table 12A, which is listed in section VI. of the Addendum to this 
proposed rule and available via the Internet). We note that, as IPPS 
wage data are dynamic, it is possible that urban areas without IPPS 
wage data will vary in the future.
    For FY 2012, using our established methodology, we are proposing 
to calculate a LTCH PPS wage index value for rural areas with no 
IPPS wage data using the unweighted average of the wage indices from 
all of the CBSAs that are contiguous to the rural counties of the 
State (for an explanation of this policy, we refer readers to 73 FR 
26818). For this purpose, we define ``contiguous'' as sharing a 
border. Based on the FY 2008 IPPS wage data that we are proposing to 
use to determine the proposed FY 2012 LTCH PPS wage index values in 
this proposed rule, there are no IPPS wage data for the rural area 
of Massachusetts (CBSA code 22). Consistent with the methodology 
described above, the proposed FY 2012 wage index value for rural 
Massachusetts is computed using the unweighted average of the wage 
indices from all of the CBSAs contiguous to the rural counties in 
that State. Specifically, the entire Massachusetts rural area 
consists of Dukes and Nantucket counties. The borders of Dukes and 
Nantucket counties are ``contiguous'' with Barnstable County, MA, 
and Bristol County, MA. Therefore, the proposed FY 2012 LTCH PPS 
wage index value for rural Massachusetts is computed as the 
unweighted average of the proposed FY 2012 wage indexes for 
Barnstable County and Bristol County, which are shown in Table 12A 
in the Addendum to this proposed rule). As noted above, as IPPS wage 
data are dynamic, it is possible that rural areas without IPPS wage 
data will vary in the future.
    The proposed FY 2012 LTCH wage index values that would be 
applicable for LTCH discharges occurring on or after October 1, 
2011, through September 30, 2012, are presented in Table 12A (for 
urban areas) and Table 12B (for rural areas) in the Addendum of this 
proposed rule.

5. Proposed Budget Neutrality Adjustment for Changes to the Area Wage 
Level Adjustment

    Historically, the LTCH PPS wage index and labor-related share 
are updated annually based on the latest available data. However, 
there are currently no statutory or regulatory requirements that the 
annual update to the LTCH PPS area wage level adjustment at existing 
Sec.  412.525(c) (that is, the wage index and the labor-related 
share) be budget neutral such that estimated aggregate LTCH PPS 
payments would be unaffected (that is, would be neither greater than 
nor less than estimated aggregate LTCH PPS payments without such 
changes). In section VII.E.3. of the preamble of this proposed rule, 
under Sec.  412.525(c), we are proposing that, beginning in FY 2012, 
any changes to the wage index values or labor-related share be made 
in a budget neutral manner such that estimated aggregate LTCH PPS 
payments are unaffected, that is, would be neither greater than nor 
less than estimated aggregate LTCH PPS payments without such changes 
to the area wage level adjustment. Under this proposal, we are also 
proposing to determine an area wage level adjustment budget 
neutrality factor that would be applied to the standard Federal rate 
to ensure that any changes to the area wage level adjustment would 
be budget neutral such that any changes to the wage index values or 
labor-related share would not result in any change (increase or 
decrease) in estimated aggregate LTCH PPS payments. Therefore, under 
proposed Sec.  412.523(d)(4), we are proposing to apply an area wage 
level adjustment budget neutrality factor of 0.99723 (determined 
under the proposed methodology described in section VII.E.3. of the 
preamble of this proposed rule) to determine the proposed FY 2012 
LTCH PPS standard Federal rate. (The development of the proposed 
LTCH PPS standard Federal rate for FY 2012 is discussed in section 
V.A.2. of this Addendum.)

C. Proposed LTCH PPS Cost-of-Living Adjustment for LTCHs Located in 
Alaska and Hawaii

    In the August 30, 2002 final rule (67 FR 56022), we established, 
under Sec.  412.525(b), a cost-of-living adjustment (COLA) for LTCHs 
located in Alaska and Hawaii to account for the higher costs 
incurred in those States. Specifically, we apply a COLA to payments 
to LTCHs located in Alaska and Hawaii by multiplying the nonlabor-
related portion of the standard Federal payment rate by the 
applicable COLA factors established annually by CMS. Higher labor-
related costs for LTCHs located in Alaska and Hawaii are taken into 
account in the adjustment for area wage levels described above.
    For FY 2011 and in prior years, we used the most recent updated 
COLA factors obtained from the U.S. Office of Personnel Management 
(OPM) Web site at http://www.opm.gov/oca/cola/rates.asp to adjust 
the payments for LTCHs in Alaska and Hawaii. Sections 1911 through 
1919 of the Nonforeign Area Retirement Equity Assurance Act, as 
contained in subtitle B of title XIX of the National Defense 
Authorization Act (NDAA) for Fiscal Year 2010 (Pub. L. 111-84, 
October 28, 2009) transitions the Alaska and Hawaii COLAs to 
locality pay. Under section 1914 of Public Law 111-84, locality pay 
is being phased in over a 3-year period beginning in January 2010 
with COLA rates frozen as of the date of enactment, October 28, 
2009, and then proportionately reduced to reflect the phase-in of 
locality.
    We do not believe it is appropriate to propose to use either the 
2010 or 2011 reduced factors for adjusting the nonlabor-related 
portion of the standard Federal rate for LTCHs in Alaska or Hawaii.
    Therefore, for FY 2012, we are proposing to continue to use the 
same COLA factors (published by OPM) that we used to adjust payments 
in FY 2011 (which are based on OPM's 2009 COLA factors) to adjust 
the nonlabor-related portion of the standard Federal rate for LTCHs 
located in Alaska and Hawaii. We believe using these COLA factors 
would appropriately adjust the nonlabor-related portion of the 
standard Federal rate for LTCHs in Alaska and Hawaii consistent with 
Sec.  412.525(b). (We note that this proposal is consistent with the 
proposed adjustment for cost-of-living in Alaska and Hawaii for IPPS 
hospitals discussed in section II.B.2. of this Addendum.) We invite 
public comment on this proposal.
    In this proposed rule, for FY 2012, under the broad authority 
conferred upon the

[[Page 26041]]

Secretary by section 123 of the BBRA, as amended by section 307(b) 
of BIPA, to determine appropriate adjustments under the LTCH PPS, 
consistent with our current policy, we are proposing to apply a COLA 
to payments to LTCHs located in Alaska and Hawaii by multiplying the 
nonlabor-related portion of the standard Federal payment rate by the 
proposed factors listed in the chart below because they are the most 
recent available data at this time. As discussed above, these 
factors were obtained from the OPM and are also proposed to be used 
under the IPPS for FY 2012.
[GRAPHIC] [TIFF OMITTED] TP05MY11.095

D. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

1. Background

    Under the broad authority conferred upon the Secretary by 
section 123 of the BBRA as amended by section 307(b) of BIPA, in the 
regulations at Sec.  412.525(a), we established an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. We refer to these 
cases as high cost outliers (HCOs). Providing additional payments 
for outliers strongly improves the accuracy of the LTCH PPS in 
determining resource costs at the patient and hospital level. These 
additional payments reduce the financial losses that would otherwise 
be incurred when treating patients who require more costly care and, 
therefore, reduce the incentives to underserve these patients. We 
set the outlier threshold before the beginning of the applicable 
rate year so that total estimated outlier payments are projected to 
equal 8 percent of total estimated payments under the LTCH PPS.
    Under Sec.  412.525(a) in the regulations (in conjunction with 
Sec.  412.503), we make outlier payments for any discharges if the 
estimated cost of a case exceeds the adjusted LTCH PPS payment for 
the MS-LTC-DRG plus a fixed-loss amount. Specifically, in accordance 
with Sec.  412.525(a)(3) (in conjunction with Sec.  412.503), we 
make an additional payment to an HCO case that is equal to 80 
percent of the difference between the estimated cost of the patient 
case and the outlier threshold, which is the sum of the adjusted 
Federal prospective payment for the MS-LTC-DRG and the fixed-loss 
amount. The fixed-loss amount is the amount used to limit the loss 
that a hospital will incur under the outlier policy for a case with 
unusually high costs. This results in Medicare and the LTCH sharing 
financial risk in the treatment of extraordinarily costly cases. 
Under the LTCH PPS HCO policy, the LTCH's loss is limited to the 
fixed-loss amount and a fixed percentage of costs above the outlier 
threshold (adjusted MS-LTC-DRG payment plus the fixed-loss amount). 
The fixed percentage of costs is called the marginal cost factor. We 
calculate the estimated cost of a case by multiplying the Medicare 
allowable covered charge by the hospital's overall hospital cost-to-
charge ratio (CCR).
    Under the LTCH PPS HCO policy at Sec.  412.525(a), we determine 
a fixed-loss amount, that is, the maximum loss that a LTCH can incur 
under the LTCH PPS for a case with unusually high costs before the 
LTCH will receive any additional payments. We calculate the fixed-
loss amount by estimating aggregate payments with and without an 
outlier policy. The fixed-loss amount results in estimated total 
outlier payments being projected to be equal to 8 percent of 
projected total LTCH PPS payments. Currently, MedPAR claims data and 
CCRs based on data from the most recent Provider-Specific File (PSF) 
(or from the applicable statewide average CCR if a LTCH's CCR data 
are faulty or unavailable) are used to establish a fixed-loss 
threshold amount under the LTCH PPS.

2. Determining LTCH CCRs Under the LTCH PPS

a. Background

    The following is a discussion of CCRs that are used in 
determining payments for HCO and SSO cases under the LTCH PPS, at 
Sec.  412.525(a) and Sec.  412.529, respectively. Although this 
section is specific to HCO cases, because CCRs and the policies and 
methodologies pertaining to them are used in determining payments 
for both HCO and SSO cases (to determine the estimated cost of the 
case at Sec.  412.529(d)(2)), we are discussing the determination of 
CCRs under the LTCH PPS for both of these types of cases 
simultaneously.
    In determining both HCO payments (at Sec.  412.525(a)) and SSO 
payments (at Sec.  412.529), we calculate the estimated cost of the 
case by multiplying the LTCH's overall CCR by the Medicare allowable 
charges for the case. In general, we use the LTCH's overall CCR, 
which is computed based on either the most recently settled cost 
report or the most recent tentatively settled cost report, whichever 
is from the latest cost reporting period, in accordance with Sec.  
412.525(a)(4)(iv)(B) and Sec.  412.529(f)(4)(ii) for HCOs and SSOs, 
respectively. (We note that, in some instances, we use an 
alternative CCR, such as the statewide average CCR in accordance 
with the regulations at Sec.  412.525(a)(4)(iv)(C) and Sec.  
412.529(f)(4)(iii), or a CCR that is specified by CMS or that is 
requested by the hospital under the provisions of the regulations at 
Sec.  412.525(a)(4)(iv)(A) and Sec.  412.529(f)(4)(i).) Under the 
LTCH PPS, a single prospective payment per discharge is made for 
both inpatient operating and capital-related costs. Therefore, we 
compute a single ``overall'' or ``total'' LTCH-specific CCR based on 
the sum of LTCH operating and capital costs (as described in Section 
150.24, Chapter 3, of the Medicare Claims Processing Manual (Pub. 
100-4)) as compared to total charges. Specifically, a LTCH's CCR is 
calculated by dividing a LTCH's total Medicare costs (that is, the 
sum of its operating and capital inpatient routine and ancillary 
costs) by its total Medicare charges (that is, the sum of its

[[Page 26042]]

operating and capital inpatient routine and ancillary charges).

b. LTCH Total CCR Ceiling

    Generally, a LTCH is assigned the applicable statewide average 
CCR if, among other things, a LTCH's CCR is found to be in excess of 
the applicable maximum CCR threshold (that is, the LTCH CCR 
ceiling). This is because CCRs above this threshold are most likely 
due to faulty data reporting or entry, and, therefore, CCRs based on 
erroneous data should not be used to identify and make payments for 
outlier cases. Thus, under our established policy, generally, if a 
LTCH's calculated CCR is above the applicable ceiling, the 
applicable LTCH PPS statewide average CCR is assigned to the LTCH 
instead of the CCR computed from its most recent (settled or 
tentatively settled) cost report data.
    In accordance with Sec.  412.525(a)(4)(iv)(C)(2) for HCOs and 
Sec.  412.529(f)(4)(iii)(B) for SSOs, using our established 
methodology for determining the LTCH total CCR ceiling (described 
above), based on IPPS total CCR data from the December 2010 update 
of the PSF, we are proposing to establish a total CCR ceiling of 
1.210 under the LTCH PPS that would be effective for discharges 
occurring on or after October 1, 2011, through September 30, 2012. 
Consistent with our historical policy of using the best available 
data, we also are proposing that if more recent data become 
available, we would use such data to establish a total CCR ceiling 
for FY 2012 in the final rule.

c. Proposed LTCH Statewide Average CCRs

    Our general methodology established for determining the 
statewide average CCRs used under the LTCH PPS is similar to our 
established methodology for determining the LTCH total CCR ceiling 
(described above) because it is based on ``total'' IPPS CCR data. 
Under the LTCH PPS HCO policy at Sec.  412.525(a)(4)(iv)(C) and the 
SSO policy at Sec.  412.529(f)(4)(iii), the fiscal intermediary or 
MAC may use a statewide average CCR, which is established annually 
by CMS, if it is unable to determine an accurate CCR for a LTCH in 
one of the following circumstances: (1) New LTCHs that have not yet 
submitted their first Medicare cost report (for this purpose, 
consistent with current policy, a new LTCH is defined as an entity 
that has not accepted assignment of an existing hospital's provider 
agreement in accordance with Sec.  489.18); (2) LTCHs whose CCR is 
in excess of the LTCH CCR ceiling; and (3) other LTCHs for whom data 
with which to calculate a CCR are not available (for example, 
missing or faulty data). (Other sources of data that the fiscal 
intermediary or MAC may consider in determining a LTCH's CCR include 
data from a different cost reporting period for the LTCH, data from 
the cost reporting period preceding the period in which the hospital 
began to be paid as a LTCH (that is, the period of at least 6 months 
that it was paid as a short-term, acute care hospital), or data from 
other comparable LTCHs, such as LTCHs in the same chain or in the 
same region.)
    Consistent with our historical practice of using the best 
available data and using our established methodology for determining 
the LTCH statewide average CCRs, based on the most recent complete 
IPPS total CCR data from the December 2010 update of the PSF, we are 
proposing to establish LTCH PPS statewide average total CCRs for 
urban and rural hospitals that would be effective for discharges 
occurring on or after October 1, 2011, through September 30, 2012, 
in Table 8C of the Addendum to this proposed rule. Consistent with 
our historical policy of using the best available data, we also are 
proposing that if more recent data become available, we would use 
such data to establish LTCH PPS statewide average total CCRs for FY 
2012 in the final rule.
    All areas in the District of Columbia, New Jersey, and Rhode 
Island are classified as urban. Therefore, there are no rural 
statewide average total CCRs listed for those jurisdictions in Table 
8C listed in section VI. of the Addendum to this proposed rule and 
available via the Internet. This policy is consistent with the 
policy that we established when we revised our methodology for 
determining the applicable LTCH statewide average CCRs in the FY 
2007 IPPS final rule (71 FR 48119 through 48121) and is the same as 
the policy applied under the IPPS. In addition, although North 
Dakota and Puerto have areas that are designated as rural, there are 
no short-term, acute care IPPS hospitals or LTCHs located in those 
areas as of March 2011. Therefore, there is no rural statewide 
average total CCR listed for rural North Dakota in Table 8C listed 
in section VI. of the Addendum to this proposed rule and available 
via the Internet.
    In addition, consistent with our existing methodology, in 
determining the urban and rural statewide average total CCRs for 
Maryland LTCHs paid under the LTCH PPS, in this proposed rule, we 
are using, as a proxy, the national average total CCR for urban IPPS 
hospitals and the national average total CCR for rural IPPS 
hospitals, respectively. We use this proxy because we believe that 
the CCR data on the PSF for Maryland hospitals may not be entirely 
accurate (as discussed in greater detail in the FY 2007 IPPS final 
rule (71 FR 48120)).

d. Reconciliation of LTCH HCO and SSO Payments

    We note that under the LTCH PPS HCO policy at Sec.  
412.525(a)(4)(iv)(D) and the LTCH PPS SSO policy at Sec.  
412.529(f)(4)(iv), the payments for HCO and SSO cases, respectively, 
are subject to reconciliation. Specifically, any reconciliation of 
outlier payments is based on the CCR that is calculated based on a 
ratio of cost-to-charge data computed from the relevant cost report 
determined at the time the cost report coinciding with the discharge 
is settled. For additional information, we refer readers to sections 
150.26 through 150.28 of the Medicare Claims Processing Manual (Pub. 
100-4) as added by Change Request 7192 (Transmittal 2111; December 
3, 2010) and the RY 2009 LTCH PPS final rule (73 FR 26820 through 
26821).

3. Establishment of the Proposed LTCH PPS Fixed-Loss Amount for FY 2012

    When we implemented the LTCH PPS, as discussed in the August 30, 
2002 LTCH PPS final rule (67 FR 56022 through 56026), under the 
broad authority of section 123 of the BBRA as amended by section 
307(b) of BIPA, we established a fixed-loss amount so that total 
estimated outlier payments are projected to equal 8 percent of total 
estimated payments under the LTCH PPS. To determine the fixed-loss 
amount, we estimate outlier payments and total LTCH PPS payments for 
each case using claims data from the MedPAR files. Specifically, to 
determine the outlier payment for each case, we estimate the cost of 
the case by multiplying the Medicare covered charges from the claim 
by the LTCH's CCR. Under Sec.  412.525(a)(3) (in conjunction with 
Sec.  412.503), if the estimated cost of the case exceeds the 
outlier threshold, we make an outlier payment equal to 80 percent of 
the difference between the estimated cost of the case and the 
outlier threshold (that is, the sum of the adjusted Federal 
prospective payment for the MS-LTC-DRG and the fixed-loss amount).
    In this proposed rule, we are proposing to continue to use our 
existing methodology to calculate the proposed fixed-loss amount for 
FY 2012 (based on updated data and the proposed rates and policies 
presented in this proposed rule) in order to maintain estimated HCO 
payments at the projected 8 percent of total estimated LTCH PPS 
payments. (For an explanation of our rationale for establishing an 
HCO payment ``target'' of 8 percent of total estimated LTCH 
payments, we refer readers to the August 30, 2002 LTCH PPS final 
rule (67 FR 56022 through 56024).) Consistent with our historical 
practice of using the best data available, in determining the 
proposed fixed-loss amount for FY 2012, we are using the most recent 
available LTCH claims data and CCR data at this time. Specifically, 
we are using LTCH claims data from the December 2010 update of the 
FY 2010 MedPAR files and CCRs from the December 2010 update of the 
PSF to determine a fixed-loss amount that would result in estimated 
outlier payments projected to be equal to 8 percent of total 
estimated payments in FY 2012 because these data are the most recent 
complete LTCH data currently available. Consistent with the 
historical practice of using the best available data, we also are 
proposing that if more recent LTCH claims data become available, we 
would use them for determining the fixed-loss amount for FY 2012 in 
the final rule. Furthermore, we are proposing to determine the 
proposed FY 2012 fixed-loss amount based on the proposed MS-LTC-DRG 
classifications and relative weights from the version of the GROUPER 
that would be in effect as of the beginning of FY 2012, that is, 
proposed Version 29.0 of the GROUPER.
    Under the broad authority of section 123(a)(1) of the BBRA and 
section 307(b)(1) of BIPA, we are proposing to establish a fixed-
loss amount of $19,270 for FY 2012. Thus, we would make an 
additional payment to an HCO case that is equal to 80 percent of the 
difference between the estimated cost of the case and the outlier 
threshold (the sum of the adjusted Federal LTCH payment for the MS-
LTC-DRG and the proposed fixed-loss amount of $19.270). We also note 
that the proposed fixed-loss amount of $19,270 for FY 2012 is 
slightly higher than the FY 2011 fixed-loss amount of $18,785. Based 
on

[[Page 26043]]

our payment simulations using the most recent available data at this 
time, the proposed increase in the fixed-loss amount for FY 2012 
would be necessary to maintain the existing requirement that 
estimated outlier payments would equal 8 percent of estimated total 
LTCH PPS payments. (For further information on the existing 8 
percent HCO ``target'' requirement, as noted above, we refer readers 
to the August 30, 2002 LTCH PPS final rule (67 FR 56022 through 
56024.) Maintaining the fixed-loss amount at the current level would 
result in HCO payments that are greater than the current regulatory 
8-percent requirement because a higher fixed-loss amount would 
result in fewer cases qualifying as outlier cases as well as a 
decrease in the amount of the additional payment for an HCO case 
because the maximum loss that a LTCH must incur before receiving an 
HCO payment (that is, the fixed-loss amount) would be larger. For 
these reasons, we believed that proposing a slight increase in the 
fixed-loss amount is appropriate and necessary to maintain that 
estimated outlier payments would equal 8 percent of estimated total 
LTCH PPS payments as required under Sec.  412.525(a).

4. Application of Outlier Policy to SSO Cases

    As we discussed in the August 30, 2002 final rule (67 FR 56026), 
under some rare circumstances, a LTCH discharge could qualify as a 
SSO case (as defined in the regulations at Sec.  412.529 in 
conjunction with Sec.  412.503) and also as a HCO case. In this 
scenario, a patient could be hospitalized for less than five-sixths 
of the geometric average length of stay for the specific MS-LTC-DRG, 
and yet incur extraordinarily high treatment costs. If the estimated 
costs exceeded the HCO threshold (that is, the SSO payment plus the 
fixed-loss amount), the discharge is eligible for payment as a HCO. 
Thus, for a SSO case in FY 2012, the HCO payment would be 80 percent 
of the difference between the estimated cost of the case and the 
outlier threshold (the sum of the proposed fixed-loss amount of 
$19,270 and the amount paid under the SSO policy as specified in 
Sec.  412.529).

E. Computing the Proposed Adjusted LTCH PPS Federal Prospective 
Payments for FY 2012

    Section 412.525 sets forth the adjustments to the LTCH PPS 
standard Federal rate. Under Sec.  412.525(c), the standard Federal 
rate is adjusted to account for differences in area wages by 
multiplying the labor-related share of the standard Federal rate by 
the appropriate LTCH PPS wage index (as shown in Tables 12A and 12B 
listed in section VI. of the Addendum of this proposed rule and 
available via the Internet). The standard Federal rate is also 
adjusted to account for the higher costs of hospitals in Alaska and 
Hawaii by multiplying the nonlabor-related portion of the standard 
Federal rate by the appropriate cost-of-living factor (shown in the 
chart in section V.C.5. of the Addendum of this proposed rule) in 
accordance with Sec.  412.525(b). In this proposed rule, we are 
proposing to establish a proposed standard Federal rate for FY 2012 
of $40,082.61, as discussed above in section V.A.2. of the Addendum 
of this proposed rule. We illustrate the methodology to adjust the 
proposed LTCH PPS Federal rate for FY 2012 in the following example:
    Example: 
    During FY 2012, a Medicare patient is in a LTCH located in 
Chicago, Illinois (CBSA 16974). The FY 2012 LTCH PPS wage index 
value for CBSA 16974 is 1.0632 (Table 12A listed in section VI. of 
the Addendum of this proposed rule and available via the Internet). 
The Medicare patient is classified into proposed MS-LTC-DRG 28 
(Spinal Procedures with MCC), which has a proposed relative weight 
for FY 2012 of 1.7360 (Table 11 listed in section VI. of the 
Addendum of this proposed rule and available via the Internet).
    To calculate the LTCH's total adjusted Federal prospective 
payment for this Medicare patient, we compute the wage-adjusted 
Federal prospective payment amount by multiplying the unadjusted 
proposed standard Federal rate ($40,082.61) by the proposed labor-
related share (70.334 percent) and the proposed wage index value 
(1.0632). This wage-adjusted amount is then added to the nonlabor-
related portion of the unadjusted proposed standard Federal rate 
(29.666 percent; adjusted for cost of living, if applicable) to 
determine the adjusted Federal rate, which is then multiplied by the 
proposed MS-LTC-DRG relative weight (1.7360) to calculate the total 
adjusted proposed Federal LTCH PPS prospective payment for FY 2012 
($72,676.47). The table below illustrates the components of the 
calculations in this example.
[GRAPHIC] [TIFF OMITTED] TP05MY11.096

VI. Tables Referenced in this Proposed Rule and Available Only Through 
the Internet on the CMS Web Site

    This section lists the tables referred to throughout the 
preamble of this proposed rule and in this Addendum. In the past, a 
majority of these tables were published in the Federal Register as 
part of the annual proposed and final rules. However, beginning in 
FY 2012, IPPS tables 2, 3A, 3B, 4A, 4B, 4C, 4D, 4E, 4F, 4J, 5, 6A, 
6B, 6C, 6D, 6E, 6F, 7A, 7B, 8A, 8B, 9A, 9C, and 10, and LTCH PPS 
tables 8C, 11, 12A, and 12B will no longer be published as part of 
the annual IPPS/LTCH PPS proposed and final rulemakings. Instead, 
these tables, along with new LTCH PPS tables 13A and 13B, and new 
IPPS table 14 will be available only through the Internet. IPPS 
tables 1A, 1B, 1C, and 1D, and LTCH PPS table 1E, displayed at the 
end of this section, will continue to be published in the Federal 
Register as part of the annual and final rules. We note that 
previously tables 6G, 6H, 6I, 6I.1, 6I.2, 6J, 6J.1, 6J.2, and 6K 
were already made available only through the Internet. We will 
continue to post these tables through the Internet.
    Readers who experience any problems accessing any of the tables 
that are posted on

[[Page 26044]]

the CMS Web sites identified below should contact Ing Jye Cheng at 
(410) 786-4548.
    The following IPPS tables for this FY 2012 proposed rule are 
available only through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the 
link on the left side of the screen titled, ``FY 2012 IPPS Proposed 
Rule Home Page'' or ``Acute Inpatient--Files for Download''.

Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges 
Occurring in Federal Fiscal Year 2010; Proposed Hospital Wage 
Indexes for Federal Fiscal Year 2012; Hospital Average Hourly Wages 
for Federal Fiscal Years 2010 (2006 Wage Data), 2011 (2007 Wage 
Data), and 2012 (2008 Wage Data); and 3-Year Average of Hospital 
Average Hourly Wages
Table 3A.--Proposed FY 2012 and 3-Year Average Hourly Wage for Acute 
Care Hospitals in Urban Areas by CBSA
Table 3B.--Proposed FY 2012 and 3-Year Average Hourly Wage for Acute 
Care Hospitals in Rural Areas by CBSA
Table 4A.--Proposed Wage Index and Capital Geographic Adjustment 
Factor (GAF) for Acute Care Hospitals in Urban Areas by CBSA and by 
State--FY 2012
Table 4B.--Proposed Wage Index and Capital Geographic Adjustment 
Factor (GAF) for Acute Care Hospitals in Rural Areas by CBSA and by 
State--FY 2012
Table 4C.--Proposed Wage Index and Capital Geographic Adjustment 
Factor (GAF) for Acute Care Hospitals That Are Reclassified by CBSA 
and by State--FY 2012
Table 4D.--States Designated as Frontier, with Acute Care Hospitals 
Receiving at a Minimum the Frontier State Floor Wage Index \1\; 
Urban Areas with Acute Care Hospitals Receiving the Proposed 
Statewide Rural Floor Wage Index--FY 2012
Table 4E.--Urban CBSAs and Constituent Counties for Acute Care 
Hospitals--FY 2012
Table 4F.--Proposed Puerto Rico Wage Index and Capital Geographic 
Adjustment Factor (GAF) for Acute Care Hospitals by CBSA--FY 2012
Table 4J.--Proposed Out-Migration Adjustment for Acute Care 
Hospitals--FY 2012
Table 5.--List of Proposed Medicare Severity Diagnosis-Related 
Groups (MS-DRGs), Relative Weighting Factors, and Geometric and 
Arithmetic Mean Length of Stay--FY 2012
Table 6A.--Proposed New Diagnosis Codes--FY 2012
Table 6B.--Proposed New Procedure Codes--FY 2012
Table 6C.--Proposed Invalid Diagnosis Codes--FY 2012
Table 6D.-- Proposed Invalid Procedure Codes--FY 2012
Table 6E.--Proposed Revised Diagnosis Code Titles--FY 2012
Table 6F.--Proposed Revised Procedure Code Titles--FY 2012
Table 6G.--Proposed Additions to the CC Exclusions List--FY 2012
Table 6H.--Proposed Deletions from the CC Exclusions List--FY 2012
Table 6I.--Proposed Complete MCC List--FY 2012
Table 6I.1.--Proposed Additions to the MCC List--FY 2012
Table 6I.2.--Proposed Deletions to the MCC List--FY 2012
Table 6J.--Proposed Complete CC List--FY 2012
Table 6J.1.--Proposed Additions to the CC List--FY 2012
Table 6J.2.--Proposed Deletions to the CC List--FY 2012
Table 6K.--Proposed Complete List of CC Exclusions--FY 2012
Table 7A.--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2010 MedPAR Update--December 2010 GROUPER V28.0 
MS-DRGs
Table 7B.--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2010 MedPAR Update--December 2010 GROUPER V29.0 
MS-DRGs
Table 8A.--Proposed FY 2012 Statewide Average Operating Cost-to-
Charge Ratios (CCRs) for Acute Care Hospitals (Urban and Rural)
Table 8B.--Proposed FY 2012 Statewide Average Capital Cost-to-Charge 
Ratios (CCRs) for Acute Care Hospitals
Table 9A.--Hospital Reclassifications and Redesignations--FY 2012
Table 9C.--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act--FY 2012
Table 10.--Proposed Geometric Mean Plus the Lesser of .75 of the 
National Adjusted Operating Standardized Payment Amount (Increased 
to Reflect the Difference Between Costs and Charges) or .75 of One 
Standard Deviation of Mean Charges by Medicare Severity Diagnosis-
Related Groups (MS-DRGs)
Table 14.--List of Hospitals with Fewer than 1,600 Medicare 
Discharges Based on the December 2010 Update of the FY 2010 MedPAR 
File and Their Proposed FY 2012 Low-Volume Payment Adjustment

    The following LTCH PPS tables for this FY 2012 proposed rule are 
available only through the Internet on the CMS Web site at http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the 
list item for Regulation Number CMS-1518-P.

Table 8C.--Proposed FY 2012 Statewide Average Total Cost-to-Charge 
Ratios (CCRs) for LTCHs (Urban and Rural)
Table 11.--Proposed MS-LTC-DRGs, Relative Weights, Geometric Average 
Length of Stay, and Short-Stay Outlier (SSO) Threshold for 
Discharges Occurring from October 1, 2011 through September 30, 2012 
under the LTCH PPS
Table 12A.--Proposed LTCH PPS Wage Index for Urban Areas for 
Discharges Occurring from October 1, 2011 through September 30, 2012
Table 12B.--Proposed LTCH PPS Wage Index for Rural Areas for 
Discharges Occurring From October 1, 2011 through September 20, 2012
Table 13A.--Composition of Proposed Low-Volume Quintiles for MS-LTC-
DRGs--FY 2012
Table 13B.--Proposed No-Volume MS-LTC-DRG Crosswalk for FY 2012
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Appendix A: Regulatory Impact Analysis

I. Introduction

A. Overall Impact

    We have examined the impacts of this proposed rule as required 
by Executive Order 12866 on Regulatory Planning and Review 
(September 30, 1993), Executive Order 13563 on Improving Regulation 
and Regulatory Review (February 2, 2011) the Regulatory Flexibility 
Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of 
the Social Security Act, section 202 of the Unfunded Mandates Reform 
Act of 1995 (March 22, 1995, Pub. L. 104-4), Executive Order 13132 
on Federalism (August 4, 1999), and the Congressional Review Act (5 
U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that 
maximize net benefits (including potential economic, environmental, 
public health and safety effects, distributive impacts, and equity). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, of reducing costs, of harmonizing rules, and of 
promoting flexibility. A regulatory impact analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more in any 1 year).
    We have determined that this proposed rule is a major rule as 
defined in 5 U.S.C. 804(2). We estimate that the proposed changes 
for FY 2012 acute care hospital operating and capital payments will 
redistribute amounts in excess of $100 million among different types 
of inpatient cases. The proposed applicable percentage increase to 
the IPPS rates required by the statute, in conjunction with other 
proposed payment changes in this proposed rule, would result in an 
estimated $498 million decrease in FY 2012 operating payments (or -
0.5 percent change) and an estimated $146 million increase in FY 
2012 capital payments (or 1.8 percent change). The impact analysis 
of the capital payments can be found in section VIII. of this 
Appendix. In addition, as described in section IX. of this Appendix, 
LTCHs are expected to experience a change in payments by $95 million 
(or 1.9 percent).
    Our operating impact estimate includes the proposed -2.5 percent 
documentation and coding adjustment applied to the hospital-specific 
rates and the proposed -3.15 percent adjustment for documentation 
and coding changes to the IPPS standardized amounts. In addition, 
our operating impact estimate includes the proposed 1.5 percent 
hospital update to the standardized amount (which includes the 
proposed 2.8 percent market basket update with the reduction of 1.2 
percentage point for the multifactor productivity adjustment and the 
0.1 percentage point reduction required under the Affordable Care 
Act). Finally, our operating impact estimate includes the proposed 
1.1 percent update to the standardized amount and the 0.9 percent 
update to the hospital-specific rates in light of DC Circuit's 
decision in Cape Cod v. Sebelius (630 F.3d 203 (D.C. Cir. 2011)). 
The estimates of IPPS operating payments to acute care hospitals do 
not reflect any changes in hospital admissions or real case-mix 
intensity, which would also affect overall payment changes.
    The RFA requires agencies to analyze options for regulatory 
relief of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
government jurisdictions. We estimate that most hospitals and most 
other providers and suppliers are small entities as that term is 
used in the RFA. The great majority of hospitals and most other 
health care providers and suppliers are small entities, either by 
being nonprofit organizations or by meeting the SBA definition of a 
small business (having revenues of less than $7.5 million to $34.5 
million in any 1 year). (For details on the latest standards for 
health care providers, we refer readers to page 33 of the Table of 
Small Business Size Standards for NAIC 622 found on the SBA Web site 
at: http://www.sba.gov/contractingopportunities/sizestandardtopics/tableofsize/index.html.)
    For purposes of the RFA, all hospitals and other providers and 
suppliers are considered to be small entities. Individuals and 
States are not included in the definition of a small entity. We 
believe that the provisions of this proposed rule relating to acute 
care hospitals would have a significant impact on small entities as 
explained in this Appendix. Because we lack data on individual 
hospital receipts, we cannot determine the number of small 
proprietary LTCHs. Therefore, we are assuming that all LTCHs are 
considered small entities for the purpose of the analysis in section 
IX. of this Appendix. Medicare fiscal intermediaries and MACs are 
not considered to be small entities. Because we acknowledge that 
many of the affected entities are small entities, the analysis 
discussed throughout the preamble of this proposed rule constitutes 
our proposed regulatory flexibility analysis. Therefore, we are 
soliciting public comments on our estimates and analysis of the 
impact of our proposals on those small entities.
    In addition, section 1102(b) of the Social Security Act requires 
us to prepare a regulatory impact analysis for any proposed or final 
rule that may have a significant impact on the operations of a 
substantial number of small rural hospitals. This analysis must 
conform to the provisions of section 603 of the RFA. With the 
exception of hospitals located in certain New England counties, for 
purposes of section 1102(b) of the Act, we now define a small rural 
hospital as a hospital that is located outside of an urban area and 
has fewer than 100 beds. Section 601(g) of the Social Security 
Amendments of 1983 (Pub. L. 98-21) designated hospitals in certain 
New England counties as belonging to the adjacent urban area. Thus, 
for purposes of the IPPS and the LTCH PPS, we continue to classify 
these hospitals as urban hospitals. (We refer readers to Table I and 
section VI. of this Appendix for the quantitative effects of the 
proposed policy changes under the IPPS for operating costs.)
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule whose mandates require spending in 
any 1 year of $100 million in 1995 dollars, updated annually for 
inflation. In 2011, that threshold level is approximately $136 
million. This proposed rule would not mandate any requirements for 
State, local, or tribal governments, nor would it affect private 
sector costs.
    The analysis that begins in section II of this Appendix, in 
conjunction with the remainder of this document, demonstrates that 
this proposed rule is consistent with the regulatory philosophy and 
principles identified in Executive Orders 12866 and 13563, the RFA, 
and section 1102(b) of the Act. The proposed rule would affect 
payments to a substantial number of small rural hospitals, as well 
as other classes of hospitals, and the effects on some hospitals may 
be significant.

B. Need

    This proposed rule is necessary in order to make payment and 
policy changes under the Medicare IPPS for Medicare acute care 
hospital inpatient services for operating and capital-related costs 
as well as for certain hospitals and hospital units excluded from 
the IPPS. This proposed rule also is necessary to make payment and 
policy changes for Medicare hospitals under the LTCH PPS payment 
system.

II. Objectives of the IPPS

    The primary objective of the IPPS is to create incentives for 
hospitals to operate efficiently and minimize unnecessary costs 
while at the same time ensuring that payments are sufficient to 
adequately compensate hospitals for their legitimate

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costs. In addition, we share national goals of preserving the 
Medicare Hospital Insurance Trust Fund.
    We believe the changes in this proposed rule would further each 
of these goals while maintaining the financial viability of the 
hospital industry and ensuring access to high quality health care 
for Medicare beneficiaries. We expect that these proposed changes 
would ensure that the outcomes of the prospective payment systems 
are reasonable and equitable while avoiding or minimizing unintended 
adverse consequences.

III. Limitations of Our Analysis

    The following quantitative analysis presents the projected 
effects of our proposed policy changes, as well as statutory changes 
effective for FY 2012, on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per case 
while holding all other payment policies constant. We use the best 
data available, but, generally, we do not attempt to make 
adjustments for future changes in such variables as admissions, 
lengths of stay, or case-mix.

IV. Hospitals Included in and Excluded From the IPPS

    The prospective payment systems for hospital inpatient operating 
and capital-related costs of acute care hospitals encompass most 
general short-term, acute care hospitals that participate in the 
Medicare program. There were 32 Indian Health Service hospitals in 
our database, which we excluded from the analysis due to the special 
characteristics of the prospective payment methodology for these 
hospitals. Among other short-term, acute care hospitals, only the 46 
such hospitals in Maryland remain excluded from the IPPS pursuant to 
the waiver under section 1814(b)(3) of the Act.
    As of March 2011, there are 3,419 IPPS acute care hospitals to 
be included in our analysis. This represents about 64 percent of all 
Medicare-participating hospitals. The majority of this impact 
analysis focuses on this set of hospitals. There also are 
approximately 1,342 CAHs. These small, limited service hospitals are 
paid on the basis of reasonable costs rather than under the IPPS. 
(We refer readers to section VII.M. of this Appendix for a further 
description of the impact of CAH-related proposed policy changes.) 
There are also 1,290 IPPS-excluded hospitals and 2,119 IPPS-excluded 
hospital units. These IPPS-excluded hospitals and units include 
IPFs, IRFs, LTCHs, RNHCIs, children's hospitals, and cancer 
hospitals, which are paid under separate payment systems. Changes in 
the prospective payment systems for IPFs and IRFs are made through 
separate rulemaking. Payment impacts for these IPPS-excluded 
hospitals and units are not included in this proposed rule. The 
impact of the proposed update and policy changes to the LTCH PPS for 
FY 2012 are discussed in section IX. of this Appendix.

V. Effects on Hospitals and Hospital Units Excluded From the IPPS

    As of March 2011, there were 3,409 hospitals and hospital units 
excluded from the IPPS. Of these, 78 children's hospitals, 11 cancer 
hospitals, and 17 RNHCIs are being paid on a reasonable cost basis 
subject to the rate-of-increase ceiling under Sec.  413.40. The 
remaining providers, 235 rehabilitation hospitals and 940 
rehabilitation units, and 437 LTCHs, are paid the Federal 
prospective per discharge rate under the IRF PPS and the LTCH PPS, 
respectively, and 512 psychiatric hospitals and 1,179 psychiatric 
units are paid the Federal per diem amount under the IPF PPS. As 
stated above, IRFs and IPFs are not affected by proposed rate 
updates discussed in this proposed rule. The impacts of the changes 
to LTCHs are discussed in section IX. of this Appendix.
    In the past, certain hospitals and units excluded from the IPPS 
have been paid based on their reasonable costs subject to limits as 
established by the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA). Cancer and children's hospitals continue to be paid on a 
reasonable cost basis subject to TEFRA limits for FY 2012. For these 
hospitals (cancer and children's hospitals), consistent with the 
authority provided in section 1886(b)(3)(B)(ii) of the Act, the 
update is the FY 2012 percentage increase in the IPPS operating 
market basket. In compliance with section 404 of the MMA, in the FY 
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43930), we replaced the 
FY 2002-based IPPS operating and capital market baskets with the 
revised and rebased FY 2006-based IPPS operating and capital market 
baskets. Therefore, consistent with current law, based on IHS Global 
Insight, Inc.'s 2011 first quarter forecast, with historical data 
through the 2010 fourth quarter, we are estimating that the FY 2012 
update based on the IPPS operating market basket will be 2.8 percent 
(that is, the current estimate of the market basket rate-of-
increase). However, the Affordable Care Act requires an adjustment 
for multifactor productivity (currently estimated to be -1.2 
percentage points) and a 0.1 percentage point reduction to the 
market basket update resulting in a proposed 1.5 percent applicable 
percentage increase for IPPS hospitals. RNCHIs, children's hospitals 
and cancer hospitals are not subject to the reduction in the 
applicable percentage increase required under the Affordable Care 
Act. In accordance with Sec.  403.752(a) of the regulations, RNHCIs 
are paid under Sec.  413.40. Therefore, for RNHCIs, the proposed 
update is the same as for children's and cancer hospitals, which is 
the percentage increase in the FY 2012 IPPS operating market basket, 
estimated to be 2.8 percent, without the reductions required under 
the Affordable Care Act.
    The impact of the proposed update in the rate-of-increase limit 
on those excluded hospitals depends on the cumulative cost increases 
experienced by each excluded hospital since its applicable base 
period. For excluded hospitals that have maintained their cost 
increases at a level below the rate-of-increase limits since their 
base period, the major effect is on the level of incentive payments 
these excluded hospitals receive. Conversely, for excluded hospitals 
with per-case cost increases above the cumulative update in their 
rate-of-increase limits, the major effect is the amount of excess 
costs that will not be reimbursed.
    We note that, under Sec.  413.40(d)(3), an excluded hospital 
that continues to be paid under the TEFRA system and whose costs 
exceed 110 percent of its rate-of-increase limit receives its rate-
of-increase limit plus 50 percent of the difference between its 
reasonable costs and 110 percent of the limit, not to exceed 110 
percent of its limit. In addition, under the various provisions set 
forth in Sec.  413.40, cancer and children's hospitals can obtain 
payment adjustments for justifiable increases in operating costs 
that exceed the limit.

VI. Quantitative Effects of the Proposed Policy Changes Under the IPPS 
for Operating Costs

A. Basis and Methodology of Estimates

    In this proposed rule, we are announcing proposed policy changes 
and payment rate updates for the IPPS for operating costs of acute 
care hospitals. Updates to the capital payments to acute care 
hospitals are discussed in section VIII. of this Appendix. Based on 
the overall percentage change in payments per case estimated using 
our payment simulation model, we estimate that total FY 2012 
operating payments would change by -0.5 percent compared to FY 2011, 
largely due to the documentation and coding adjustments and the 
applicable percentage increase applied to the IPPS rates. This 
amount reflects the proposed FY 2012 adjustments for documentation 
and coding and recoupment described in section II.D. of the preamble 
of this proposed rule: -3.15 percent for the IPPS national 
standardized amounts and -2.5 percent for the IPPS hospital-specific 
rates. The impacts do not illustrate changes in hospital admissions 
or real case-mix intensity, which will also affect overall payment 
changes.
    We have prepared separate impact analyses of the proposed 
changes to each system. This section deals with proposed changes to 
the operating inpatient prospective payment system for acute care 
hospitals. Our payment simulation model relies on the most recent 
available data to enable us to estimate the impacts on payments per 
case of certain proposed changes in this proposed rule. However, 
there are other proposed changes for which we do not have data 
available that would allow us to estimate the payment impacts using 
this model. For those proposed changes, we have attempted to predict 
the payment impacts based upon our experience and other more limited 
data.
    The data used in developing the quantitative analyses of changes 
in payments per case presented below are taken from the FY 2010 
MedPAR file and the most current Provider-Specific File (PSF) that 
is used for payment purposes. Although the analyses of the proposed 
changes to the operating PPS do not incorporate cost data, data from 
the most recently available hospital cost reports were used to 
categorize hospitals. Our analysis has several qualifications. 
First, in this analysis, we do not make adjustments for future 
changes in such variables as admissions, lengths of stay, or 
underlying growth in real case-mix. Second, due to the 
interdependent nature of the IPPS payment components, it is very 
difficult to precisely quantify the impact associated with each 
change. Third, we use

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various data sources to categorize hospitals in the tables. In some 
cases, particularly the number of beds, there is a fair degree of 
variation in the data from the different sources. We have attempted 
to construct these variables with the best available source overall. 
However, for individual hospitals, some miscategorizations are 
possible.
    Using cases from the FY 2010 MedPAR file, we simulated payments 
under the operating IPPS given various combinations of payment 
parameters. As described above, Indian Health Service hospitals and 
hospitals in Maryland were excluded from the simulations. The impact 
of payments under the capital IPPS, or the impact of payments for 
costs other than inpatient operating costs, are not analyzed in this 
section. Estimated payment impacts of the capital IPPS for FY 2012 
are discussed in section VIII. of this Appendix.
    We discuss the following proposed changes below:
     Effects of the application of the proposed 
documentation and coding adjustment and applicable percentage 
increase (including the proposed market basket update, the 
multifactor productivity adjustment and the applicable percentage 
reduction in accordance with the Affordable Care Act) to the 
standardized amount and hospital-specific rates.
     Effects of the proposed increase to the standardized 
amount and hospital-specific rates in light of D.C. Circuit's 
decision in Cape Cod v. Sebelius, 630 F.3d 203 (D.C. Cir. 2011).
     The effects of the proposed annual reclassification of 
diagnoses and procedures, full implementation of the MS-DRG system 
and 100 percent cost-based MS-DRG relative weights.
     The effects of the proposed changes in hospitals' wage 
index values reflecting updated wage data from hospitals' cost 
reporting periods beginning during FY 2008, compared to the FY 2007 
wage data.
     The effects of the recalibration of the MS-DRG relative 
weights as required by section 1886(d)(4)(C) of the Act, including 
the wage and recalibration budget neutrality factors.
     The effects of the proposed geographic 
reclassifications by the MGCRB that will be effective in FY 2012.
     The effects of the rural floor with the application of 
the national budget neutrality factor applied to the wage index, as 
required by the Affordable Care Act.
     The effects of the expiration of applying an imputed 
floor to States that have no rural areas and to States that have 
rural areas but no IPPS hospitals are located in those areas.
     The effects of the frontier wage index provision that 
requires that hospitals located in States that qualify as frontier 
States cannot have a wage index less than 1.0. This provision is not 
budget neutral.
     The effects of section 505 of Pub. L. 108-173, which 
provides for an increase in a hospital's wage index if the hospital 
qualifies by meeting a threshold percentage of residents of the 
county where the hospital is located who commute to work at 
hospitals in counties with higher wage indexes.
     The total estimated change in payments based on the 
proposed FY 2012 policies relative to payments based on FY 2011 
policies that include the applicable percentage increase of 1.5 
percent (or 2.8 percent market basket update with a reduction of 1.2 
percentage points for the multifactor productivity adjustment, and a 
0.1 percentage point reduction, as required under the Affordable 
Care Act).
    To illustrate the impact of the proposed FY 2012 changes, our 
analysis begins with a FY 2011 baseline simulation model using: the 
proposed FY 2012 applicable percentage increase of 1.5 percent and 
the proposed documentation and coding adjustment of -3.15 percent; 
the FY 2011 MS-DRG GROUPER (Version 28.0); the most current CBSA 
designations for hospitals based on OMB's MSA definitions; the FY 
2011 wage index; and no MGCRB reclassifications. Outlier payments 
are set at 5.1 percent of total operating MS-DRG and outlier 
payments for modeling purposes.
    Section 1886(b)(3)(B)(viii) of the Act, as added by section 
5001(a) of Public Law 109-171, as amended by section 4102(b)(1)(A) 
of the ARRA (Pub. L. 111-5) and by section 3401(a)(2) of the 
Affordable Care Act (Pub. L. 111-148), provides that, for FY 2007 
through FY 2014, the update factor will include a reduction of 2.0 
percentage points for any hospital that does not submit quality data 
in a form and manner and at a time specified by the Secretary. 
(Beginning in FY 2015, the reduction is one-quarter of such 
applicable percentage increase determined without regard to section 
1886(b)(3)(B)(ix), (xi), or (xii) of the Act.) At the time that this 
impact was prepared, 56 hospitals did not receive the full market 
basket rate-of-increase for FY 2011 because they failed the quality 
data submission process or did not choose to participate. For 
purposes of the simulations shown below, we modeled the proposed 
payment changes for FY 2012 using a reduced update for these 56 
hospitals. However, we do not have enough information at this time 
to determine which hospitals will not receive the full update factor 
for FY 2012.
    Each proposed policy change, statutory or otherwise, is then 
added incrementally to this baseline, finally arriving at an FY 2012 
model incorporating all of the proposed changes. This simulation 
allows us to isolate the effects of each change.
    Our final comparison illustrates the percent change in payments 
per case from FY 2011 to FY 2012. Three factors not discussed 
separately have significant impacts here. The first factor is the 
update to the standardized amount. In accordance with section 
1886(b)(3)(B)(i) of the Act, we are proposing to update the 
standardized amounts for FY 2012 using an applicable percentage 
increase of 1.5 percent. This includes our forecasted IPPS operating 
hospital market basket increase of 2.8 percent with a proposed 
reduction of 1.2 percentage points for the multifactor productivity 
adjustment and a 0.1 percentage point reduction as required under 
the Affordable Care Act. (Hospitals that fail to comply with the 
quality data submission requirements will receive a proposed update 
of -0.5 percent (this update includes the 2.0 percentage point 
reduction for failure to submit these data).) Under section 
1886(b)(3)(B)(iv) of the Act, the proposed updates to the hospital-
specific amounts for SCHs and for MDHs are also equal to the 
applicable percentage increase, or 1.5 percent. In addition, we are 
proposing to update the Puerto Rico-specific amount by an applicable 
percentage increase of 1.5 percent.
    A second significant factor that affects the changes in 
hospitals' payments per case from FY 2011 to FY 2012 is the change 
in hospitals' geographic reclassification status from one year to 
the next. That is, payments may be reduced for hospitals 
reclassified in FY 2011 that are no longer reclassified in FY 2012. 
Conversely, payments may increase for hospitals not reclassified in 
FY 2011 that are reclassified in FY 2012.
    A third significant factor is that we currently estimate that 
actual outlier payments during FY 2011 will be 4.9 percent of total 
MS-DRG payments. Our updated FY 2011 outlier estimate accounts for 
changes to the FY 2011 IPPS payments required under the Affordable 
Care Act. When the FY 2011 final rule was published, we projected FY 
2011 outlier payments would be 5.1 percent of total MS-DRG plus 
outlier payments; the average standardized amounts were offset 
correspondingly. The effects of the lower than expected outlier 
payments during FY 2011 (as discussed in the Addendum to this 
proposed rule) are reflected in the analyses below comparing our 
current estimates of FY 2011 payments per case to estimated FY 2012 
payments per case (with outlier payments projected to equal 5.1 
percent of total MS-DRG payments).

B. Analysis of Table I

    Table I displays the results of our analysis of the proposed 
changes for FY 2012. The table categorizes hospitals by various 
geographic and special payment consideration groups to illustrate 
the varying impacts on different types of hospitals. The top row of 
the table shows the overall impact on the 3,419 acute care hospitals 
included in the analysis.
    The next four rows of Table I contain hospitals categorized 
according to their geographic location: all urban, which is further 
divided into large urban and other urban; and rural. There are 2,492 
hospitals located in urban areas included in our analysis. Among 
these, there are 1,369 hospitals located in large urban areas 
(populations over 1 million), and 1,123 hospitals in other urban 
areas (populations of 1 million or fewer). In addition, there are 
927 hospitals in rural areas. The next two groupings are by bed-size 
categories, shown separately for urban and rural hospitals. The 
final groupings by geographic location are by census divisions, also 
shown separately for urban and rural hospitals.
    The second part of Table I shows hospital groups based on 
hospitals' FY 2012 payment classifications, including any 
reclassifications under section 1886(d)(10) of the Act. For example, 
the rows labeled urban, large urban, other urban, and rural show 
that the numbers of hospitals paid based on these categorizations 
after consideration of geographic reclassifications (including 
reclassifications under sections 1886(d)(8)(B) and 1886(d)(8)(E) of 
the Act that have

[[Page 26049]]

implications for capital payments) are 2,514; 1,382; 1,132; and 905, 
respectively.
    The next three groupings examine the impacts of the changes on 
hospitals grouped by whether or not they have GME residency programs 
(teaching hospitals that receive an IME adjustment) or receive DSH 
payments, or some combination of these two adjustments. There are 
2,389 nonteaching hospitals in our analysis, 790 teaching hospitals 
with fewer than 100 residents, and 240 teaching hospitals with 100 
or more residents.
    In the DSH categories, hospitals are grouped according to their 
DSH payment status, and whether they are considered urban or rural 
for DSH purposes. The next category groups together hospitals 
considered urban or rural, in terms of whether they receive the IME 
adjustment, the DSH adjustment, both, or neither.
    The next five rows examine the impacts of the changes on rural 
hospitals by special payment groups (SCHs, RRCs, and MDHs). There 
were 175 RRCs, 320 SCHs, 195 MDHs, and 120 hospitals that are both 
SCHs and RRCs, and 18 hospitals that are both MDHs and RRCs.
    The next series of groupings are based on the type of ownership 
and the hospital's Medicare utilization expressed as a percent of 
total patient days. These data were taken from the FY 2008 or FY 
2007 Medicare cost reports.
    The next two groupings concern the geographic reclassification 
status of hospitals. The first grouping displays all urban hospitals 
that were reclassified by the MGCRB for FY 2012. The second grouping 
shows the MGCRB rural reclassifications. The final category shows 
the impact of the proposed policy changes on the 19 cardiac 
hospitals.
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1. Effects of the Proposed Hospital Update and Documentation and Coding 
Adjustment (Column 2)

    As discussed in section II.D. of the preamble of this proposed 
rule, this column includes the proposed hospital update including 
the 2.8 percent market basket update, the reduction of 1.2 
percentage points for the multifactor productivity adjustment and 
the 0.1 percentage point reduction in accordance with the Affordable 
Care Act. In addition, this column includes the proposed FY 2012 
documentation and coding adjustment of -3.15 percent on the national 
standardized amount and the proposed -2.5 percent documentation and 
coding adjustment on the hospital-specific rates. As a result, we 
are proposing to apply a -1.65 percent adjustment to the national 
standardized amount and -1.0 percent adjustment to the hospital 
specific rate. Overall, hospitals will experience a -1.6 percent 
decrease in payments due to the effects of the hospital update and 
documentation and coding adjustment on the national standardized 
amount. Hospital categories that experience less than a 1.6 percent 
decrease in payments have hospitals that are paid under the 
hospital-specific rate, which is reduced by 1.0 percent. In 
addition, Puerto Rico hospitals will experience a -1.0 percent 
decrease in payments, a smaller decrease than average, because we 
are not proposing any documentation and coding adjustment to the 
Puerto Rico-specific rate, which is 25 percent of Puerto Rico's 
payment rate.

2. Effects of the Proposed Adjustment to the Standardized Amount for 
Cape Cod Hospital v. Sebelius (Column 3)

    Column 3 shows the impact of the proposed 1.1 percent adjustment 
to the national standardized amount and the proposed 0.9 percent 
adjustment to the hospital-specific rate in light of the decision in 
Cape Cod Hospital v. Sebelius, as discussed in section II. of the 
Addendum to this proposed rule.
    Overall, hospitals will experience a 1.1 percent increase in 
payments due to the effects of the adjustment on the national 
standardized amount. Hospital categories that experience less than a 
1.1 percent increase in payments include hospitals that are paid 
under the hospital-specific rate, which we are proposing to increase 
by 0.9 percent. Rural hospitals will experience a 1.0 percent 
increase in payments because many rural hospitals are paid under the 
hospital-specific rate, which we are proposing to increase by 0.9 
percent.

3. Effects of the Proposed Changes to the MS-DRG Reclassifications and 
Relative Cost-Based Weights with Recalibration Budget Neutrality 
(Column 4)

    Column 4 shows the effects of the proposed changes to the MS-
DRGs and relative weights with the application of the recalibration 
budget neutrality factor to the standardized amounts. Section 
1886(d)(4)(C)(i) of the Act requires us annually to make appropriate 
classification changes in order to reflect changes in treatment 
patterns, technology, and any other factors that may change the 
relative use of hospital resources. Consistent with section 
1886(d)(4)(C)(iii) of the Act, we are calculating a recalibration 
budget neutrality factor to account for the changes in MS-DRGs and 
relative weights to ensure that the overall payment impact is budget 
neutral.
    As discussed in section II.E. of the preamble of this proposed 
rule, the FY 2012 MS-DRG relative weights will be 100 percent cost-
based and 100 percent MS-DRGs. For FY 2012, the proposed MS-DRGs are 
calculated using the FY 2010 MedPAR data grouped to the Version 29.0 
(FY 2012) MS-DRGs. The methods of calculating the relative weights 
and the reclassification changes to the GROUPER are described in 
more detail in section II.H. of the preamble of this proposed rule.
    The ``All Hospitals'' line in Column 4 indicates that proposed 
changes due to MS-DRGs and relative weights will result in a 0.0 
percent change in payments with the application of the recalibration 
budget neutrality factor of 0.998413 on to the standardized amount. 
The changes in payments due to the proposed MS-DRGs, relative 
weights and GROUPER are modest with no hospital category seeing an 
increase or decrease of more than 0.2 percent.

4. Effects of Proposed Wage Index Changes (Column 5)

    Column 5 shows the impact of updated wage data with the 
application of the wage budget neutrality factor. Section 
1886(d)(3)(E) of the Act requires that, beginning October 1, 1993, 
we annually update the wage data used to calculate the wage index. 
In accordance with this requirement, the proposed wage index for 
acute care hospitals for FY 2012 is based on data submitted for 
hospital cost reporting periods beginning on or after October 1, 
2007 and before October 1, 2008. The estimated impact of the updated 
wage data and labor share on hospital payments is isolated in Column 
5 by holding the other payment parameters constant in this 
simulation. That is, Column 5 shows the percentage change in 
payments when going from a model using the FY 2011 wage index, based 
on FY 2007 wage data, the current labor-related share and having a 
100-percent occupational mix adjustment applied, to a model using 
the FY 2012 pre-reclassification wage index with the labor-related 
share, also having a 100-percent occupational mix adjustment 
applied, based on FY 2008 wage data (while holding other payment 
parameters such as use of the Version 29.0 MS-DRG GROUPER constant). 
The occupational mix adjustment is based on the 2007-2008 
occupational mix survey.
    In addition, the column shows the impact of the application of 
wage budget neutrality to the national standardized amount. In FY 
2010, we began calculating separate wage budget neutrality and 
recalibration budget neutrality factors, in accordance with section 
1886(d)(3)(E) of the Act, which specifies that budget neutrality to 
account for wage changes or updates made under that subparagraph 
must be made without regard to the 62 percent labor-related share 
guaranteed under section 1886(d)(3)(E)(ii) of the Act. Therefore, 
for FY 2012, we are calculating the wage budget neutrality factor to 
ensure that payments under updated wage data and the labor-related 
share are budget neutral without regard to the lower labor-related 
share of 62 percent applied to hospitals with a wage index less than 
or equal to 1. In other words, the wage budget neutrality is 
calculated under the assumption that all hospitals receive the 
higher labor-related share of the standardized amount. The proposed 
wage budget neutrality factor is 1.000113, and the overall payment 
change is 0 percent.
    Column 5 shows the impacts of updating the wage data using FY 
2008 cost reports. Overall, the new wage data will lead to a 0.0 
percent change for all hospitals before being combined with the wage 
budget neutrality adjustment shown in Column 5. Among the regions, 
the largest increase is in the rural New England region, which 
experiences a 0.8 percent increase due to increases in the wage 
index among rural Connecticut and rural Massachusetts hospitals. The 
largest decline from updating the wage data is seen in the rural 
East South Central region (-0.5 percent decrease).
    In looking at the wage data itself, the national average hourly 
wage increased 3.4 percent compared to FY 2011. Therefore, the only 
manner in which to maintain or exceed the previous year's wage index 
was to match or exceed the national 3.4 percent increase in average 
hourly wage. Of the 3,424 hospitals with wage data for both FYs 2011 
and 2012, 1,681, or 49.1 percent, experienced an average hourly wage 
increase of 3.4 percent or more.
    The following chart compares the shifts in proposed wage index 
values for hospitals for FY 2012 relative to FY 2011. Among urban 
hospitals, 37 will experience an increase of more than 5 percent and 
less than 10 percent and 5 will experience an increase of more than 
10 percent. Among rural hospitals, 1 will experience an increase of 
more than 5 percent and less than 10 percent, and none will 
experience an increase of more than 10 percent. However, 915 rural 
hospitals will experience increases or decreases of less than 5 
percent, while 2,397 urban hospitals will experience increases or 
decreases of less than 5 percent. Fifty-six urban hospitals will 
experience decreases in their wage index values of more than 5 
percent and less than 10 percent. Sixteen urban hospitals will 
experience decreases in their wage index values of greater than 10 
percent. One rural hospital will experience a decrease of more than 
10 percent. Ten rural hospitals will experience decreases in their 
wage index values of greater than 5 percent but less than 10 
percent. These figures reflect changes in the wage index which is an 
adjustment to either 68.8 percent or 62 percent of the labor share 
of a hospital's standardized amount, depending upon whether its wage 
index is greater than 1.0 or less than or equal to 1.0. Therefore, 
these figures illustrate a somewhat larger change in the wage index 
than will occur to the hospital's total payment.
    The following chart shows the projected impact for urban and 
rural hospitals.

[[Page 26059]]

[GRAPHIC] [TIFF OMITTED] TP05MY11.107

5. Combined Effects of the Proposed MS-DRG and Wage Index Changes 
(Column 6)

    Section 1886(d)(4)(C)(iii) of the Act requires that changes to 
MS-DRG reclassifications and the relative weights cannot increase or 
decrease aggregate payments. In addition, section 1886(d)(3)(E) of 
the Act specifies that any updates or adjustments to the wage index 
are to be budget neutral. We computed a proposed wage budget 
neutrality factor of 1.000113, and a proposed recalibration budget 
neutrality factor of 0.998419 (which is applied to the Puerto Rico-
specific standardized amount and the hospital-specific rates). The 
product of the two proposed budget neutrality factors is the 
proposed cumulative wage and recalibration budget neutrality factor. 
The proposed cumulative wage and recalibration budget neutrality 
adjustment is 0.998532, or approximately -0.15 percent, which is 
applied to the national standardized amounts. Because the wage 
budget neutrality and the recalibration budget neutrality are 
calculated under different methodologies according to the statute, 
when the two budget neutralities are combined and applied to the 
standardized amount, the overall payment impact is not necessarily 
budget neutral. However, in this proposed rule, we are estimating 
that the changes in the MS-DRG relative weights and updated wage 
data with wage and budget neutrality applied will result in a 0.0 
change in payments.
    We estimate that the combined impact of the proposed changes to 
the relative weights and MS-DRGs and the proposed updated wage data 
with budget neutrality applied will result in no change in payments 
for urban or rural hospitals. Urban West South Central hospitals 
would experience a 0.4 percent increase in payments due to increases 
in their wages compared to the national average, while the urban 
East South Central and East North Central area would experience a -
0.3 decrease in payments because of below average increases in 
wages. Among the rural hospital categories, rural New England 
hospitals would experience the greatest increase in payment (0.7 
percent) primarily due to above average increases in the wage data, 
while the rural Pacific area would experience a 0.4 percent decrease 
in payments due to decreases in the wage data.

6. Effects of MGCRB Reclassifications (Column 7)

    Our impact analysis to this point has assumed acute care 
hospitals are paid on the basis of their actual geographic location 
(with the exception of ongoing policies that provide that certain 
hospitals receive payments on other bases than where they are 
geographically located). The changes in Column 7 reflect the per 
case payment impact of moving from this baseline to a simulation 
incorporating the MGCRB decisions for FY 2012 which affect 
hospitals' wage index area assignments.
    By spring of each year, the MGCRB makes reclassification 
determinations that will be effective for the next fiscal year, 
which begins on October 1. The MGCRB may approve a hospital's 
reclassification request for the purpose of using another area's 
wage index value. Hospitals may appeal denials of MGCRB decisions to 
the CMS Administrator. Further, hospitals have 45 days from 
publication of the IPPS rule in the Federal Register to decide 
whether to withdraw or terminate an approved geographic 
reclassification for the following year.
    The overall effect of geographic reclassification is required by 
section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, 
for the purposes of this impact analysis, we are applying an 
adjustment of 0.991528 to ensure that the effects of the section 
1886(d)(10) reclassifications are budget neutral (section II.A. of 
the Addendum to this proposed rule). Geographic reclassification 
generally benefits hospitals in rural areas. We estimate that 
geographic reclassification will increase payments to rural 
hospitals by an average of 1.7 percent. By region, all the rural 
hospital categories, with the exception of the one rural Puerto Rico 
hospital, will experience increases in payments due to MGCRB 
reclassification. Rural hospitals in the East South Central region 
will experience a 2.6 percent increase in payments and rural 
hospitals in the Mountain region will experience a 0.5 percent 
increase in payments. Urban hospitals in New England and the Middle 
Atlantic will experience an increase in payments of 0.9 percent and 
0.3 percent, respectively, largely due to reclassifications of 
hospitals in Connecticut and New Jersey.
    Table 9A listed in section VI. of the Addendum to this proposed 
rule and available via the Internet reflects the approved 
reclassifications for FY 2012.

7. Effects of the Rural Floor, Including Application of National Budget 
Neutrality (Column 8)

    As discussed in section III.B. of the preamble of the FY 2009 
IPPS final rule, the FY 2010 IPPS/RY 2010 LTCH PPS final rule, the 
FY 2011 IPPS/LTCH PPS final rule and this proposed rule, section 
4410 of Public Law 105-33 established the rural floor by requiring 
that the wage index for a hospital in any urban area cannot be less 
than the wage index received by rural hospitals in the same State. 
Beginning with FY 2008, we apply a uniform budget neutrality 
adjustment is applied to the wage index. For FY 2012 (and in FY 
2011), the Affordable Care Act requires that we apply one rural 
floor budget neutrality factor to the wage index, nationally. The 
proposed FY 2012 rural floor budget neutrality factor applied to the 
wage index is 0.993834, which would reduce wage indexes by -0.62 
percent.
    Column 8 shows the projected impact of the rural floor with the 
national rural floor budget neutrality factor applied to the wage 
index. The column compares the post-reclassification FY 2012 wage 
index of providers before the rural floor adjustment and the post-
reclassification FY 2012 wage index of providers with the rural 
floor adjustment. Only urban hospitals can benefit from the rural 
floor provision. Because the provision is budget neutral, all other 
hospitals (that is, all rural hospitals and those urban hospitals to 
which the adjustment is not made) experience a decrease in payments 
due to the budget neutrality adjustment applied nationally to their 
wage index.
    We project that, in aggregate, rural hospitals will experience a 
-0.2 percent decrease in payments as a result of the application of 
rural floor budget neutrality because the rural hospitals do not 
benefit from the rural floor, but have their wage indexes downwardly 
adjusted to ensure that the application of the rural floor is budget 
neutral overall. We project hospitals located in other urban areas 
(populations of 1 million or fewer) will experience a 0.2 percent 
increase in payments because those providers benefit from the rural 
floor. Urban hospitals in the New England region can expect a 5.0 
percent increase in payments primarily due to the application of the 
rural floor in Massachusetts and the applicable national rural floor 
budget neutrality as required by the Affordable Care Act. All 60 
urban providers in Massachusetts are expected to receive the rural 
floor wage index of 1.3614. During most past years, there have been 
no IPPS hospitals located in rural areas in Massachusetts. There was 
one urban IPPS hospital that was reclassified to rural Massachusetts 
(under section 1886(d)(8)(E) of the Act) which established the 
Massachusetts rural floor, but the wage index resulting from that 
hospital's data was not high enough for any urban hospital to 
benefit from the rural floor policy. However, beginning with the FY 
2012 wage index, the rural floor for the State

[[Page 26060]]

is established by the conversion of a CAH to an IPPS hospital that 
is geographically located in rural Massachusetts. Massachusetts 
hospitals can expect approximately an 8-percent increase in IPPS 
payments due to the application of rural floor.
    Urban Puerto Rico hospitals are expected to experience a 0.1 
percent increase in payments as a result of the application of a 
Puerto Rico rural floor. Similar to Massachusetts, this is the first 
year in which urban Puerto Rico hospitals will receive a rural floor 
as a result of a new IPPS hospital located in rural Puerto Rico 
setting a rural floor. We are proposing to apply a rural floor 
budget neutrality factor to the Puerto Rico-specific wage index of 
0.989226 or 1.1 percent. The Puerto Rico-specific wage index adjusts 
the Puerto Rico-specific standardized amount, which represents 25 
percent of payments to Puerto Rico hospitals.

8. Effects of the Expiration of the Imputed Floor (Column 9)

    As discussed in section III.F.2. of the preamble of this 
proposed rule, the imputed floor, which is budget neutral, is set to 
expire with the FY 2011 wage index, and we are not proposing to 
extend it.
    Column 9 shows the effects of the expiration of the imputed 
floor. This column compares payments that would have been made if 
the imputed floor were still in place to payments that are estimated 
to be made with only the rural floor. There are 39 hospitals in New 
Jersey that are affected by the expiration of the imputed floor. 
Therefore, only urban providers in the Middle Atlantic Region (New 
Jersey) will experience a decrease by 0.4 percent, from the imputed 
floor no longer being applied in that State. Hospitals in other 
regional categories will experience an increase in payments as they 
will no longer have payments reduced because of the imputed floor to 
ensure budget neutrality.

9. Effects of the Proposed Application of the Frontier Wage Index 
(Column 10)

    Section 10324(a) of Affordable Care Act requires that we 
establish a minimum post-reclassified wage-index of 1.00 for all 
hospitals located in ``frontier States.'' The term ``frontier 
States'' is defined in the statute as States in which at least 50 
percent of counties have a population density less than 6 persons 
per square mile. Based on these criteria, five States (Montana, 
North Dakota, Nevada, South Dakota, and Wyoming) are considered 
frontier States and 47 hospitals located in those States will 
receive a frontier wage index of 1.0. This provision is not budget 
neutral and is estimated to increase IPPS operating payments by 
approximately $48 million.
    Urban hospitals located in the West North Central region and 
urban hospitals located in the Mountain region will experience an 
increase in payments by 0.5 percent and 0.2 percent, respectively 
because many of the hospitals located in this region are frontier 
hospitals. Similarly, rural hospitals located in the Mountain region 
and rural hospitals in the West North Central region will experience 
an increase in payments by 0.6 percent and 0.1 percent, 
respectively.

10. Effects of the Proposed Wage Index Adjustment for Out-Migration 
(Column 11)

    Section 1886(d)(13) of the Act, as added by section 505 of 
Public Law 108-173, provides for an increase in the wage index for 
hospitals located in certain counties that have a relatively high 
percentage of hospital employees who reside in the county, but work 
in a different area with a higher wage index. Hospitals located in 
counties that qualify for the payment adjustment are to receive an 
increase in the wage index that is equal to a weighted average of 
the difference between the wage index of the resident county, post-
reclassification and the higher wage index work area(s), weighted by 
the overall percentage of workers who are employed in an area with a 
higher wage index. Overall, rural hospitals will experience a 0.1 
percent increase in payments as a result of the outmigration 
adjustment. Rural providers with less than 50 beds will experience a 
0.2 percent increase in payments in FY 2012. We included these 
additional payments to providers in the impact table shown above, 
and we estimate the impact of these providers receiving the out-
migration increase to be approximately $14 million.

11. Effects of the Expiration of Section 508 (Column 12)

    Column 12 shows our estimate of the changes in payments due to 
the expiration of section 508, a non-budget neutral reclassification 
provision, applied under the MMEA. Because this provision is not 
budget neutral, the expiration of this reclassification provision 
results in a -0.2 percent decrease in payments, overall. Section 508 
hospitals are generally urban hospitals, resulting in a -0.2 percent 
decrease in payments among the urban hospital category and a 0.0 
percent change in payments among rural hospitals. Urban New England 
and Urban Middle Atlantic regions will experience a decrease in 
payments of -0.2 percent and -0.4 percent respectively because many 
section 508 hospitals are located in those regions. Urban teaching 
hospitals that do not receive DSH will experience a -0.3 percent 
decrease in payments due to the expiration of section 508.

12. Effects of All Proposed FY 2012 Changes (Column 13)

    Column 13 shows our estimate of the changes in payments per 
discharge from FY 2011 and FY 2012, resulting from all proposed 
changes reflected in this proposed rule for FY 2012. It includes 
combined effects of the previous columns in the table.
    The average decrease in payments under the IPPS for all 
hospitals is approximately -0.5 percent. As discussed in section 
II.D. of the preamble of this proposed rule, this column includes 
the proposed FY 2012 documentation and coding adjustment of -3.15 
percent on the national standardized amount and -2.5 percent on the 
hospital-specific rates. In addition, this column includes the 
proposed annual hospital update of 1.5 percent to the national 
standardized amount. This annual hospital update includes the 2.8 
percent market basket update, the reduction of -1.2 percentage 
points for the multifactor productivity adjustment, and the -0.1 
percentage point reduction under section 3401 of the Affordable Care 
Act. As described in Column 2, the proposed annual hospital update, 
combined with the proposed documentation and coding adjustment, 
results in a -1.6 percent decrease in payments in FY 2012 relative 
to FY 2011. As described in Column 3, the proposed 1.1 percent 
adjustment to the national standardized amount and the proposed 0.9 
percent adjustment to the hospital specific rate in light of a 
recent court decision related to rural floor budget neutrality 
results in a 1.1 percent increase in payments in FY 2012 relative to 
FY 2011. In addition, column 12 describes a -0.2 percent decrease in 
payments due to the expiration of section 508 reclassifications that 
had been extended for FY 2011 under the MMEA. Section 508 was not a 
budget-neutral provision. There might also be interactive effects 
among the various factors comprising the payment system that we are 
not able to isolate. For these reasons, the values in Column 13 may 
not equal the sum of the percentage changes described above.
    The overall change in payments per discharge for hospitals paid 
under the IPPS in FY 2012 is estimated to decrease by -0.5 percent. 
The payment decreases among the hospital categories are largely 
attributed to the proposed documentation and coding adjustments. 
Hospitals in urban areas would experience an estimated -0.4 percent 
decrease in payments per discharge in FY 2012 compared to FY 2011. 
Hospital payments per discharge in rural areas are estimated to 
decrease by -0.8 percent in FY 2012 as compared to FY 2011.
    Among urban census divisions, the largest estimated payment 
decreases will be 1.2 percent in the East North Central region 
because many of the urban providers in this region had benefited 
from section 508 reclassifications in FY 2011 that have expired for 
FY 2012. Urban Middle Atlantic providers will experience a -0.9 
percent decrease in payments due to the expiration of the imputed 
floor that had previously benefited urban hospitals in this region. 
Urban hospitals in the New England will see the largest payment 
increases (3.6 percent) because the Massachusetts hospitals are 
benefitting from the rural floor in their State. Furthermore, urban 
Puerto Rico hospitals will experience a 0.2 percent increase in 
payments due to the application of the rural floor.
    Among the rural regions, the providers in the East South Central 
region will experience the largest decrease in payments of -1.6 
percent due to decreases in wage data. Rural hospitals in the West 
North Central region will experience a decrease in payments by -0.2 
percent, which is better than average, because the rural providers 
in this region benefit from MGCRB reclassification and the frontier 
State wage index provision, implemented under the Affordable Care 
Act.
    Among special categories of hospitals, MDHs will receive an 
estimated payment decrease of -0.4 percent. MDHs are paid the higher 
of the IPPS rate based on the national standardized amount, that is, 
the Federal rate, or, if the hospital-specific rate exceeds

[[Page 26061]]

the Federal rate, the Federal rate plus 75 percent of the difference 
between the Federal rate and the hospital-specific rate. MDHs will 
experience a decrease in payments because of the proposed 
documentation and coding adjustments applied to both the Federal 
rate and the hospital-specific rate. SCHs are paid the higher of 
their Federal rate and the hospital-specific rate. Overall, SCHs 
will experience an estimated decrease in payments by -1.4 percent 
due to the proposed documentation and coding adjustments to the 
national standardized amount and the hospital-specific rates.
    Rural hospitals reclassified for FY 2012 are anticipated to 
receive a -0.6 percent payment decrease, and rural hospitals that 
are not reclassifying are estimated to receive a payment decrease of 
-1.2 percent. Urban reclassified hospitals will experience payment 
decreases better than average at -0.2 percent due to the benefits 
under MGCRB reclassification and the rural floor. Urban non-
reclassified hospitals will experience a payment decrease of -0.5 
percent.
    Cardiac hospitals are expected to experience a payment decrease 
of 0.6 percent in FY 2012 relative to FY 2011.

C. Impact Analysis of Table II

    Table II presents the projected impact of the proposed changes 
for FY 2012 for urban and rural hospitals and for the different 
categories of hospitals shown in Table I. It compares the estimated 
average payments per discharge for FY 2011 with the proposed 
payments per discharge for FY 2012, as calculated under our models. 
Thus, this table presents, in terms of the average dollar amounts 
paid per discharge, the combined effects of the proposed changes 
presented in Table I. The estimated percentage changes shown in the 
last column of Table II equal the estimated percentage changes in 
average payments per discharge from Column 13 of Table I.
BILLING CODE 4120-01-P

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[[Page 26063]]

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[[Page 26064]]

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BILLING CODE 4120-01-C

VII. Effects of Other Proposed Policy Changes

    In addition to those proposed policy changes discussed above 
that we are able to model using our IPPS payment simulation model, 
we are proposing to make various other changes in this proposed 
rule. Generally, we have limited or no specific data available with 
which to estimate the impacts of these proposed changes. Our 
estimates of the likely impacts associated with these other proposed 
changes are discussed below.

A. Effects of Proposed Policy on HACs, Including Infections

    In section II.F. of the preamble of this proposed rule, we 
discuss our implementation of section 1886(d)(4)(D) of the Act, 
which requires the Secretary to identify conditions that are: (1) 
High cost, high volume, or both; (2) result in the assignment of a 
case to an MS-DRG that has a higher payment when present as a 
secondary diagnosis; and (3) could reasonably have been prevented 
through application of evidence-based guidelines. For discharges 
occurring on or after October 1, 2008, hospitals will not receive 
additional payment for cases in which one of the selected conditions 
was not present on admission, unless, based on data and clinical 
judgment, it cannot be determined at the time of admission whether a 
condition is present. That is, the case will be paid as though the 
secondary diagnosis were not present. However, the statute also 
requires the Secretary to continue counting the condition as a 
secondary diagnosis that results in a higher IPPS payment when doing 
the budget neutrality calculations for MS-DRG reclassifications and 
recalibration. Therefore, we will perform our budget neutrality 
calculations as though the payment provision did not apply, but 
Medicare will make a lower payment to the hospital for the specific 
case that includes the secondary diagnosis. Thus, the provision 
results in cost savings to the Medicare program.
    We note that the provision will only apply when one or more of 
the selected conditions are the only secondary diagnosis or 
diagnoses present on the claim that will lead to higher payment. 
Medicare beneficiaries will generally have multiple secondary 
diagnoses during a hospital stay, such that beneficiaries having one 
MCC or CC will frequently have additional conditions that also will 
generate higher payment. Only a small percentage of the cases will 
have only one secondary diagnosis that would lead to a higher 
payment. Therefore, if at least one nonselected secondary diagnosis 
that leads to higher payment is on the claim, the case will continue 
to be assigned to the higher paying MS-DRG and there will be no 
Medicare savings from that case. In addition, as discussed in 
section II.F.3.e. of the preamble of this proposed rule, it is 
possible to have two severity levels where the HAC does not affect 
the MS-DRG assignment or for an MS-DRG not to have severity levels. 
In either of these circumstances, the case will continue to be 
assigned to the higher paying MS-DRG and there will be no Medicare 
savings from that case.
    In section II.F. of the preamble of this proposed rule, we 
discuss our proposal to add an additional HAC for FY 2012: Contrast-
Induced Acute Kidney Injury. In that discussion, we stated that, in 
FY 2009, there were 38,324 inpatient discharges coded as acute renal 
failure using ICD-9-CM diagnosis code 584.9 and reported as not 
present on admission (POA status = N) when reported with one of the 
above procedure codes submitted through Medicare claims. These cases 
had an average charge of $29,122 for the entire hospital stay. 
Further analysis of the FY 2009 claims showed that the average 
charge was approximately $9,122 more than the average charge for 
inpatient discharges coded as acute renal failure using ICD-9-CM 
diagnosis code 584.9 and reported as present on admission (POA 
status = Y).
    The HAC payment provision went into effect on October 1, 2008. 
Our savings estimates for the next 5 fiscal years are shown below:
[GRAPHIC] [TIFF OMITTED] TP05MY11.111

B. Effects of Proposed Policy Relating to New Medical Service and 
Technology Add-On Payments

    In section II.I. of the preamble to this proposed rule, we 
discuss the three applications for add-on payments for new medical 
services and technologies for FY 2012, as well as the status of the 
new technology that was approved to receive new technology add-on 
payments in FY 2011. As explained in that section, add-on payments 
for new technology under section 1886(d)(5)(K) of the Act are not 
required to be budget neutral. As discussed in section II.I.4. of 
the preamble of this proposed rule, we have yet to determine whether 
any of the three applications we received for consideration for new 
technology add-on payments for FY 2012 will meet the specified 
criteria. Consequently, it is premature to estimate the potential 
payment impact of any potential new technology add-on payments for 
FY 2012. We note that if any of the three applications are found to 
be eligible for new technology add-on payments for FY 2012 in

[[Page 26065]]

the FY 2012 IPPS/LTCH PPS final rule, we would discuss the estimated 
payment impact for FY 2012 in that final rule.
    However, because we are proposing to continue to make new 
technology add-on payments in FY 2012 for the AutoLITT\TM\ (because 
the technology is still within the 3-year anniversary of the 
product's entry onto the market), we are providing an estimate of 
total payments for this technology for FY 2012. We note that new 
technology add-on payments per case are limited to the lesser of (1) 
50 percent of the costs of the new technology or (2) 50 percent of 
the amount by which the costs of the case exceed the standard MS-DRG 
payment for the case. Because it is difficult to predict the actual 
new technology add-on payment for each case, our estimate below is 
based on the increase in add-on payments for FY 2012 as if every 
claim that would qualify for a new technology add-on payments would 
receive the maximum add-on payment. Therefore, we currently estimate 
that payments for the AutoLITT\TM\ will increase overall FY 2012 
payments by $900,000. For FY 2011, the applicant estimates that 
approximately 170 Medicare beneficiaries would be eligible for the 
AutoLITT\TM\. Therefore, based on the applicant's estimate from FY 
2011, we currently estimate that payments for the AutoLITT\TM\ will 
increase overall FY 2012 payments by $900,000.

C. Effects of Proposed Requirements for Hospital Inpatient Quality 
Reporting (IQR) Program

    In section VII.C. of Appendix A of the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50662 through 50663), we discussed the impact of 
the FY 2011 through FY 2014 Hospital Inpatient Quality Reporting 
(IQR) Program requirements we adopted in that final rule. We 
estimated that 95 hospitals would not receive the full payment 
update in any fiscal year from FY 2012 through FY 2014. At the time 
that analysis was prepared, 104 hospitals did not receive the full 
payment update in FY 2010.
    In section IV.A. of the preamble of this proposed rule, we 
discuss our proposed requirements for hospitals to report quality 
data under the Hospital IQR Program in order to receive the full 
update to the standardized amount for FY 2012 through FY 2015. We 
now estimate that approximately 104 hospitals may not receive the 
full update in any fiscal year. (In this proposed rule, we are 
proposing to retire eight of the FY 2011 measures for the FY 2014 
payment determination. We believe that this proposal would not have 
a significant effect on our estimate.) We believe that most of these 
hospitals would be either small rural or small urban hospitals. 
However, at this time, information is not available to determine the 
precise number of hospitals that will not meet the requirements to 
receive the full annual percentage increase for FY 2012 through FY 
2015.
    In section IV.A.7. of the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50225 through 50229), we established Hospital IQR validation 
requirements for the FY 2012 and FY 2013 payment determinations. 
Beginning with the FY 2012 payment update, hospitals must pass our 
validation requirement of a minimum of 75 percent reliability, based 
upon our chart-audit validation process, for four quarters of data 
from the last quarter of CY 2011 through the third quarter of CY 
2012.
    In previous years, charts were requested by the CMS CDAC 
contractor and hospitals were given 45 days from the date of the 
request to submit the requested records. In section IV.A.6.a. of the 
preamble of this proposed rule and in proposed Sec.  412.140(d)(1), 
beginning with the FY 2012 we are proposing to reduce the deadline 
from 45 days to 30 days for hospitals to return requested medical 
record documentation to support our validation requirement. This may 
be an additional administrative burden to hospitals selected for 
validation. However, this deadline is in line with our QIO 
regulations at Sec.  476.78 and the total burden would be 18 charts 
for each for the four quarters that must be copied and mailed in a 
30-day period for FY 2012 and subsequent years.
    In addition, we are proposing to add a new Sec.  478.78(b)(2)(2) 
that will require the submission of medical information within 21 
days in those situations in which a ``serious reportable event'' or 
other circumstance has been identified during the course of a QIO 
review. We do not believe this will cause a significantly higher 
administrative burden on the hospitals, since CMS reimburses 
providers returning medical records to QIOs at the rate of 12 cents 
per page for copying and approximately $4.00 per chart for postage. 
Given that we reimburse for the data collection effort, we believe 
that this proposed requirement represents a minimal burden to 
providers. We have continued our efforts to ensure that QIOs provide 
assistance to all hospitals that wish to participate in the Hospital 
IQR Program.
    In section IV.A.6.b. of the preamble of this proposed rule, for 
FY 2014 payment determinations and subsequent years, we are 
proposing to add two strata to the current Hospital IQR validation 
sample of SCIP, AMI, HF, and PN cases. For the first stratum, we are 
proposing to select three cases per selected hospital per quarter to 
validate the CLABSI measure using a two step selection process that 
would target potential patients with positive infection from blood 
culture results and a Central Venous Catheter. The requirement of an 
additional 3 charts per hospital submitted for validation for the 
CLABSI measure would result in approximately 2,400 total additional 
charts per quarter being submitted to CMS by all selected hospitals. 
We reimburse hospitals for the cost of sending charts to the CDAC 
contractor at the rate of 12 cents per page for copying and 
approximately $4.00 per chart for postage. Our experience shows that 
the average chart received by the CDAC contractor is approximately 
275 pages. Thus, we would expend approximately $88,800 per quarter 
to collect the additional charts we need to validate the CLASBI 
measure. Additionally, we will collect the CLABSI-specific data 
elements from all charts currently requested for Hospital IQR 
validation. We would validate a total of 15 records per quarter per 
validated hospital in 5 strata (SCIP, AMI, HF, PN, CLABSI and the 
proposed ED/Global Immunization measure).
    In section IV.A.6.b. of the preamble of this proposed rule, for 
FY 2014 and subsequent years, we are proposing to add a second 
stratum to our validation sample, which would enable us to validate 
the EDT and the Immunization for Influenza and Immunization for 
Pneumonia global measures. Thus, we would be validating a total of 
18 records per quarter per selected hospital in 6 strata ((1) SCIP, 
(2) AMI, (3) HF, (4) PN, (5) CLABSI, and (6) EDT/immunization 
measures). Under the assumptions outlined above, we would expend 
approximately $88,800 per quarter to collect the additional charts 
for the EDT/immunization measures. The proposed total requirement of 
18 charts per hospital (should we adopt both the proposed CLABSI 
validation requirement and the proposed EDT/immunization validation 
requirement) would result in approximately 14,400 charts per quarter 
being submitted to CMS. Using the assumptions discussed above, for 
the FY 2014 Hospital IQR Program, we estimate that CMS would have 
expenditures of approximately $532,800 per quarter related to the 
validation requirement. Additionally, we will collect the CLABSI-
specific data and the EDT/Immunization data elements from all charts 
currently requested for Hospital IQR validation. We would validate a 
total of 18 records per quarter per validated hospital in 6 strata 
(SCIP, AMI, HF, PN, CLABSI and the proposed ED/Global Immunization 
measure). We do not believe this will be an additional burden on the 
hospitals since this data will be abstracted from records already 
submitted.
    Given that we reimburse for the data collection effort, we 
believe that a requirement for 18 charts per hospital per quarter 
represents a minimal burden to participating hospitals selected for 
validation.
    Finally, with respect to our proposed validation requirements, 
we also are proposing for FY 2015 to select additional hospitals for 
validation if they were open under their current CCNs in FY 2012 but 
not selected for validation in the three previous annual Hospital 
IQR Program validation selections. This proposal could affect data 
collection costs and burdens, but we are unable to estimate any 
impact at this time.
    We are proposing to adjust the Hospital IQR Program data 
submission deadline from 4\1/2\ months to 104 days. While the 
proposed shortened time frame may create a new administrative burden 
for hospitals, we believe that this burden is reduced because many 
hospitals currently report AMI, HF, SCIP, and PN data to the Joint 
Commission within 4 months following a discharge quarter. We believe 
that our proposed 104 day deadline is relatively consistent with 
other industry submission deadlines.

D. Effects of Additional Proposed Hospital Value-Based Purchasing 
(VBP) Program Requirements

    Section 1886(o)(1)(B) of the Act directs the Secretary to begin 
making value-based incentive payments under the Hospital VBP Program 
to hospitals for discharges occurring on or after October 1, 2012. 
These incentive payments will be funded for FY 2013 through

[[Page 26066]]

a reduction to the FY 2013 base operating MS-DRG payment for each 
discharge of 1 percent, as required by section 1886(o)(7)(B)(i) of 
the Act. The applicable percentage for FY 2014 is 1.25 percent, for 
FY 2015 is 1.5 percent, for FY 2016 is 1.75 percent, and for FY 2017 
and subsequent years is 2 percent.
    In section IV.B. of the preamble of this proposed rule, we are 
proposing additional requirements for the FY 2014 Hospital VBP 
Program. Specifically, we are proposing the addition of a Medicare 
Spending per Beneficiary Measure, how the proposed measure would be 
scored, and the measure's proposed performance period and proposed 
baseline period. Because this additional measure is claims-based and 
is required for the Hospital IQR Program, its inclusion in the 
Hospital VBP Program does not result in any additional burden 
because the Hospital VBP Program uses data that are required for the 
Hospital IQR Program.

E. Effects of Proposed Requirements for Hospital Readmissions 
Reduction Program

    In section IV.C. of the preamble of this proposed rule, we are 
proposing the selection of three high cost, high volume conditions 
for the Hospital Readmission Reduction Program FY 2013 payment 
reduction, and the definition of readmission for these conditions. 
We also are proposing the use of the following three measures for 
these conditions for the FY 2013 payment determination:
     Heart failure [HF] 30-day Risk Standardized Readmission 
Measure
     Acute Myocardial Infarction [AMI] 30-day Risk 
Standardized Readmission Measure
     Pneumonia [PN] 30-day Risk Standardized Readmission 
Measure
    These three risk-adjusted NQF endorsed measures will be 
calculated by CMS for hospitals subject to this provision using 
Medicare FFS Part A and B claims data, and require no submission of 
additional data by the hospital. Therefore, there is no data 
collection burden associated with this provision for FY 2013. These 
measures also are used under the Hospital IQR Program, and have been 
publicly reported on the Hospital Compare Web site since 2009. 
Therefore, there is a high degree of familiarity and acceptance 
among the stakeholder community with regard to these measures.
    We also are proposing a methodology for calculating the Excess 
Readmission Ratio using these three measures for the FY 2013 payment 
determination. This would be defined as a ratio of the number of 
risk-adjusted readmissions (based on actual readmissions) for the 
given condition at a specified hospital compared with the number of 
readmissions that would be expected for an average hospital caring 
for the same patients. Below is a description of this calculation:
Numerator--Adjusted number of readmissions at specific hospital 
(calculated for each patient and add up results for all patients):

Hospital-specific readmission effect + average hospital contribution 
to readmission risk + [risk factor weights x patient risk factors]

Denominator--Number of readmissions if an average hospital treated 
the same patients (calculated for each patient and summed for all 
patients):
Average hospital contribution to readmission risk + [risk factor 
weights x patient risk factors]

    We are proposing a minimum case threshold of 25 cases for a 
given condition in order to have an Excess Readmission Ratio 
calculated. Using the proposed 25 case threshold, we have analyzed 
the distribution of Excess Readmission Ratio calculations on various 
types of IPPS hospitals. The results of these analyses are shown in 
the three tables below.
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    The three tables above show the distribution of Excess 
Readmission Ratios for AMI hospitalizations, HF hospitalizations, 
and PN hospitalizations respectively. The data for these tables come 
from the publicly-reported risk-standardized rates of readmission 
reported in 2010 on Hospital Compare (representing hospitalizations 
between July 2006 and June 2009). The distributions of the ratios 
are shown only for hospitals with at least 25 cases included in the 
measures over the 3-year period.
    The first column of the tables lists hospital characteristics 
(census region, bed size, teaching status, and urban/rural location) 
and the second column shows the number of hospitals included in the 
distribution for the particular category. For example, for the first 
table, AMI readmission, a total of 2,477 hospitals had at least 25 
included hospitalizations between July 2006 and June 2009. Of these 
hospitals, 148 were in the New England region.
    The third and fourth columns show the number and percentage of 
hospitals (of those with 25 or more cases) in the particular 
category with an Excess Readmission Ratio less than or equal to 1; 
such hospitals would not have their payments adjusted due to the 
Readmission Reduction Program because they would not be found to 
have ``excess'' readmissions. For example in the first table, for 
AMI readmissions, 72 of the 148 hospitals in the New England region 
(that had 25 or more AMI hospitalizations) had an Excess Readmission 
Ratio of less than or equal to 1, which means that 48.6 percent of 
the hospitals in the New England region (with at least 25 cases of 
AMI in 3 years) would not have their payments affected by the 
Hospital Readmission Reduction Program, whereas the remaining 
hospitals would be at risk of a payment reduction based on excess 
readmissions.
    The following eight columns show the distribution of the excess 
readmissions. For example, for AMI, in the New England region the 
mean Excess Readmission Ratio is 1.0060, the lowest 5th percentile 
hospitals had ratios of 0.9172 or less and the highest 95th 
percentile of hospitals had Excess Readmission Ratios of 1.1104 or 
greater.
    The final column of each table shows the number of hospitals, 
within the given category, that are not included in the distribution 
based on sample size. For example, for AMI, in the New England 
region 30 hospitals are not included in the distribution because 
they had fewer than 25 AMI hospitalizations over the 3-year period. 
Currently, 25 hospitalizations is the minimum number of 
hospitalizations for public reporting. Hospitals with fewer than 25 
cases for a given condition do not have risk-standardized rates of 
readmission reported on Hospital Compare. We are proposing to use 
this threshold for inclusion in the Readmission Reduction Program.
    Overall these analyses show, for all three conditions, that in 
all hospital categories approximately half of the hospitals are at 
risk of payment reductions based on excess readmissions. This 
percentage does not vary greatly by region; however for all three 
measures the Mid-Atlantic region has the lowest percentage of 
hospitals with Excess Readmission Ratios of less than or equal to 1 
and, therefore, the Mid-Atlantic region is the region with the 
highest percentage of hospitals at risk of payment reduction. By 
contrast, the Mountain region has the largest percentage of 
hospitals with ratios of less than or equal to 1. The distributions 
do not differ greatly by bed size, though the largest hospitals have 
slightly lower percentages of hospitals with ratios less than or 
equal to 1 for AMI and PN. The distributions do not vary greatly by 
teaching status or rural/urban location for any of the measures.
    We also are proposing to publicly report the readmission rates 
for these three measures on the Hospital Compare Web site using the 
current processes employed for public reporting of these measures, 
which includes a preview period. We believe that this also poses no 
additional burden to hospitals, as they currently employ this system 
for Hospital IQR public reporting.

F. Effects of Proposed Policy Changes Relating to Payment 
Adjustments for Medicare Disproportionate Share Hospitals (DSHs) 
and Indirect Medical Education (IME)

    In section IV.G. of the preamble of this proposed rule, we 
proposed to exclude from the hospital's disproportionate patient 
percentage (DPP) of the Medicare DSH calculation and from the 
available bed day count used to calculate the DSH payment adjustment 
and the IME payment adjustments, patient days for hospice patients 
receiving inpatient hospice services in a hospital setting. For the 
purpose of the DSH payment calculation, the patient days for hospice 
patients receiving inpatient hospice services in the hospital would 
be excluded from both the numerator and the denominator of the 
Medicare and Medicaid fractions. As such, the impact on hospitals' 
DSH payment adjustment would vary based on the demographic 
composition of an individual hospital's patient population. In other 
words, under this proposal, some hospitals may receive increased DSH 
payment adjustments and other hospitals may expect to receive lower 
DSH payment adjustments, depending on the extent to which a hospital 
provides inpatient hospice services to hospice patients.
    The proposed change in policy to exclude from the available bed 
count, patient days for hospice patients receiving hospice services 
in an inpatient hospital setting only impacts DSH payments for 
limited situations. Specifically, urban hospitals with fewer than 
100 beds or rural hospitals with fewer than 500 beds, with the 
exception of rural referral centers or MDHs, are subject to a cap of 
their DSH payment adjustment of 12 percent. Thus, a decrease in the 
number of available beds due to the exclusion of beds used to 
provide inpatient hospice services only impacts a provider's DSH 
payments if it results in the hospital's bed count falling below the 
bed count threshold. Should a hospital fall below the bed count 
threshold, it would become subject to the Medicare DSH payment 
adjustment cap and its DSH payment could decrease.
    For IME payment purposes, a decrease in a hospital's number of 
available beds results in an increase in the resident-to-bed ratio. 
The exclusion of bed days associated with hospice patients from the 
available bed count for IME would reduce the available beds, 
increase the resident-to-bed ratio, and, consequently, may increase 
IME payments to teaching hospitals depending on the extent to which 
these hospitals were providing inpatient hospice services to hospice 
patients.

G. Effects of the FY 2012 Low-Volume Hospital Payment Adjustment

    As discussed in section IV.E. of the preamble to this proposed 
rule, we discuss the provisions of sections 3125 and 10314 of the 
Affordable Care Act that expand eligibility for the low-volume 
hospital payment adjustment at section 1886(d)(12) of the Act for 
FYs 2011 and 2012 to hospitals with less than 1,600 Medicare 
discharges (instead of the prior requirement of less than 800 total, 
Medicare and non-Medicare, discharges) and hospitals that are 
located more than 15 miles from other IPPS hospitals (rather than 
the prior requirement of more than 25 miles). The payment adjustment 
is also changed from an empirically determined additional 25 percent 
payment adjustment to qualifying hospitals with less than 200 total 
discharges (69 FR 49099 through 49102 and 70 FR 47432 through 47434) 
to a continuous, linear sliding scale adjustment ranging from an 
additional 25 percent payment adjustment to qualifying hospitals 
with 200 or fewer Medicare discharges to no additional payment to 
hospitals with 1,600 or more Medicare discharges (75 FR 50241).
    Based on FY 2010 claims data (December 2010 update of the MedPAR 
file), we estimate that 492 out of the 502 hospitals in our database 
that qualified as a low-volume hospital for FY 2011 would continue 
to meet the Medicare discharges criterion to qualify as a low-volume 
hospital for FY 2012. For purposes of this impact analysis, we are 
assuming that all of these 492 hospitals would continue to meet the 
distance criterion in FY 2012. If all 492 hospitals qualified for 
the low-volume payment adjustment in FY 2012, we estimate that these 
hospitals would receive an additional estimated $280 million based 
on the proposed FY 2012 low-volume payment adjustment (described in 
section IV.E. of the preamble of this proposed rule) as compared to 
FY 2012 payments without the proposed low-volume adjustment. (As 
discussed in section IV.E. of the preamble of this proposed rule, 
for FY 2012, we are proposing to determine a hospital's number of 
Medicare discharges based on the most recent update of the FY 2010 
MedPAR files (that is, the December 2010 update for this proposed 
rule.)
    In addition, we identified an additional 89 hospitals in our 
database that would meet the Medicare discharges criterion to 
qualify as a low-volume hospital for FY 2012 based on our proposal 
set forth in section IV.E. of the preamble of this proposed rule. 
(We note that these 89 hospitals did not meet the discharge 
criterion to qualify as a low-volume hospital for FY 2011.) However, 
we are not able to estimate the number of these 89 hospitals that 
would also meet the distance criterion. The actual number of 
hospitals that would also meet the distance criterion to qualify as

[[Page 26071]]

a low-volume hospital would very likely be significantly less than 
the estimated 89 maximum number of potential additional low-volume 
hospitals for FY 2012 (as compared to FY 2011). (We note that 
approximately 40 percent of the hospitals that met the discharge 
criterion for FY 2011 also met the mileage criterion and, therefore, 
are eligible to receive the low-volume payment adjustment in FY 
2011.) If all these 89 hospitals were to qualify as low-volume 
hospitals in FY 2012, we estimate that an additional $26 million in 
payments would be made for the FY 2012 low-volume payment adjustment 
at section 1886(d)(12) of the Act.

H. Effects of Proposed Changes Relating to MDHs

    As discussed in section IV.H. of the preamble to this proposed 
rule, section 3124 of Public Law 111-148 extended the MDH program 
for 1 additional year, from the end of FY 2011 (that is, for 
discharges before October 1, 2011) to the end of FY 2012 (that is, 
for discharges before October 1, 2012). The extension had no impact 
on FY 2011. For FY 2012, the extension allows the continuation of 
MDH status and the payment methodology, for an MDH to be paid its 
hospital-specific rate, based on its FY 1982, 1987, or 2002 updated 
costs per discharge, rather than the Federal rate, if this results 
in a greater aggregate payment. Therefore, the impact of the 
extension is one additional year of hospital-specific rate payments, 
when greater than Federal rate payments, for these hospitals as 
MDHs, rather than Federal rate payments for these hospitals without 
special treatment as MDHs.

I. Effects of Proposed Policy Relating to CRNA Services Furnished 
in Rural Hospitals and CAHs

    In section IV.I. of this preamble of this proposed rule, we 
discuss the interim final rule with comment that appeared in the 
November 24, 2010 Federal Register (75 FR 72256) regarding pass-
through payment for CRNA services. In that interim final rule with 
comment period, we stated that we were changing the effective date 
of our policy to allow hospitals and CAHs that have reclassified as 
rural under 42 CFR 412.103 to be eligible for CRNA pass-through from 
``cost reporting periods beginning on or after October 1, 2010'' to 
``December 2, 2010.'' In section IV.I. of the preamble of this 
proposed rule, we state that we intend to respond to comments 
received on the interim final rule with comment period in the FY 
2012 IPPS/LTCH PPS final rule. Also in the interim final rule with 
comment (75 FR 72258), we stated that a change to the effective date 
would only affect at most a small subset of hospitals and CAHs 
affected by the change to the regulations adopted in the FY 2010 
IPPS/LTCH PPS final rule and, for this reason, we expected the 
change to the effective date in the interim final rule with comment 
period to have a minor impact on Federal expenditures.

J. Effects of Proposed Changes Relating to ESRD Add-On Payment

    In section IV.L. of the preamble of this proposed rule, we 
discuss our proposal to clarify that the term ``Medicare 
discharges'' as used in Sec.  412.104(a) refers to discharges of all 
beneficiaries entitled to Medicare Part A; that is, discharges 
associated with individuals entitled to Part A, including discharges 
of individuals receiving benefits under original Medicare, 
discharges of individuals whose inpatient benefits are exhausted or 
whose stay was not covered by Medicare, and discharges for 
individuals enrolled in Medicare Advantage Plans, cost contracts 
under section 1876 of the Act (health maintenance organizations 
(HMOs)) and competitive medical plans (CMPs).
    We are not able to provide a detailed analysis of the impact of 
the clarification of this definition. We are not proposing any 
changes to the existing regulations at Sec.  412.104 under which we 
will continue to provide an additional Medicare payment to a 
hospital for inpatient services provided to Medicare beneficiaries 
with ESRD who receive a dialysis treatment during a hospital stay, 
if the hospital has established that ESRD Medicare beneficiary 
discharges, excluding certain MS-DRGs for renal failure, admission 
for renal dialysis, and kidney transplant, where the beneficiary 
received dialysis services during the inpatient stay, are 10 percent 
or more of its total Medicare discharges. We note that this 
clarification could change both the denominator (total Medicare 
discharges) and the numerator (ESRD Medicare beneficiary discharges, 
excluding certain MS-DRGs for renal failure, admission for renal 
dialysis, and kidney transplant) associated with this calculation. 
As a result of our proposed clarification, these discharges would be 
included in the denominator of the calculation for the determination 
of eligibility for the ESRD additional payment to hospitals. 
Similarly, for the numerator of this calculation, we also would 
include all discharges of ESRD beneficiaries who are entitled to 
Medicare Part A and who receive inpatient dialysis, subject to the 
exclusions of certain MS-DRG codes described above. Depending on 
whether or not the additional discharges are for ESRD beneficiaries, 
the calculation may increase or decrease.

K. Effects of Proposed Changes Relating to the Reporting 
Requirements for Pension Costs for Medicare Cost-Finding and Wage 
Reporting Purposes

    In sections III.D.3. and IV.M. of the preamble of this proposed 
rule, we are proposing to revise our policy for determining pension 
cost for Medicare purposes. We are setting forth two distinct 
proposals: One proposal for determining and reporting defined 
benefit pension costs on the cost report for Medicare cost finding 
purposes and the other for determining and reporting defined benefit 
pension costs for Medicare wage index purposes. The allowable 
pension cost under the current rules and the proposed policies are 
based on the amount funded. The current rules impose an actuarially 
based limit on the allowable amount and the proposed rules limit the 
costs based on historical funding data. Because the current rules 
and the proposed policies are both tied to the amount funded, we 
expect that there would be minimal impact. We note that it is not 
possible to determine a precise impact for Medicare cost-finding 
purposes because we do not currently have data in the form and 
manner required to calculate the pension costs for all providers 
under our proposal. Moreover, because we lack these data, we are 
unable to determine a hospital-level impact for the Medicare wage 
index. We note that our proposal may result in redistribution within 
the Medicare wage index, but section 1886(d)(3)(E) of the Act 
requires any adjustments or updates made to the Medicare wage index 
to be budget neutral.

L. Effects of Implementation of Rural Community Hospital 
Demonstration Program

    In section IV.N. of the preamble of this proposed rule, we 
discuss our implementation of section 410A of Public Law 108-173, as 
amended, which, prior to the amendments made by the Affordable Care 
Act, required the Secretary to establish a demonstration that would 
modify reimbursement for inpatient services for up to 15 small rural 
hospitals. Section 410A(c)(2) requires that ``[i]n conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' As discussed in 
section IV.N. of the preamble of this proposed rule, in the IPPS 
final rules for each of the previous 7 fiscal years, we have 
estimated the additional payments made by the program for each of 
the participating hospitals as a result of the demonstration. In 
order to achieve budget neutrality, we are proposing to adjust the 
national IPPS rates by an amount sufficient to account for the added 
costs of this demonstration. In other words, we are proposing to 
apply budget neutrality across the payment system as a whole rather 
than merely across the participants of this demonstration. We 
believe that the language of the statutory budget neutrality 
requirement permits the agency to implement the budget neutrality 
provision in this manner. The statutory language requires that 
``aggregate payments made by the Secretary do not exceed the amount 
which the Secretary would have paid if the demonstration * * * was 
not implemented'' but does not identify the range across which 
aggregate payments must be held equal.
    An extension of this demonstration was mandated by the 
Affordable Care Act. The demonstration is extended for an additional 
5 years and expanded to include up to a total of 30 hospitals. We 
are proposing to make an adjustment in the FY 2012 IPPS final rule 
of $52,642,213 to the national IPPS rates. This amount accounts for 
an estimate of the demonstration cost for FY 2012 for the 8 
hospitals that are currently participating in the demonstration and, 
in addition, an estimate of the cost of participation in the 
demonstration for the 19 additional hospitals selected to 
participate as a result of the expansion of the demonstration under 
the Affordable Care Act. In addition, for this FY 2012 proposed 
rule, we are proposing that the budget neutrality adjustment also 
account for any differences between the cost of the

[[Page 26072]]

demonstration program for hospitals participating in the 
demonstration during FYs 2007 and 2008, represented by their cost 
reports beginning in FYs 2007 and 2008, and the amount that was 
offset by the budget neutrality adjustment for FYs 2007 and 2008. 
The estimated $52,642,213 that we are proposing to offset does not 
account for any differences between the cost of the demonstration 
program for hospitals participating in the demonstration during FYs 
2007 and 2008 and the amount that was offset by the budget 
neutrality adjustment for FYs 2007 and 2008 because the specific 
numeric value associated with this component of the proposed 
adjustment to the national IPPS rates cannot be known at this time. 
This is because settled cost reports beginning in FYs 2007 and 2008 
of the hospitals participating during FYs 2007 and 2008 in the 
demonstration are not available yet. We anticipate that those 
settled cost reports may be available prior to the publication of 
the FY 2012 IPPS/LTCH PPS final rule. To this extent that they 
become available prior to publication of the FY 2012 IPPS/LTCH PPS 
final rule, under our proposal these costs would be included in the 
amount to be offset by the FY 2012 budget neutrality adjustment.

M. Effects of Proposed Changes to the List of MS-DRGs Subject To 
Postacute Care Transfer and DRG Special Pay Policy

    In section IV.P. of the preamble to this proposed rule, we 
discuss proposed changes to the list of MS-DRGs subject to the 
postacute care transfer and DRG special payment policies. As 
reflected in Table 5 listed in section VI of the Addendum to this 
proposed rule and available via the Internet, using criteria set 
forth in regulation at Sec.  412.4, we evaluated MS-DRG charges, 
discharge, and transfer data to determine which MS-DRGs qualify for 
the postacute care transfer and DRG special pay policies. We note 
that we are making no proposal to change these payment policies in 
this FY 2012 proposed rule. We are proposing to change the status of 
certain MS-DRGs as a result of proposals to revise the MS-DRGs for 
FY 2012. We are proposing to change the status of eight MS-DRGs to 
qualify for the postacute care transfer policy in FY 2012, after not 
qualifying in FY 2011. An additional five MS-DRGs that qualified 
under the policy in FY 2011 do not qualify in FY 2012, and we are 
proposing to change their statuses accordingly. Finally, three MS-
DRGs now qualify for the MS-DRG special pay policy in FY 2012 after 
not qualifying in FY 2011, and we are proposing to add them to the 
list of qualifying MS-DRGs. Column 4 of Table I in this Appendix A 
shows the effects of the proposed changes to the MS-DRGs and 
relative weights with the application of the recalibration budget 
neutrality factor to the standardized amounts. Section 
1886(d)(4)(C)(i) of the Act requires us annually to make appropriate 
classification changes in order to reflect changes in treatment 
patterns, technology, and any other factors that may change the 
relative use of hospital resources. The analysis and methods 
determining the proposed changes due to the MS-DRGs and relative 
weights accounts for and includes changes in MS-DRG postacute care 
transfer and special pay policy statuses. We refer readers to 
section VI.D. of this Appendix for a more detailed discussion of 
payment impacts due to MS-DRG reclassification policies.

N. Effects of Proposed Changes Relating to Hospital Services 
Furnished Under Arrangements

    In section VI.B. of the preamble of this proposed rule, we are 
proposing to clarify that only diagnostic and therapeutic services 
(that is, ancillary services) may be provided outside the hospital 
under arrangement. Routine services must be provided in the hospital 
in which the patient is a registered inpatient. We are aware of only 
a few cases where routine services are being provided outside the 
hospital other than where the patient is a registered inpatient. 
Therefore, we have determined that the impact of this clarification 
is negligible.

O. Effects of Proposed Change Relating to CAH Payment for Ambulance 
Services

    In section VI.C. of the preamble of this proposed rule, we 
discuss our proposal to revise the regulations at Sec.  413.70(b)(5) 
to state that, effective for cost reporting periods beginning on or 
after October 1, 2011, payment for ambulance services furnished by a 
CAH or by a CAH-owned entity is 101 percent of the reasonable costs 
of the CAH or the entity in furnishing those services, but only if 
the CAH or the entity is the only provider or supplier of ambulance 
services located within a 35-mile drive of the CAH. In addition, we 
are proposing to revise the regulations at Sec.  413.70(b)(5) to 
state that, effective for cost reporting periods beginning on or 
after October 1, 2011, if there is no provider or supplier of 
ambulance services located within a 35-mile drive of the CAH, but 
there is a CAH-owned and operated entity located more than a 35-mile 
drive from the CAH, the CAH owned and operated entity would be paid 
at 101 percent of reasonable cost for its ambulance services as long 
as that entity is the closest provider or supplier of ambulance 
services to the CAH. We believe this proposal would continue to 
allow for sufficient ambulance services to CAHs. We do not have 
sufficient information or data to determine how many CAH-owned and 
operated entities would qualify under the proposal. As a result, we 
are unable to quantify the financial impact of this proposed for 
payment based on 101 percent of reasonable cost. However, even those 
entities that do not qualify for payment based on 101 percent of 
reasonable cost would be paid for ambulance services under the 
Medicare ambulance fee schedule.

VIII. Effects of Proposed Changes in the Capital IPPS

A. General Considerations

    For the impact analysis presented below, we used data from the 
December 2010 update of the FY 2010 MedPAR file and the December 
2010 update of the Provider-Specific File (PSF) that is used for 
payment purposes. Although the analyses of the proposed changes to 
the capital prospective payment system do not incorporate cost data, 
we used the December 2010 update of the most recently available 
hospital cost report data (FYs 2008 and 2009) to categorize 
hospitals. Our analysis has several qualifications. We use the best 
data available and make assumptions about case-mix and beneficiary 
enrollment as described below. In addition, as discussed in section 
V.E. of the preamble to this proposed rule, we are proposing to make 
a -1.0 percent documentation and coding adjustment to the national 
capital rate for FY 2012 in addition to the -0.6 percent adjustment 
established for FY 2008, the -0.9 percent adjustment for FY 2009, 
and the -2.9 percent adjustment for FY 2011. This results in a 
proposed cumulative adjustment factor of 0.9479 that we applied in 
determining the proposed FY 2012 national capital rate to account 
for improvements in documentation and coding that do not reflect 
real changes in case mix under the MS-DRGs. We note that we applied 
a -2.6 percent documentation and coding adjustment to the Puerto 
Rico-specific capital rate in FY 2011, which reflects the entire 
amount of our current estimate of the effects of documentation for 
FYs 2008 and 2009 that do not reflect real changes in case-mix under 
the MS-DRGs. Therefore, we are not proposing to adjust the proposed 
Puerto Rico-specific capital rate in FY 2012 to account for changes 
in documentation and coding.
    Due to the interdependent nature of the IPPS, it is very 
difficult to precisely quantify the impact associated with each 
proposed change. In addition, we draw upon various sources for the 
data used to categorize hospitals in the tables. In some cases (for 
instance, the number of beds), there is a fair degree of variation 
in the data from different sources. We have attempted to construct 
these variables with the best available sources overall. However, it 
is possible that some individual hospitals are placed in the wrong 
category.
    Using cases from the December 2010 update of the FY 2010 MedPAR 
file, we simulated payments under the capital IPPS for FY 2011 and 
FY 2012 for a comparison of total payments per case. Any short-term, 
acute care hospitals not paid under the general IPPS (Indian Health 
Service hospitals and hospitals in Maryland) are excluded from the 
simulations.
    The methodology for determining a capital IPPS payment is set 
forth at Sec.  412.312. The basic methodology for calculating 
proposed capital IPPS payments in FY 2012 is as follows:
    (Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for 
hospitals located in Alaska and Hawaii) x (1 + DSH Adjustment Factor 
+ IME adjustment factor, if applicable).
    In addition to the other proposed adjustments, hospitals may 
also receive outlier payments for those cases that qualify under the 
threshold established for each fiscal year. We modeled payments for 
each hospital by multiplying the capital Federal rate by the GAF and 
the hospital's case-mix. We then added estimated payments for 
indirect medical education, disproportionate share, and outliers, if 
applicable. For purposes of this impact analysis, the model includes 
the following assumptions:

[[Page 26073]]

     We estimate that the Medicare case-mix index would 
increase by 1.0 percent in both FYs 2011 and 2012.
     We estimate that the Medicare discharges would be 
approximately 11.8 million in FY 2011 and 12.2 million in FY 2012.
     The capital Federal rate was updated beginning in FY 
1996 by an analytical framework that considers changes in the prices 
associated with capital-related costs and adjustments to account for 
forecast error, changes in the case-mix index, allowable changes in 
intensity, and other factors. As discussed in section III.A.1.a. of 
the preamble of this proposed rule, the proposed update is 1.5 
percent for FY 2012.
     In addition to the proposed FY 2012 update factor, the 
proposed FY 2012 capital Federal rate was calculated based on a 
proposed GAF/DRG budget neutrality factor of 1.0005, and a proposed 
outlier adjustment factor of 0.9406. As discussed in section 
III.A.4. of the Addendum to this proposed rule, an exceptions 
adjustment factor is not necessary in FY 2012 because there are no 
longer any hospitals eligible to receive special exceptions payments 
in FY 2012. However, the special exceptions adjustment factor was 
not built permanently into the capital rate; that is, was not 
applied cumulatively. Therefore, because there will be no special 
exceptions payments in FY 2012, we are only applying an adjustment 
to restore the special exceptions adjustment that was applied to the 
FY 2011 capital rate, that is, 1.0004 (calculated as 1/0.9996).
     For FY 2012, as discussed above and in section V.E. of 
the preamble to this proposed rule, we are proposing to apply a 
cumulative 0.9479 adjustment in determining the proposed FY 2012 
national capital rate for changes in documentation and coding that 
are expected to increase case-mix under the MS-DRGs but do not 
reflect real case-mix change. This cumulative adjustment of 0.9479 
reflects the proposed additional -1.0 percent adjustment in FY 2012 
for the effects of documentation and coding in FYs 2008 and 2009.

B. Results

    We used the actuarial model described above to estimate the 
potential impact of our proposed changes for FY 2012 on total 
capital payments per case, using a universe of 3,419 hospitals. As 
described above, the individual hospital payment parameters are 
taken from the best available data, including the December 2010 
update of the FY 2010 MedPAR file, the December 2010 update to the 
PSF, and the most recent cost report data from the December 2010 
update of HCRIS. In Table III, we present a comparison of estimated 
total payments per case for FY 2011 and estimated total payments per 
case proposed for FY 2012 based on the proposed FY 2012 payment 
policies. Column 2 shows estimates of payments per case under our 
model for FY 2011. Column 3 shows estimates of payments per case 
under our model for FY 2012. Column 4 shows the total percentage 
change in payments from FY 2011 to FY 2012. The proposed change 
represented in Column 4 includes the proposed 1.5 percent update to 
the capital Federal rate and other proposed changes in the 
adjustments to the capital Federal rate. The comparisons are 
provided by: (1) Geographic location; (2) region; and (3) payment 
classification.
    The simulation results show that, on average, proposed capital 
payments per case in FY 2012 are expected to increase as compared to 
capital payments per case in FY 2011. The proposed capital rate for 
FY 2012 would increase approximately 0.60 percent as compared to the 
FY 2011 capital rate. The proposed changes to the GAFs are expected 
to result, on average, in a slight decrease in capital payments for 
most regions with the following exceptions. We estimate that the 
GAFs will result in a slight increase in capital payments for the 
West North Central and West South Central urban and rural regions, 
as well as a slight increase for Puerto Rico and the Pacific rural 
region. The West North Central urban and rural regions include the 
frontier States that have a wage index of no less than 1.0 under the 
provisions of section 10324 of the Affordable Care Act, which 
creates the slight increase in capital IPPS payments for FY 2012. 
For the West South Central urban and rural regions, increases in 
their wage data are creating the estimated increase in their FY 2012 
capital IPPS payments. The GAFs for hospitals located in Puerto Rico 
results in a positive effect in estimated capital IPPS payments in 
FY 2012 because of the application of a Puerto Rico rural floor--FY 
2012 is the first year an IPPS hospital is located in rural Puerto 
Rico and, therefore, setting a rural floor. The most significant 
increase resulting from the proposed changes to the GAFs is for the 
New England urban region. We estimate the proposed changes to the 
GAFs would result in a 3.9 percent increase in capital payments per 
case in FY 2012 compared to FY 2011 due to the application of the 
rural floor in Massachusetts. Previously, there had been no IPPS 
hospitals in Massachusett's rural areas, but the conversion of a CAH 
in rural Massachusetts to an IPPS hospital has set a rural floor for 
that State for FY 2012.
    We also are estimating a slight decrease in outlier payments 
from FY 2011 to FY 2012 due primarily to an estimated increase in 
capital IPPS payments per discharge. Because capital payments per 
discharge are projected to be higher in FY 2012 compared to FY 2011, 
fewer cases would qualify for outlier payments.
    The net impact of these proposed changes, as discussed above, is 
an estimated 1.7 percent change in capital payments per discharge 
from FY 2011 to FY 2012 for all hospitals (as shown below in Table 
III).
    The geographic comparison shows that, on average, all hospitals, 
urban and rural, are expected to experience an increase in capital 
IPPS payments per case in FY 2012 as compared to FY 2011. Capital 
IPPS payments per case for urban hospitals are estimated to increase 
1.7 percent, while rural hospitals are expected to experience a 1.4 
percent increase.
    The change comparisons by region shows that most urban regions 
would experience, on average, increases in capital IPPS payments of 
between 1.0 percent for the East North Central urban region, and 5.4 
percent for the New England urban region. As discussed above, the 
New England urban region is estimated to have a larger than average 
increase in capital payments per case in FY 2012 as compared to FY 
2011 due to the application of a rural floor. The rural regions show 
estimates of a 0.8 percent change in capital payments from FY 2011 
to FY 2012 in the East North Central rural region to a 3.0 percent 
increase for the Puerto Rico rural region. This estimated increase 
in capital IPPS payments for the Puerto Rico rural region is due to 
the application of a rural floor, as discussed above.
    By type of ownership, government hospitals are estimated to 
experience a 1.6 percent increase in capital payments per case; 
voluntary hospitals, an estimated 1.7 percent increase in capital 
payments; and proprietary hospitals, an estimated 1.8 percent 
increase in capital payments from FY 2011 to FY 2012.
    Section 1886(d)(10) of the Act established the MGCRB. Hospitals 
may apply for reclassification for purposes of the wage index for FY 
2012. Reclassification for wage index purposes also affects the GAFs 
because that factor is constructed from the hospital wage index.
    To present the effects of the hospitals being reclassified for 
FY 2012, we show the average capital payments per case for 
reclassified hospitals for FY 2011. All reclassified and non-
reclassified hospitals are expected to experience an increase in 
capital payments in FY 2012 as compared to FY 2011. Urban 
reclassified hospitals are estimated to experience the largest 
increase of 1.9 percent, while urban nonreclassified and rural 
reclassified are both estimated to have a 1.6 percent increase. For 
rural nonreclassified hospitals, the estimated increase in capital 
payments per case is 1.2 percent. Other reclassified hospitals (that 
is, hospitals reclassified under section 1886(d)(8)(B) of the Act) 
are expected to experience an increase of 0.7 percent in capital 
payments from FY 2011 to FY 2012.
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IX. Effects of Proposed Payment Rate Changes and Policy Changes Under 
the LTCH PPS

A. Introduction and General Considerations

    In section VII. of the preamble and section V. of the Addendum 
to this proposed rule, we set forth the annual update to the payment 
rates for the LTCH PPS for FY 2012. In the preamble, we specify the 
statutory authority for the proposed provisions that are presented, 
identify those proposed policies, and present rationales for our 
proposed decisions as well as alternatives that were considered. In 
this section of Appendix A to this proposed rule, we discuss the 
impact of the proposed changes to the payment rates, factors, and 
other payment rate policies related to the LTCH PPS that are 
presented in the preamble of this proposed rule in terms of their 
estimated fiscal impact on the Medicare budget and on LTCHs.
    Currently, our database of 422 LTCHs includes the data for 82 
nonprofit (voluntary ownership control) LTCHs and 322 proprietary 
LTCHs. Of the remaining 18 LTCHs, 12 LTCHs are government-owned and 
operated and the ownership type of the other 6 LTCHs is unknown. In 
the impact analysis, we used the proposed rates, factors, and 
policies presented in this proposed rule, including the proposed 1.5 
percent annual update, which is based on the full increase of the 
proposed LTCH PPS market basket and the reductions required by 
sections 1886(m)(3) and (m)(4) of the Act, the proposed update to 
the MS-LTC-DRG classifications and relative weights, the proposed 
update to the wage index values and labor-related share, including 
the proposed application of a budget neutrality adjustment for 
changes to the area wage adjustment, and the best available claims 
and CCR data to estimate the change in payments for FY 2012. The 
proposed standard Federal rate for FY 2012 is $40,082.61. This 
proposed rate reflects the proposed 1.5 percent annual update to the 
standard Federal rate and the proposed area wage level budget 
neutrality factor of 0.99723, which ensures that the proposed 
changes in the wage indexes and labor-related share do not influence 
estimated aggregate payments.
    Based on the best available data for the 422 LTCHs in our 
database, we estimate that the proposed update to the standard 
Federal rate for FY 2012 (discussed in section V.A.2. of the 
Addendum to this proposed rule) and the proposed changes to the area 
wage adjustment for FY 2012 (discussed in section V.B. of the 
Addendum to this proposed rule), in addition to an estimated 
increase in HCO payments and an estimated increase in SSO payments, 
would result in an increase in estimated payments from FY 2011 of 
approximately $95.0 million (or about 1.9 percent). Based on the 422 
LTCHs in our database, we estimate FY 2012 LTCH PPS payments to be 
approximately $5.233 billion, an increase from FY 2011 LTCH PPS 
payments which were approximately $5.138 billion. Because the 
combined distributional effects and estimated changes to the 
Medicare program payments are approximately $100 million, this 
proposed rule is considered a major economic rule, as defined in 
this section. We note the approximately $95 million for the 
projected increase in estimated aggregate proposed LTCH PPS payments 
from FY 2011 to FY 2012 does not reflect changes in LTCH admissions 
or case-mix intensity in estimated LTCH PPS payments, which also 
would affect overall payment changes.
    The projected 1.9 percent increase in estimated proposed 
payments per discharge from FY 2011 to FY 2012 is attributable to 
several factors, including the proposed 1.5 percent annual update to 
the standard Federal rate, and projected increases in proposed 
estimated HCO and SSO payments. As Table IV shows, the change 
attributable

[[Page 26076]]

solely to the proposed update to the standard Federal rate is 
projected to result in an increase of 1.3 percent in estimated 
payments per discharge from FY 2011 to FY 2012, on average, for all 
LTCHs. Because we are proposing to apply an area wage level budget 
neutrality factor to the standard Federal rate, the proposed update 
to the wage data and labor-related share does not impact the 
proposed increase in payments.
    As discussed in section V.B. of the Addendum to this proposed 
rule, we are proposing to update the wage index values for FY 2012 
based on the most recent available data. In addition, we are 
proposing a decrease in the labor-related share from 75.271 percent 
to 70.334 percent under the LTCH PPS for FY 2012, based on the most 
recent available data on the relative importance of the proposed 
labor-related share of operating and capital costs of the proposed 
FY 2008-based RPL market basket. We also are proposing to apply an 
area wage level budget neutrality factor to the standard Federal 
rate to ensure that annual changes to the area wage level adjustment 
(that is, the wage index and labor-related changes) are budget 
neutral. We are proposing an area wage level budget neutrality 
factor of 0.99723, which reduces the proposed standard Federal rate 
by 0.28 percent. Therefore, the proposed changes to the wage data 
and labor-related share do not result in a change in aggregate LTCH 
PPS payments.
    Table IV below shows the impact of the proposed payment rate and 
proposed policy changes on LTCH PPS payments for FY 2012 presented 
in this proposed rule by comparing estimated FY 2011 payments to 
estimated FY 2012 payments. The projected increase in payments per 
discharge from FY 2011 to FY 2012 is 1.9 percent (shown in Column 
8). This projected increase in payments is attributable to the 
impacts of the proposed change to the standard Federal rate (1.3 
percent in Column 6), as well as the effect of the estimated 
increase in payments for HCO cases and SSO cases in FY 2012 as 
compared to FY 2011 (0.2 percent and 0.3 percent, respectively). 
That is, estimated total HCO payments are projected to increase from 
FY 2011 to FY 2012 in order to ensure that estimated HCO payments 
would be 8 percent of the total estimated LTCH PPS payments in FY 
2012. An analysis of the most recent available LTCH PPS claims data 
(that is, FY 2010 claims data from the December 2010 update of the 
MedPAR file) indicates that the FY 2011 HCO threshold of $18,785 (as 
established in the FY 2011 IPPS/LTCH PPS final rule) may result in 
HCO payments in FY 2011 that fall slightly below the estimated 8 
percent. Specifically, we currently estimate that HCO payments would 
be approximately 7.8 percent of the estimated total LTCH PPS 
payments in FY 2011. We estimate that the impact of the increase in 
HCO payments would result in approximately a 0.2 percent increase in 
estimated payments from FY 2011 to FY 2012, on average, for all 
LTCHs. Furthermore, in calculating the estimated increase in 
payments from FY 2011 to FY 2012 for HCO and SSO cases, we increased 
estimated costs by the applicable market basket percentage increase 
as projected by our actuaries, which increases estimated payments by 
0.3 percent relative to last year. We note that estimated payments 
for all SSO cases comprise approximately 13 percent of the estimated 
total LTCH PPS payments, and estimated payments for HCO cases 
comprise approximately 8 percent of the estimated total LTCH PPS 
payments. Payments for HCO cases are based on 80 percent of the 
estimated cost of the case above the HCO threshold, while the 
majority of the payments for SSO cases (over 65 percent) are based 
on the estimated cost of the SSO case.
    As we discuss in detail throughout this proposed rule, based on 
the most recent available data, we believe that the provisions of 
this proposed rule relating to the LTCH PPS would result in an 
increase in estimated aggregate LTCH PPS payments and that the 
resulting LTCH PPS payment amounts would result in appropriate 
Medicare payments.

B. Impact on Rural Hospitals

    For purposes of section 1102(b) of the Act, we define a small 
rural hospital as a hospital that is located outside of an urban 
area and has fewer than 100 beds. As shown in Table IV, we are 
projecting a 2.8 percent increase in estimated payments per 
discharge for FY 2012 as compared to FY 2011 for rural LTCHs that 
would result from the proposed changes presented in this proposed 
rule, as well as the effect of estimated changes to HCO and SSO 
payments. This estimated impact is based on the data for the 26 
rural LTCHs in our database (out of 422 LTCHs) for which complete 
data were available.
    The estimated increase in LTCH PPS payments from FY 2011 to FY 
2012 for rural LTCHs is primarily due to the higher than average 
impacts from the proposed changes to the area wage level adjustment, 
specifically, the proposed reduction to the labor-related share from 
75.271 to 70.334. Although we are proposing to apply an area wage 
level budget neutrality factor for proposed changes to the wage 
indexes and labor-related share to ensure that there is no change in 
aggregate LTCH PPS payments due to those changes, we estimate rural 
hospitals would experience a 0.8 percent increase in payments due to 
the proposed changes to the area wage level adjustment, as shown in 
Column 7 below. Rural hospitals generally have a wage index of less 
than 1; therefore, a proposed decrease to the labor-related share 
results in their proposed wage index reducing a smaller portion of 
the standard Federal rate, resulting in an estimated increase in 
payments in FY 2012 as compared to FY 2011.

C. Anticipated Effects of Proposed LTCH PPS Payment Rate Change and 
Policy Changes

1. Budgetary Impact

    Section 123(a)(1) of the BBRA requires that the PPS developed 
for LTCHs ``maintain budget neutrality.'' We believe that the 
statute's mandate for budget neutrality applies only to the first 
year of the implementation of the LTCH PPS (that is, FY 2003). 
Therefore, in calculating the FY 2003 standard Federal rate under 
Sec.  412.523(d)(2), we set total estimated payments for FY 2003 
under the LTCH PPS so that estimated aggregate payments under the 
LTCH PPS were estimated to equal the amount that would have been 
paid if the LTCH PPS had not been implemented.
    As discussed above in section IX.A. of this Appendix, we project 
an increase in aggregate LTCH PPS payments in FY 2012 of 
approximately $95 million (or 1.9 percent) based on the 422 LTCHs in 
our database.

2. Anticipated Effects of Proposed Requirements for LTCH Quality 
Reporting Program

    In section VII.C. of the preamble of this proposed rule, we 
discuss our proposed requirements for LTCHs to report quality data 
under the LTCH quality reporting program. As set forth at section 
1886(m)(5)(A) of the Act, beginning with FY 2014, the Secretary must 
reduce by 2.0 percentage points any annual update to the standard 
Federal rate for discharges for any LTCH which does not comply with 
the LTCH quality data submission requirements. When the policy is 
implemented for FY 2014, we estimate that few LTCHs would not 
receive the full payment update in any fiscal year. We believe that 
most of these LTCHs would be either small rural or small urban 
LTCHs. However, at this time, information is not available to 
determine the precise number of LTCHs that will not meet the 
requirements for the full hospital market basket increase for FY 
2014.
    In section VII.C. of the preamble of this proposed rule, we are 
proposing three quality reporting measure for LTCHs for FY 2014: (1) 
Catheter-Associated Urinary Tract Infections (CAUTI); (2) Central 
Line Catheter-Associated Blood Stream Infection Event (CLABSI); and 
(3) Pressure Ulcers that are New or Have Worsened. We estimate that 
the total LTCH costs to report these data, including: NHSN 
registration and training for the CAUTI and CLABSI quality measures; 
data submission for all three measures, and monitoring data 
submission to be $1,128,440.

3. Impact of Proposed Application of LTCH Moratorium on the Increase in 
Beds at Section 114(d)(1)(B) of Public Law 110-173 (MMSEA) to LTCHs and 
LTCH Satellite Facilities Established or Classified as Such Under 
Section 114(d)(1)(B) of Public Law 110-173

    As discussed in section VII.F. of the preamble of this proposed 
rule, at proposed Sec.  412.23(e)(8), for the period beginning 
October 1, 2011, and ending December 28, 2012, we are proposing to 
apply the moratorium on the increase in the number of beds under 
section 114(d)(1)(B) of the MMSEA, and specified in paragraph (e)(7) 
to LTCHs and LTCH satellite facilities that were established or 
classified as such after the December 29, 2007 under one of the 
exceptions to the moratorium at section 114(d)(2) of the MMSEA, as 
set forth in paragraph (e)(6)(ii). The proposed regulation precludes 
an LTCH or LTCH satellite that was developed under an exception to 
the establishment of new LTCHs and LTCH satellites from increasing 
the number of Medicare-certified beds beyond the initial number for 
which the facility was first paid under the LTCH PPS. Approximately 
50 LTCHs and 8 satellite facilities were developed under the 
exceptions at Sec.  412.23(e)(6)(ii). Because additional

[[Page 26077]]

increases in the number of LTCH beds in these facilities could 
result in added costs to the Medicare program, the impact of 
precluding additional growth in the number of Medicare certified 
beds in these facilities is expected to result in no additional 
spending under the Medicare program from these LTCHs and LTCH 
satellites.

4. Impact of the Proposed Clarification to the Greater than 25 Day 
Average Length of Stay Requirement for LTCHs

    In section VII.E.5. of the preamble of this proposed rule, we 
have proposed two clarifications to our existing policy for 
determining whether a hospital is meeting the greater than 25 day 
average length of stay requirement for payment under the LTCH PPS. 
First, we are proposing to clarify and revise the regulations at 
Sec.  412.23(e)(3)(iv) dealing with the average length of stay 
determination when there is a change of ownership of either a 
hospital seeking to qualify as an LTCH or of an existing LTCH. 
Second, we describe, and are proposing to clarify, our existing 
policy regarding the inclusion of Medicare Advantage days in the 
average length of stay calculation. Because typically LTCHs track 
the lengths of stay of their Medicare patients on an on-going basis 
for purposes of maintaining their LTCH status and Medicare 
contractors are already tasked with evaluating each LTCH's average 
length of stay, we do not believe that there is any actual impact 
resulting from the clarification of these existing policies nor do 
they impose any additional burdens on either LTCHs or Medicare 
contractors.

5. Impact on Providers

    The basic methodology for determining a per discharge LTCH PPS 
payment is set forth in Sec.  412.515 through Sec.  412.536. In 
addition to the basic MS-LTC-DRG payment (the standard Federal rate 
multiplied by the MS-LTC-DRG relative weight), we make adjustments 
for differences in area wage levels, the COLA for Alaska and Hawaii, 
and SSOs. Furthermore, LTCHs may also receive HCO payments for those 
cases that qualify based on the threshold established each year.
    To understand the impact of the proposed changes to the LTCH PPS 
payments presented in this proposed rule on different categories of 
LTCHs for FY 2012, it is necessary to estimate payments per 
discharge for FY 2011 using the rates, factors (including the FY 
2011 GROUPER (Version 28.0)), and relative weights and the policies 
established in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50364 
through 50400 and 50442 through 50449). It is also necessary to 
estimate the payments per discharge that would be made under the 
proposed LTCH PPS rates, factors, policies, and GROUPER (proposed 
Version 29.0) for FY 2012 (as discussed in VII. of the preamble and 
section V. of the Addendum to this proposed rule). These estimates 
of FY 2011 and FY 2012 LTCH PPS payments are based on the best 
available LTCH claims data and other factors, such as the 
application of inflation factors to estimate costs for SSO and HCO 
cases in each year. We also evaluated the proposed change in 
estimated FY 2011 payments to estimated FY 2012 payments (on a per 
discharge basis) for each category of LTCHs.
    Hospital groups were based on characteristics provided in the 
OSCAR data, FY 2008 through FY 2009 cost report data in HCRIS, and 
PSF data. Hospitals with incomplete characteristics were grouped 
into the ``unknown'' category. Hospital groups include the 
following:
     Location: Large urban/other urban/rural.
     Participation date.
     Ownership control.
     Census region.
     Bed size.
    To estimate the impacts of the proposed payment rates and policy 
changes among the various categories of existing providers, we used 
LTCH cases from the FY 2010 MedPAR file to estimate payments for FY 
2011 and to estimate payments for FY 2012 for 422 LTCHs. We believe 
that the discharges based on the FY 2010 MedPAR data for the 422 
LTCHs in our database, which includes 322 proprietary LTCHs, provide 
sufficient representation in the MS-LTC-DRGs containing discharges 
for patients who received LTCH care for the most commonly treated 
LTCH patients' diagnoses.

6. Calculation of Prospective Payments

    For purposes of this impact analysis, to estimate per discharge 
payments under the LTCH PPS, we simulated payments on a case-by-case 
basis using LTCH claims from the FY 2010 MedPAR files. For modeling 
estimated LTCH PPS payments for FY 2011, we applied the FY 2011 
standard Federal rate (that is, $39,599.95, under which LTCH 
discharges occurring on or after October 1, 2010, to September 30, 
2011 are paid). For modeling estimated LTCH PPS payments for FY 
2012, we applied the proposed FY 2012 standard Federal rate of 
$40,082.61, which would be effective for LTCH discharges occurring 
on or after October 1, 2011, and through September 30, 2012. The 
proposed FY 2012 standard Federal rate of $40,082.61 includes the 
proposed application of an area wage level budget neutrality factor 
of 0.99723 (as discussed in section VII.E.4. of the preamble of this 
proposed rule).
    Furthermore, in modeling estimated LTCH PPS payments for both FY 
2011 and FY 2012 in this impact analysis, we applied the FY 2011 and 
the proposed FY 2012 adjustments for area wage levels and the 
proposed COLA for Alaska and Hawaii. Specifically, we adjusted for 
differences in area wage levels in determining estimated FY 2011 
payments using the current LTCH PPS labor-related share of 75.271 
percent (75 FR 50445) and the wage index values established in the 
Tables 12A and 12B of the Addendum to the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50627 through 50646). We also applied the FY 2011 
COLA factors shown in the table in section V.B.5. of the Addendum to 
that final rule (75 FR 50446) to the FY 2011 nonlabor-related share 
(24.729 percent) for LTCHs located in Alaska and Hawaii. Similarly, 
we adjusted for differences in area wage levels in determining 
estimated FY 2012 payments using the proposed LTCH PPS FY 2012 
labor-related share of 70.334 percent and the proposed FY 2012 wage 
index values presented in Tables 12A and 12B listed in section VI. 
of the Addendum to this proposed rule (and available via the 
Internet). We also applied the proposed FY 2012 COLA factors shown 
in the table in section V.B.5. of the Addendum to the FY 2011 IPPS/
LTCH PPS final rule to the proposed FY 2012 nonlabor-related share 
(29.666 percent) for LTCHs located in Alaska and Hawaii.
    As discussed above, our impact analysis reflects an estimated 
change in payments for SSO cases, as well as an estimated increase 
in payments for HCO cases (as described in section V.C. of the 
Addendum to this proposed rule). In modeling proposed payments for 
SSO and HCO cases in FY 2012, we applied an inflation factor of 
1.055 (determined by OACT) to the estimated costs of each case 
determined from the charges reported on the claims in the FY 2010 
MedPAR files and the best available CCRs from the December 2010 
update of the PSF. Furthermore, in modeling estimated LTCH PPS 
payments for FY 2012 in this impact analysis, we used the proposed 
FY 2012 fixed-loss amount of $19,270 (as discussed in section V.C. 
of the Addendum to this proposed rule).
    These impacts reflect the estimated ``losses'' or ``gains'' 
among the various classifications of LTCHs from the FY 2011 to FY 
2012 based on the proposed payment rates and policy changes 
presented in this proposed rule. Table IV illustrates the estimated 
aggregate impact of the LTCH PPS among various classifications of 
LTCHs.
     The first column, LTCH Classification, identifies the 
type of LTCH.
     The second column lists the number of LTCHs of each 
classification type.
     The third column identifies the number of LTCH cases.
     The fourth column shows the estimated payment per 
discharge for FY 2011 (as described above).
     The fifth column shows the estimated payment per 
discharge for FY 2012 (as described above).
     The sixth column shows the percentage change in 
estimated payments per discharge from FY 2011 to FY 2012 due to the 
proposed update to the standard Federal rate (as discussed in 
section V.A.2. of the Addendum to this proposed rule).
     The seventh column shows the percentage change in 
estimated payments per discharge from FY 2011 to FY 2012 for 
proposed changes to the area wage level adjustment (that is, the 
proposed wage indexes and proposed labor-related share) including 
the proposed application of an area wage level budget neutrality 
factor (as discussed in section V.B.5. of the Addendum to the 
proposed rule).
     The eighth column shows the percentage change in 
estimated payments per discharge from FY 2011 (Column 4) to FY 2012 
(Column 5) for all proposed changes (and includes the effect of 
estimated proposed changes to HCO and SSO payments).
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7. Results

    Based on the most recent available data for 422 LTCHs, we have 
prepared the following summary of the impact (as shown above in 
Table IV) of the proposed LTCH PPS payment rate and policy changes 
presented in this proposed rule. The impact analysis in Table IV 
shows that estimated payments per discharge are expected to increase 
approximately 1.9 percent, on average, for all LTCHs from FY 2011 to 
FY 2012 as a result of the proposed payment rate and policy changes 
presented in this proposed rule, as well as estimated increases in 
HCO and SSO payments. We note that we applied a proposed 1.5 percent 
annual update in determining the proposed standard Federal rate for 
FY 2012, based on the latest estimate of the proposed LTCH PPS 
market basket increase (2.8 percent), the proposed reduction of 1.2 
percentage points for the multifactor productivity adjustment and 
the 0.1 percentage point reduction required under sections 
1886(m)(3) and (m)(4) of the Act. We noted earlier in this section 
that for most categories of LTCHs, as shown in Table IV (Column 6), 
the impact of the increase of approximately 1.5 percent for the 
proposed annual update to the standard Federal rate is projected to 
result in approximately a 1.3 percent change in estimated payments 
per discharge for all LTCHs from FY 2011 to FY 2012. Because 
payments to cost-based SSO cases and a portion of payments to SSO 
cases that are paid based on the ``blend'' option of the SSO payment 
formula at Sec.  412.529(c)(2)(iv) are not affected by the proposed 
annual update to the standard Federal rate, we estimate that the 
effect of the proposed 1.5 percent annual update to the standard 
Federal rate would result in a 1.3 percent increase on estimated 
aggregate LTCH PPS payments to all LTCH PPS cases, including SSO 
cases. Furthermore, as discussed previously in this regulatory 
impact analysis, the average increase in estimated payments per 
discharge from the FY 2011 to FY 2012 for all LTCHs of approximately 
1.9 percent (as shown in Table IV) was determined by comparing 
estimated FY 2012 LTCH PPS payments (using the proposed rates and 
policies discussed in this proposed rule) to estimated FY 2011 LTCH 
PPS payments (as described above in section IX.C.5. of this 
Appendix).

[[Page 26080]]

a. Location

    Based on the most recent available data, the vast majority of 
LTCHs are located in urban areas. Only approximately 6 percent of 
the LTCHs are identified as being located in a rural area, and 
approximately 4 percent of all LTCH cases are treated in these rural 
hospitals. The impact analysis presented in Table IV shows that the 
average percent increase in estimated payments per discharge from FY 
2011 to FY 2012 for all hospitals is 1.9 percent for all proposed 
changes. For rural LTCHs, the percent change for all proposed 
changes is estimated to be 2.8 percent, while for urban LTCHs, we 
estimate the increase to be 1.8 percent. Large urban LTCHs are 
projected to experience an increase of 1.6 percent in estimated 
payments per discharge from FY 2011 to FY 2012, while other urban 
LTCHs are projected to experience an increase of 2.2 percent in 
estimated payments per discharge from FY 2011 to FY 2012, as shown 
in Table IV.

b. Participation Date

    LTCHs are grouped by participation date into four categories: 
(1) before October 1983; (2) between October 1983 and September 
1993; (3) between October 1993 and September 2002; and (4) after 
October 2002. Based on the most recent available data, the majority 
(approximately 47 percent) of the LTCH cases are in hospitals that 
began participating in the Medicare program between October 1993 and 
September 2002, and are projected to experience nearly the average 
increase (1.9 percent) in estimated payments per discharge from FY 
2011 to FY 2012, as shown in Table IV.
    In the participation category where LTCHs began participating in 
the Medicare program before October 1983, LTCHs are projected to 
experience a lower than average percent increase (1.2 percent) in 
estimated payments per discharge from FY 2011 to FY 2012, as shown 
in Table IV. Approximately 4 percent of LTCHs began participating in 
Medicare before October 1983. The LTCHs in this category are 
projected to experience a lower than average increase in estimated 
payments because of decreases in payments due to the proposed 
changes to the area wage adjustment. Approximately 10 percent of 
LTCHs began participating in Medicare between October 1983 and 
September 1993. These LTCHs are also projected to experience a 
slightly lower than average increase (1.7 percent) in estimated 
payments from FY 2011 to FY 2012. LTCHs that began participating in 
Medicare after October 2002 currently represent approximately 41 
percent of all LTCHs, and are projected to experience an average 
increase (1.9 percent) in estimated payments from FY 2011 to FY 
2012.

c. Ownership Control

    Other than LTCHs whose ownership control type is unknown, LTCHs 
are grouped into three categories based on ownership control type: 
voluntary, proprietary, and government. Based on the most recent 
available data, approximately 19 percent of LTCHs are identified as 
voluntary (Table IV). We expect that, for these LTCHs in the 
voluntary category, estimated FY 2012 LTCH payments per discharge 
would increase higher than the average (2.1 percent) in comparison 
to estimated payments in FY 2011 primarily because we project an 
increase in estimated HCO payments and SSO payments to be higher 
than the average for these LTCHs. The majority (76 percent) of LTCHs 
are identified as proprietary and these LTCHs are projected to 
experience a nearly average increase (1.8 percent) in estimated 
payments per discharge from FY 2011 to FY 2012. Finally, government-
owned and operated LTCHs (3 percent) are also expected to experience 
a nearly average increase in payments of 1.8 percent in estimated 
payments per discharge from FY 2011 to FY 2012.

d. Census Region

    Estimated payments per discharge for FY 2012 are projected to 
increase for LTCHs located in all regions in comparison to FY 2011. 
Of the 9 census regions, we project that the increase in estimated 
payments per discharge would have the largest positive impact on 
LTCHs in the West South Central region (2.4 percent, as shown in 
Table IV). The estimated percent increase in payments per discharge 
from FY 2011 to FY 2012 for the West South Central is largely 
attributable to the proposed changes in the area wage level 
adjustment.
    In contrast, LTCHs located in the New England region are 
projected to experience the smallest increase in estimated payments 
per discharge from FY 2011 to FY 2012. The average estimated 
increase in payments of 1.0 percent for LTCHs in the New England 
region is primarily due to estimated decreases in payments 
associated with the area wage level adjustment.

e. Bed Size

    LTCHs were grouped into six categories based on bed size: 0-24 
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; and greater 
than 200 beds.
    We project that payments for small LTCHs (0-24 beds) would 
experience a 2.5 percent increase in payments due to increases in 
the proposed area wage adjustment while large LTCHs (200+ beds) 
would experience a 1.8 percent increase in payments. LTCHs with 
between 75 and 124 beds and between 125 and 199 beds are expected to 
experience a slightly below average increase in payments per 
discharge from FY 2011 to FY 2012 (1.6 percent and 1.7 percent, 
respectively) primarily due to an estimated decreases in their 
payments from FY 2011 to FY 2012 due to the proposed area wage level 
adjustment.

D. Effect on the Medicare Program

    As noted previously, we project that the provisions of this 
proposed rule would result in an increase in estimated aggregate 
LTCH PPS payments in FY 2012 of approximately $95.0 million (or 
about 1.9 percent) for the 422 LTCHs in our database.

E. Effect on Medicare Beneficiaries

    Under the LTCH PPS, hospitals receive payment based on the 
average resources consumed by patients for each diagnosis. We do not 
expect any changes in the quality of care or access to services for 
Medicare beneficiaries under the LTCH PPS, but we continue to expect 
that paying prospectively for LTCH services would enhance the 
efficiency of the Medicare program.

X. Alternatives Considered

A. General

    This proposed rule contains a range of policies. It also 
provides descriptions of the statutory provisions that are 
addressed, identifies proposed policies, and presents rationales for 
our decisions and, where relevant, alternatives that were 
considered.

B. Alternative Considered for Hospital Inpatient Quality Review 
(IQR) and Value-Based Purchasing (VBP) Programs: Medicare Spending 
per Beneficiary Measure

    In section IV.A.3.b.(ii)(B) of the preamble to this proposed 
rule, we are proposing to adopt a claims-based Medicare spending per 
beneficiary measure for the FY 2014 Hospital IQR Program. In section 
IV.B.3.b.(iii) of the preamble of this proposed rule, we are 
proposing to adopt this claims-based Medicare spending per 
beneficiary measure for the FY 2014 Hospital VBP Program. For the 
Medicare spending per beneficiary measure, we considered an 
alternative approach based on the principle that Medicare spending 
per beneficiary benchmarks for lower quality hospitals should not 
exceed the benchmarks for higher quality hospitals. This alternative 
approach is more complex than our proposal. Due to its increased 
complexity, we are including the discussion of this alternative 
approach here rather than earlier in the preamble for ease of 
presentation: both the efficiency measure and its scoring as part of 
the Hospital VBP Program can be presented in a continuous narrative.
    As noted earlier, the NQF has not endorsed a Medicare spending 
per beneficiary measure. However, its 2009 report ``Measurement 
Framework: Evaluating Efficiency Across Patient-Focused Episodes of 
Care'' (NQF 2009), discusses four general terms that are helpful in 
framing the discussion of an alternative Medicare Spending per 
Beneficiary measure.
     Quality of care is a measure of performance on the 
Institute of Medicine's (IOM) six aims for healthcare: safety, 
timeliness, effectiveness, efficiency, equity, and patient 
centeredness.
     Cost of care is a measure of the total healthcare 
spending, including total resource use and unit price(s), by payor 
or consumer, for a healthcare service or group of healthcare 
services associated with a specified patient population, time 
period, and unit(s) of clinical accountability.
     Efficiency of care is a measure of cost of care 
associated with a specified level of quality of care. ``Efficiency 
of care'' is a measure of the relationship of the cost of care 
associated with a specific level of performance measured with 
respect to the other five IOM aims of quality.
     Value of care is a measure of a specified stakeholder's 
(such as an individual patient's, consumer organization's, payor's, 
provider's, government's, or society's) preference-weighted 
assessment of a particular combination of quality and cost of care 
performance.'' (p. 6, Measurement Framework: Evaluating Efficiency 
Across Patient-Focused Episodes of Care, NQF 2009)
    We will examine each of these four terms (Quality of Care, Cost 
of Care, Efficiency of

[[Page 26081]]

Care, and Value of Care) in the context of an alternative to our 
proposed Medicare Spending per Beneficiary measure.

1. Quality of Care

    As discussed in the Hospital VBP Program proposed rule, a 
hospital's performance on the quality measures (based on the higher 
of achievement or improvement) is consolidated into a single Total 
Performance Score for that hospital. For purposes of this 
discussion, we will refer to the Total Performance Score discussed 
in the Hospital VBP Program proposed rule as the ``total quality 
score (TQS).''

2. Cost of Care

    For purposes of this discussion, we are considering the cost of 
care to be the Medicare spending per beneficiary amount described in 
section IV.B.3.b.(3) of the preamble of this proposed rule.

3. Efficiency of Care

    The term ``efficiency of care'' is discussed in the NQF report 
as a measure of cost of care associated with a specified level of 
quality of care. ``Efficiency of care'' is a measure of the 
relationship of the cost of care associated with a specific level of 
performance measured with respect to the other five IOM aims of 
quality. We considered the following approach to measuring the 
relationship between the cost of care (that is, Medicare spending 
per beneficiary amount) and quality of care (that is, the TQS). The 
result of this measurement is an efficiency score for each hospital.

Steps in Measuring the Efficiency of Care Under the Alternative 
Approach

    Step 1:--Hospitals are grouped by total quality score (TQS).
    Step 1a.--Define the first (highest) Quality Group.
    The first Quality Group consists of hospitals with a TQS in the 
top decile of the TQSs.

{Quality1{time}  = {Q1{time}  = Quality Group 
1 = Hospitals in the top decile of quality = Hospitals with a TQS of 
100, 99, ...[alpha]1

    Step 1b.--Define the remaining Quality Groups.
    Beginning with the first TQS not included in the first Quality 
Group (TQS = [alpha]1-1), add hospitals with this TQS to 
the hospitals in the first Quality Group. This group of hospitals 
forms the second Quality Group:

{Quality2{time}  = {Q2{time}  = Quality Group 
2 = Hospitals with a TQS >= ([alpha]1-1)

    Note that {Q1{time}  [sub] {Q2{time} , 
meaning {Q1{time}  is a subset of {Q2{time} .
    The process repeats for the next Quality Group:

{Quality3{time}  = {Q3{time}  = Quality Group 
3 = Hospitals with a TQS >= ([alpha]1-2)

    Note that {Q1{time}  [sub] {Q2{time}  
[sub] {Q3{time} , meaning {Q2{time}  is a 
subset of {Q3{time} .
    It continues with successively lower quality scores until the 
hospitals with a TQS of 1 are added.

{QualityN {time}  = {QN{time}  = Last Quality 
Group N = Hospitals with a TQS >= 1

    Note that {Q1{time}  [sub] {Q2{time}  
[sub] {Q3{time} ........, [sub] {QN{time} , so 
all Quality Groups are subsets of {QN{time}  since 
{QN{time}  contains all hospitals with a TQS greater than 
or equal to 1.
    Step 2: Determine the cost benchmarks for each hospital.
    Step 2a--Determine the cost benchmark for the top Quality Group.
    The cost benchmark for the hospitals in the top Quality Group is 
the mean Medicare spending per beneficiary for the hospitals in the 
top Quality Group.
    Step 2b.--Determine the cost benchmarks for all hospitals that 
are not in the top Quality Group.
    The cost benchmark for each hospital with TQS of j is the lower 
of: (1) the 10th percentile of Medicare spending per beneficiary for 
all hospitals in the smallest (in terms of the number of hospitals 
in the group) Quality Group that contains hospitals with a TQS score 
of j; and (2) the benchmark for the group of hospitals of next 
higher quality. 
[GRAPHIC] [TIFF OMITTED] TP05MY11.119

    Step 3: Calculate the efficiency ratio for each hospital.
    Calculate the efficiency ratio for hospital k with TQS j.
    The efficiency ratio for hospital k with TQS j is the ratio of 
the Medicare spending per beneficiary for hospital k to the cost 
benchmark for TQS j.

Costk = Medicare spending per beneficiary for hospital k
Efficiency ratiok = Efficiency ratio for hospital k = 
Costk/Cost Benchmarkj

    Step 4: Calculate the efficiency ratio threshold and benchmark.
    Step 4a. Calculate the efficiency ratio threshold.
    The efficiency ratio threshold is the point at which hospitals 
can begin to earn efficiency points based on achievement. It is the 
median efficiency ratio across all hospitals.

Efficiency ratio threshold = Median efficiency ratio across all 
hospitals

    Step 4b. Calculate the efficiency ratio benchmark.
    The efficiency ratio benchmark is the point at which hospitals 
earn the maximum efficiency points (10) based on achievement. It is 
the 10th percentile of the efficiency ratios across all hospitals.

Efficiency ratio benchmark = 10th percentile efficiency ratio across 
all hospitals

    Step 5: Calculate the efficiency points based on achievement.
    Calculate the efficiency points based on achievement for 
hospital k.
    Achievement Efficiency Points k = 
    [GRAPHIC] [TIFF OMITTED] TP05MY11.120
    
    Step 6: Calculate the efficiency points based on improvement.
    Calculate the efficiency points based on improvement for 
hospital k.
    The performance period has a corresponding base period, 
analogous to the base period for other Hospital VBP measures. In 
order to calculate efficiency points based on improvement, an 
efficiency ratio would be determined for each hospital k using only 
the data from the base period and following Step 1 to Step 3 above. 
Using this base period efficiency ratio for hospital k, the

[[Page 26082]]

improvement points for hospital k are calculated as:
    Improvement Efficiency Points k = 
    [GRAPHIC] [TIFF OMITTED] TP05MY11.121
    
    The efficiency score for hospital k is the higher of the 
achievement or improvement efficiency points.

4. Value of Care

    The term ``value of care'' is discussed in the NQF report as a 
measure of a specified stakeholder's (such as an individual 
patient's, consumer organization's, payor's, provider's, 
government's, or society's) preference-weighted assessment of a 
particular combination of quality and cost of care performance. 
Under our alternative Medicare spending per beneficiary approach, we 
considered creating an efficiency adjustment to the TQS for a 
hospital using a function of the general form:
    Efficiency adjustment to the total quality score = A*TQS + 
B*(efficiency score*10) + C, where A is the weight given to the 
quality score, B is the weight given to the efficiency score, and C 
is a constant.
    We multiply the efficiency score by 10 to put it on the same 
scale as the TQS (0 to 100).
    Depending on the parameters chosen, adopting such a function for 
valuing efficiency could allow the TQS for a hospital to be adjusted 
upwards or downwards depending on the hospital's TQS and its 
efficiency score. For example, suppose two hospitals both have an 
efficiency score of 5, but one hospital has a much higher TQS than 
the other. We could choose parameters that would result in a 
negative efficiency adjustment to the TQS for the lower quality 
hospital and a positive efficiency adjustment to the TQS for the 
higher quality hospital. Under this approach, we value the 
efficiency score of 5 for the higher quality hospital more than the 
efficiency score of 5 for the lower quality hospital, hence the 
positive adjustment to the TQS for the higher quality hospital and 
the negative adjustment to the TQS for the lower quality hospital.
    Using the TQS adjusted for efficiency, meaning after we apply 
the efficiency adjustment the TQS, the linear exchange function 
approach previously proposed in the Hospital VBP Program proposed 
rule for the hospital VBP system would be used to determine each 
hospital's VBP incentive payment such that the overall hospital VBP 
program remains budget neutral.

XI. Overall Conclusion

A. Acute Care Hospitals

    Table I of section VI. of this Appendix demonstrates the 
estimated distributional impact of the IPPS budget neutrality 
requirements for the proposed MS-DRG and wage index changes, and for 
the wage index reclassifications under the MGCRB. Table I also shows 
an overall proposed decrease of 0.5 percent in operating payments. 
We estimate that operating payments would decrease by approximately 
$498 million in FY 2012. For FY 2012, we are proposing to distribute 
$250 million to hospitals that qualify to receive additional payment 
under section 1109 of Pub. L. 111-152, which is an additional $100 
million than what we had distributed under this provision in FY 
2011. In addition, we estimate a savings of $23 million associated 
with the HACs policies. These estimates, added to our proposed FY 
2012 operating estimate of -$498 million, would result in a decrease 
of $421.2 million for FY 2012. We estimate that capital payments 
will experience a 1.8 percent increase in payments per case, as 
shown in Table III of section VIII. of this Appendix. We project 
that there would be a $146 million increase in capital payments in 
FY 2012 compared to FY 2011. The proposed cumulative operating and 
capital payments should result in a net decrease of $275 million to 
IPPS providers. The discussions presented in the previous pages, in 
combination with the rest of this proposed rule, constitute a 
regulatory impact analysis.

B. LTCHs

    Overall, LTCHs are projected to experience an increase in 
estimated payments per discharge in FY 2012. In the impact analysis, 
we are using the proposed rates, factors, and policies presented in 
this proposed rule, including proposed updated wage index values and 
relative weights, and the best available claims and CCR data to 
estimate the proposed change in payments under the LTCH PPS for FY 
2012. Accordingly, based on the best available data for the 422 
LTCHs in our database, we estimate that proposed FY 2012 LTCH PPS 
payments would increase approximately $95 million (or about 1.9 
percent).

XII. Accounting Statements and Tables

A. Acute Care Hospitals

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table V below, we 
have prepared an accounting statement showing the classification of 
the expenditures associated with the provisions of this proposed 
rule as they relate to acute care hospitals. This table provides our 
best estimate of the proposed change in Medicare payments to 
providers as a result of the proposed changes to the IPPS presented 
in this proposed rule. All expenditures are classified as transfers 
to Medicare providers. 
[GRAPHIC] [TIFF OMITTED] TP05MY11.122

B. LTCHs

    As discussed in section IX. of this Appendix, the impact 
analysis for the proposed changes under the LTCH PPS for this 
proposed rule projects an increase in estimated aggregate payments 
of approximately $95 million (or about 1.9 percent) for the 422 
LTCHs in our database that are subject to payment under the LTCH 
PPS. Therefore, as required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI below, 
we have prepared an accounting statement showing the classification 
of the expenditures associated with the provisions of this proposed 
rule as they relate to proposed changes to the LTCH PPS. Table VI 
provides our best estimate of the estimated increase in Medicare 
payments under the LTCH PPS as a result of the proposed provisions 
presented in this proposed rule based on the data for the 422 LTCHs 
in our database. All expenditures are classified as transfers to 
Medicare providers (that is, LTCHs).

[[Page 26083]]

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XII. Executive Order 12866

    In accordance with the provisions of Executive Order 12866, the 
Executive Office of Management and Budget reviewed this proposed 
rule.

Appendix B: Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

I. Background

    Section 1886(e)(4)(A) of the Act requires that the Secretary, 
taking into consideration the recommendations of MedPAC, recommend 
update factors for inpatient hospital services for each fiscal year 
that take into account the amounts necessary for the efficient and 
effective delivery of medically appropriate and necessary care of 
high quality. Under section 1886(e)(5) of the Act, we are required 
to publish update factors recommended by the Secretary in the 
proposed and final IPPS rules, respectively. Accordingly, this 
Appendix provides the recommendations for the update factors for the 
IPPS national standardized amount, the Puerto Rico-specific 
standardized amount, the hospital-specific rates for SCHs and MDHs, 
and the rate-of-increase limits for certain hospitals excluded from 
the IPPS, as well as LTCHs, IPFs, and IRFs. We also discuss our 
response to MedPAC's recommended update factors for inpatient 
hospital services.

II. Inpatient Hospital Update for FY 2012

A. Proposed FY 2012 Inpatient Hospital Update

    Section 1886(b)(3)(B) of the Act, as amended by sections 3401(a) 
and 10319(a) of the Affordable Care Act, sets the applicable 
percentage increase under the IPPS for FY 2012 as equal to the rate-
of-increase in the hospital market basket for IPPS hospitals in all 
areas (which is based on IHS Global Insight Inc.'s (IGI's) first 
quarter 2011 forecast of the FY 2006-based IPPS market basket), 
subject to a reduction of 2.0 percentage points if the hospital 
fails to submit quality information under rules established by the 
Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act, 
and then subject to an adjustment based on changes in economy-wide 
productivity and an additional reduction of 0.1 percentage point. 
Sections 1886(b)(3)(B)(xi) and (b)(3)(B)(xii) of the Affordable Care 
Act, as added by section 3401(a) of the Affordable Care Act, state 
that the application of the multifactor productivity adjustment and 
the additional FY 2012 adjustment of 0.1 percentage point may result 
in the applicable percentage increase being less than zero.
    In accordance with section 1886(b)(3)(B) of the Act, as amended 
by section 3401(a) of the Affordable Care Act, in section IV.K.3. of 
the preamble of this proposed rule, we are proposing a multifactor 
productivity (MFP) adjustment (the 10-year moving average of MFP for 
the period ending FY 2012) of 1.2 percent.
    Therefore, based on IGI's first quarter 2011 forecast of the FY 
2012 market basket increase, we are proposing an applicable 
percentage increase to the FY 2012 operating standardized amount of 
1.5 percent (that is, the FY 2012 estimate of the market basket 
rate-of-increase of 2.8 percent less an adjustment of 1.2 percentage 
points for economy-wide productivity and less 0.1 percentage point) 
for hospitals in all areas, provided the hospital submits quality 
data in accordance with section 1886(b)(3)(B)(vii) of the Act and 
our rules. For hospitals that fail to submit quality data, we are 
proposing an applicable percentage increase to the operating 
standardized amount of -0.5 percent (that is, the FY 2012 estimate 
of the market basket rate-of increase of 2.8 percent less 2.0 
percentage points for failure to submit quality data, less an 
adjustment of 1.2 percentage points for economy-wide productivity, 
and less an additional adjustment of 0.1 percentage point).

B. Proposed Update for SCHs and MDHs for FY 2012

    Section 1886(b)(3)(B)(iv) of the Act provides that the FY 2012 
applicable percentage increase in the hospital-specific rates for 
SCHs and MDHs equals the applicable percentage increase set forth in 
section 1886(b)(3)(B)(i) of the Act (that is, the same update factor 
as for all other hospitals subject to the IPPS). Therefore, the 
update to the hospital specific rates for SCHs and MDHs is subject 
to section 1886(b)(3)(B)(i) of the Act, as amended by sections 
3401(a) and 10319(a) of the Affordable Care Act. Accordingly, we are 
proposing an applicable percentage increase to the hospital-specific 
rates applicable to SCHs and MDHs of 1.5 percent for hospitals that 
submit quality data or -0.5 percent for hospitals that fail to 
submit quality data.

C. Proposed FY 2012 Puerto Rico Hospital Update

    Section 401(c) of Public Law 108-173 amended section 
1886(d)(9)(C)(i) of the Act and states that, for discharges 
occurring in a fiscal year (beginning with FY 2004), the Secretary 
shall compute an average standardized amount for hospitals located 
in any area of Puerto Rico that is equal to the average standardized 
amount computed under subclause (I) for FY 2003 for hospitals in a 
large urban area (or, beginning with FY 2005, for all hospitals in 
the previous fiscal year) increased by the applicable percentage 
increase under subsection (b)(3)(B) for the fiscal year involved. 
Therefore, the update to the Puerto Rico-specific operating 
standardized amount is subject to the applicable percentage increase 
set forth in section 1886(b)(3)(B)(i) of the Act as amended by 
sections 3401(a) and 10319(a) of the Affordable Care Act (that is, 
the same update factor as for all other hospitals subject to the 
IPPS). Accordingly, we are proposing an applicable percentage 
increase to the Puerto Rico-specific standardized amount of 1.5 
percent.

D. Proposed Update for Hospitals Excluded From the IPPS

    Section 1886(b)(3)(B)(ii) of the Act is used for purposes of 
determining the percentage increase in the rate-of-increase limits 
for children's and cancer hospitals. Section 1886(b)(3)(B)(ii) of 
the Act sets the percentage increase in the rate-of-increase limits 
equal to the market basket percentage increase. In accordance with 
Sec.  403.752(a) of the regulations, RNHCIs are paid under Sec.  
413.40, which also uses section 1886(b)(3)(B)(ii) of the Act to 
update the percentage increase in the rate-of-increase limits.
    Section 1886(j)(3)(C) of the Act addresses the increase factor 
for the Federal prospective payment rate of IRFs. Section 123 of 
Public Law 106-113, as amended by section 307(b) of Public Law 106-
554 (and codified at section 1886(m)(1) of the Act), provides the 
statutory authority for updating payment rates under the LTCH PPS. 
In addition, section 124 of Public Law 106-113 provides the 
statutory authority for updating all aspects of the payment rates 
for IPFs.
    Currently, children's hospitals, cancer hospitals, and RNHCIs 
are the remaining three types of hospitals still reimbursed under 
the reasonable cost methodology. We are proposing to provide our 
current estimate of the FY 2012 IPPS operating market basket 
percentage increase (2.8 percent) to update the target limits for 
children's hospitals, cancer hospitals, and RNHCIs.
    For FY 2012, as discussed in section VII. of the preamble to 
this proposed rule, we are proposing to establish an update to the 
LTCH PPS standard Federal rate for FY 2012 based on the full 
proposed LTCH PPS market basket increase estimate (2.8 percent). The 
proposed annual update also includes the requirement at section 
1886(m)(3)(A)(i) of the Act to reduce the annual update by the 
productivity adjustment described in section 1886(b)(3)(B)(xi)(ii) 
of the Act, which is currently estimated to be 1.2 percent. In 
addition, the statute at section 1886(m)(3)(A)(ii) of the Act 
requires that any

[[Page 26084]]

annual update for FY 2012 be reduced by the ``other adjustment'' at 
section 1886(m)(4)(C) of the Act, which is 0.1 percentage point. 
Accordingly, the proposed update factor to the standard Federal rate 
for FY 2012 is 1.5 percent (that is, we are proposing to apply a 
factor of 1.015 in determining the proposed LTCH PPS standard 
Federal rate for FY 2012).
    Effective for cost reporting periods beginning on or after 
January 1, 2005, IPFs are paid under the IPF PPS. IPF PPS payments 
are based on a Federal per diem rate that is derived from the sum of 
the average routine operating, ancillary, and capital costs for each 
patient day of psychiatric care in an IPF, adjusted for budget 
neutrality. In the RY 2012 IPF PPS proposed rule (76 FR 5000 through 
5001), we proposed to extend the IPF PPS RY 2012 by 3 months (a 
total of 15 months instead of 12 months) through September 30, 2012. 
Based on IGI's fourth quarter 2010 forecast, with history through 
the third quarter of 2010, the projected 15-month market basket 
update based on the proposed FY 2008-based RPL market basket for the 
proposed 15-month RY 2012 (July 1, 2011 through September 30, 2012) 
is 3.0 percent. However, if we were not proposing to extend the 2012 
IPF PPS rate year by 3 months, we would have proposed a market 
basket update of 2.6 percent for a 12-month RY 2012. In accordance 
with section 1886(s)(2)(A)(ii) of the Act, which requires the 
application of an ``other adjustment,'' described in section 
1886(s)(3) of the Act (specifically, section 1886(s)(3)(A) for RYs 
2011 and 2012), that reduces the update to the IPF PPS base rate for 
the rate year beginning in CY 2011, we proposed to adjust the IPF 
PPS update by 0.25 percentage point for RY 2012. Therefore, we 
proposed to apply the 15-month FY 2008-based RPL market basket 
increase of 3.0 percent, which is then adjusted by the ``other 
adjustment'' of 0.25 percentage point.
    IRFs are paid under the IRF PPS for cost reporting periods 
beginning on or after January 1, 2002. For cost reporting periods 
beginning on or after October 1, 2002 (FY 2003), and thereafter, the 
Federal prospective payments to IRFs are based on 100 percent of the 
adjusted Federal IRF prospective payment amount, updated annually 
(69 FR 45721). Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 
of the Act require the application of a 0.1 percentage point 
reduction to the market basket increase factor for FYs 2012 and 
2013. In addition, section 1886(j)(3)(C)(ii)(I) of the Act requires 
the application of a productivity adjustment. Increase factors for 
the IRF PPS will be discussed in future notice and comment 
rulemaking.

III. Secretary's Recommendations

    MedPAC is recommending an inpatient hospital update equal to one 
percent for FY 2012. MedPAC's rationale for this update 
recommendation is described in more detail below. As mentioned 
above, section 1886(e)(4)(A) of the Act requires that the Secretary, 
taking into consideration the recommendations of MedPAC, recommend 
update factors for inpatient hospital services for each fiscal year 
that take into account the amounts necessary for the efficient and 
effective delivery of medically appropriate and necessary care of 
high quality. Consistent with current law, we are recommending an 
applicable percentage increase to the standardized amount of 1.5 
percent (that is, the FY 2012 estimate of the market basket rate-of-
increase of 2.8 percent less an MFP adjustment of 1.2 percentage 
points for MFP and less 0.1 percentage point). We are recommending 
that the same applicable percentage increase apply to SCHs and MDHs 
and the Puerto Rico-specific standardized amount.
    In addition to making a recommendation for IPPS hospitals, in 
accordance with section 1886(e)(4)(A) of the Act, we are 
recommending update factors for all other types of hospitals. 
Consistent with our proposal for these facilities, we are 
recommending an update for children's hospitals, cancer hospitals, 
and RNHCIs of 2.8 percent.
    For FY 2012, consistent with policy proposal set forth in 
section VII. of the preamble of this proposed rule, we are 
recommending an update of 1.5 percent to the LTCH PPS standard 
Federal rate. In addition, consistent with the proposed update 
specified in the FY 2012 IRF PPS proposed rule (as described above), 
we are recommending an update of 1.5 percent (that is, the market 
basket increase factor of 2.8 percent less 1.2 percentage points for 
economy-wide productivity and less 0.1 percentage point in 
accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 
of the Act) to the IRF PPS Federal rate for FY 2012. Finally, 
consistent with the proposed update specified in the FY 2012 IPF PPS 
proposed rule (as described above), we are recommending an update of 
3.0 percent reduced by 0.25 percentage point to the IPF PPS Federal 
rate for RY 2012 for the Federal per diem payment amount.

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating 
Payments in Traditional Medicare

    In its March 2011 Report to Congress, MedPAC assessed the 
adequacy of current payments and costs, and the relationship between 
payments and an appropriate cost base. MedPAC recommended an update 
to the hospital inpatient rates equal to one percent. MedPAC expects 
Medicare margins to remain low in 2012. At the same time though, 
MedPAC's analysis finds that efficient hospitals have been able to 
maintain positive Medicare margins while maintaining a relatively 
high quality of care. MedPAC also recommended that Congress should 
require the Secretary to make adjustments to inpatient payment rates 
in future years to recover all overpayments due to documentation and 
coding improvements. MedPAC noted that priority should be given to 
preventing future overpayments.
    Response: With regard to MedPAC's recommendation of an update to 
the hospital inpatient rates equal to one percent, for FY 2012, as 
discussed above, sections 3401(a) and 10319(a) of the Affordable 
Care Act amended section 1886(b)(3)(B) of the Act. Section 
1886(b)(3)(B), as amended by these sections, sets the requirements 
for the FY 2012 applicable percentage increase. Therefore, we have 
proposed an applicable percentage increase for FY 2012 of 1.5 
percent, provided the hospital submits quality data, consistent with 
these statutory requirements.
    Similar to our response last year, we agree with MedPAC that 
hospitals should control costs rather than have Medicare accommodate 
the current rate of growth. As MedPAC noted, the lack of financial 
pressure at certain hospitals can lead to higher costs and in turn 
bring down the overall Medicare margin for the industry.
    With regard to MedPAC's recommendation that Congress should 
require the Secretary to make adjustments to inpatient payment rates 
in future years to recover all overpayments due to diagnosis and 
coding improvements, we refer the reader to section III. D. of the 
preamble to this proposed rule for a complete discussion on the 
proposed FY 2012 MS-DRG documentation and coding adjustment. In 
section III. D. of the preamble to this proposed rule, we are 
proposing a prospective adjustment of 3.15 percent and a recoupment 
of 2.9 percent to the FY 2012 inpatient payment rates to recover 
overpayments due to documentation and coding improvements. We note 
that any recoupments for overpayments due to documentation and 
coding improvements beyond the authority of section 7(b)(1)(B) of 
Public Law 110-90 would require additional changes to current law by 
Congress. Therefore, without a change to current law, our ability to 
recoup all overpayments due to documentation and coding improvements 
is limited.
    We note that, because the operating and capital prospective 
payment systems remain separate, we are continuing to use separate 
updates for operating and capital payments. The update to the 
capital rate is discussed in section III. of the Addendum to this 
proposed rule.

[FR Doc. 2011-9644 Filed 4-19-11; 4:15 pm]
BILLING CODE 4120-01-P
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