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###### Department of Defense

###### Office of the Secretary

# AGENCY:

Office of the Secretary, DoD.

# ACTION:

Notice of DRG revised rates. 

# SUMMARY:

This notice describes the changes made to the TRICARE DRG-based payment system in order to conform to changes made to the Medicare Prospective Payment System (PPS).

It also provides the updated fixed loss cost outlier threshold, cost-to-charge ratios and the Internet address for accessing the updated adjusted standardized amount and DRG relative weights to be used for FY 2005 under the TRICARE DRG-based payment system.

# EFFECTIVE DATES:

The rates, weights and Medicare PPS changes which affect the TRICARE DRG-based payment system contained in this notice are effective for admissions occurring on or after October 1, 2004.

# ADDRESSES:

TRICARE Management Activity (TMA), Medical Benefits and Reimbursement Systems, 16401 East Centretech Parkway, Aurora, CA 80011-9066.

# FOR FURTHER INFORMATION CONTACT:

Marty Maxey, Medical Benefits and Reimbursement Systems, TMA, telephone (303) 676-3627. Questions regarding payment of specific claims under the TRICARE DRG-based payment system should be addressed to the appropriate contractor.

# SUPPLEMENTARY INFORMATION:

                    The final rule published on September 1, 1987 (52 FR 32992) set forth in basic procedures used under the CHAMPUS DRG-based payment system. This was subsequently amended by final rules published August 31, 1988 (53 FR 33461), October 21, 1988 (53 FR 41331), December 16, 1988 (53 FR 50515), May 30, 1990 (55 FR 21863), October 22, 1990 (55 FR 42560), and September 10, 1998 (63 FR 48439). An explicit tenet of these final rules, and one based on the statute authorizing the use of DRGs by TRICARE, is that the TRICARE DRG-                          ( print page 59213)                        based payment system is modeled on the Medicare PPS, and that, whenever practicable, the TRICARE system will follow the same rules that apply to the Medicare PPS. The Centers for Medicare and Medicaid Services (CMS) publishes these changes annually in the                     **Federal Register**                     and discusses in detail the impact of the changes.                

In addition, this notice updates the rates and weights in accordance with our previous final rules. The actual changes we are making, along with a description of their relationship to the Medicare PPS, are detailed below.

## I. Medicare PPS Changes Which Affect the TRICARE DRG-Based Payment System 

Following is a discussion of the changes CMS has made to the Medicare PPS that affect the TRICARE DRG-based payment system.

### A. DRG Classifications

Under both the Medicare PPS and the TRICARE DRG-based payment system, cases are classified into the appropriate DRG by a Grouper program. The Grouper classifies each case into a DRG on the basis of the diagnosis and procedure codes and demographic information (that is, sex, age, and discharge status). The Grouper used for the TRICARE DRG-based payment system is the same as the current Medicare Grouper with two modifications. The TRICARE system has replaced Medicare DRG 435 with two age-based DRGs (900 and 901),  and has implemented thirty-four (34) neonatal DRGs in place of Medicare DRGS 385 through 390. For admission occurring on or after October 1, 2001, DRG 435 has been replaced by DRG 523. The TRICARE system has replaced DRG 523 with the two age-based DRGs (900 and 901). For admissions occurring on or after October 1, 1995, the CHAMPUS grouper hierarchy logic was changed so the age split (age <29 days) and assignments to MDC 15 occur before assignment of the PreMDC DRGs. This resulted in all neonate tracheostomies and organ transplants to be grouped to MDC 15 and not to DRGs 480-483 or 495. For admissions occurring on or after October 1, 1998, the CHAMPUS grouper hierarchy logic was changed to move DRG 103 to the PreMDC DRGs and to assign patients to PREMDC DRGs 480, 103 and 495 before assignment to MDC 15 DRGs and the neonatal DRGs. For admissions occurring on or after October 1, 2001, DRGs 512 and 513 were added to the PREMDC DRGs, between DRGs 480 and 103 in the TRICARE grouper hierarchy logic. For admissions occurring on or after October 1, 2004, DRG 483 was deleted and replaced with DRGs 541 and 542, splitting the assignment of cases on the basis of the performance of a major operating room procedure. The description for DRG480 was changed to “Liver Transplant and/or Intestinal Transplant”, and the description for DRG 103 was changed to “Heart/Heart Lung Transplant or Implant of Heart Assist System”.

For FY 2005, CMS will implement classification changes, including surgical hierarchy changes. The TRICARE Grouper will incorporate all changes made to the Medicare Grouper, with the exception of the changes made to MDC 11, DRG 315 to accommodate the congressional mandate to cover the pancreatic inlet cell transplantation clinical trial for Medicare patients.

### B. Wage Index and Medicare Geographic Classification Review Board Guidelines

TRICARE will continue to use the same wage index amounts used for the Medicare PPS. In addition, TRICARE will duplicate all changes with regard to the wage index for specific hospitals that are redesignated by the Medicare Geographic Classification Review Board.

### C. Out-Commuting Wage Index Adjustment

TRICARE is adopting the out commuting wage index adjustment used in the Medicare PPS due to the passage of the Medicare Modernization Act of 2003 (MMA) P.L. 108-173.

### D. Updated Labor Market Areas

TRICARE is adopting the new labor market areas used in the Medicare PPS.

### E. Equalization of Large Urban and Other Area Adjusted Standardized Amounts (ASAs) 

TRICARE is adopting CMS' permanent equalization of the ASA rate for large urban and other areas due to the passage of the MMA of 2003. Under TRICARE, children's hospitals are reimbursed under the TRICARE DRG-based payment system and are entitled to receive the children's hospital differential. The differential amount is based on large urban and other areas. With the elimination of the other area ASA rate for hospitals subject to the TRICARE DRG-based payment, TRICARE is also eliminating the other area children's hospital differential rate and adopting the large urban differential rate for all children's hospitals.

### F. Revision of the Labor-Related Share of the Wage Index

TRICARE is adopting CMS' percentage of labor related share of the standardized amount. For wage index values greater than 1.0, the labor related portion of the ASA shall equal 71.1 percent. For wage index values less than or equal to 1.0 the labor related portion of the ASA shall equal 62 percent.

### G. Hospital Market Basket.

TRICARE will update the adjusted standardized amounts according to the final updated hospital market basket used for the Medicare PPS for all hospitals subject to the TRICARE DRG-based payment system according to CMS's August 11, 2004, final rule.

### H. Outlier Payments

Since TRICARE does not include capital payments in our DRG-based payments, we will use the fixed loss cost outlier threshold calculated by CMS for paying cost outliers in the absence of capital prospective payments. For FY 2005, the fixed loss cost outlier threshold is based on the sum of the applicable DRG-based payment rate plus any amounts payable for IDME plus a fixed dollar amount. Thus, for FY 2005, in order for a case to qualify for cost outlier payments, the costs must exceed the TRICARE DRG based payment rate (wage adjusted) for the DRG plus the IDME payment plus $23,762 (wage adjusted). The marginal cost factor for cost outliers continues to be 80 percent.

### I. National Operating Standard Cost as a Share of Total Costs

The FY 2005 TRICARE National Operating Standard Cost as a Share of Total Costs used in calculating the cost outlier threshold is 0.921.

### J. Indirect Medical Education (IDME) Adjustment

                    Passage of the MMA of 2003 modified the formula multipliers to be used in the calculation of the indirect medical education IDME adjustment factor. Since the IDME formula used by TRICARE does not include disproportionate share hospitals (DSHs), the variables in the formula are different than Medicare's, however; the percentage reduction that will be applied to Medicare's, formula will also be applied to the TRICARE IDME formula. The new multiplier for the IDME adjustment factor for TRICARE for FY 2005 is 1.07.                          ( print page 59214)    

### K. Expansion of the Post Acute Care Transfer Policy

For FY 2005 TRICARE is adopting CMS' expanding post acute care transfer policy according to CMS' final rule published August 11, 2004.

## II. Cost to Charge Ratio

For FY 2005, the cost-to-charge ratio used for the TRICARE DRG-based payment system will be 0.4438, which is increased to 0.4508 to account for bad debts. This shall be used to calculate the adjusted standardized amounts and to calculate cost outlier payments, except for children's hospitals. For children's hospital cost outliers, the cost-to charge ratio used is 0.4887.

## III. Updated Rates and Weights

                    The updated rates and weights are accessible through the Internet at                     *http://www.tricare.osd.mil*                     under the sequential headings TRICARE Provider Information, Rates and Reimbursements, and DRB Information. Table 1 provides the ASA rates and Table 2 provides the DRG weights to be used under the TRICARE DRG-based payment system during FY 2005 and which is a result of the changes described above. The implementing regulations for the TRICARE/CHAMPUS DRG-based payment system are in 32 CFR Part 199.                

Dated: September 28, 2004.

L.M. Bynum,

Alternate OSD Federal Register Liaison Officer, Department of Defense.

[FR Doc. 04-22169 Filed 10-1-04; 8:45 am]

BILLING CODE 5001-04-M