[Federal Register Volume 69, Number 219 (Monday, November 15, 2004)]
[Rules and Regulations]
[Pages 66922-67015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-24787]



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Part V





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 412 and 413



Medicare Program; Prospective Payment System for Inpatient Psychiatric 
Facilities; Final Rule

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412 and 413

[CMS-1213-F]
RIN 0938-AL50


Medicare Program; Prospective Payment System for Inpatient 
Psychiatric Facilities

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

ACTION: Final rule.

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SUMMARY: This final rule establishes a prospective payment system for 
Medicare payment of inpatient hospital services furnished in 
psychiatric hospitals and psychiatric units of acute care hospitals and 
critical access hospitals. It implements section 124 of the Medicare, 
Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA). The 
prospective payment system described in this final rule will replace 
the reasonable cost-based payment system under which psychiatric 
hospitals and psychiatric units are paid under Medicare.

DATES: This rule is effective for cost reporting periods beginning on 
or after January 1, 2005.

FOR FURTHER INFORMATION CONTACT: Janet Samen, (410) 786-9161 (General 
information.) Phillip Cotterill, (410) 786-6598 and Fred Thomas (410) 
786-6675, (For information regarding the regression analysis).

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
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Federal Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO access, a service of the U.S. 
Government Printing Office. The Website address is http://www.access.gpo.gov/nara/index.html.
    To assist readers in referencing sections contained in this 
document, we are providing he following table of contents.

Table of Contents

I. Background
    A. General and Legislative History
    B. Overview of the Payment System for Inpatient Psychiatric 
Hospitals and Psychiatric Units Before the BBRA
    1. Description of the TEFRA Payment Methodology
    2. BBA Amendments to TEFRA
    3. BBRA Amendments to TEFRA
    4. BIPA Amendments to TEFRA
II. Provisions of the Proposed Regulations
III. Analysis of and Responses to Public Comments
IV. Overview of the IPF PPS Proposed Payment Methodology
V. Development of the Budget-Neutral Federal Per Diem Base Rate.
    A. Calculation of the Federal Per Diem Base Rate
    B. Determining the Update Factors for the Budget-Neutrality 
Calculation
    1. The 1997-Based Excluded Hospital with Capital Market Basket
    2. Calculating the Budget-Neutrality Adjustment Factor
    a. Cost Report Data for January 1, 2005 through June 30, 2006
    b. Estimate of Total Payments Under the TEFRA Payment System
    c. Payments Under the IPF PPS without a Budget-Neutrality 
Adjustment
    C. Standardization and Budget-Neutrality Adjustments
    D. Calculation of the Budget Neutrality Adjustments
    1. Outlier Adjustment
    2. Stop Loss Adjustment
    3. Behavioral Offset
VI. Cost Regression Used To Develop Payment Adjustment Factors
    A. Final Regression Analysis
    B. Patient-Level Adjustments
    1. Adjustment for DRG Assignment
    2. Comorbidities
    3. Other Coding Issues
    4. Patient Age
    5. Variable Per Diem Adjustments
    6. Other Patient-Level Adjustments
    a. Gender
    b. Patients admitted through the Hospital's Emergency Department 
(ED)
    c. Patients who Receive Electroconvulsive Therapy (ECT)
    d. Patient's Involuntarily Committed to the IPF
    e. Administrative Necessary Days
    C. Facility-Level Adjustments
    1. Wage Index
    2. Rural Location
    3. Teaching Status Adjustments
    4. Other Facility-Level Adjustments
    a. Adjustment for Psychiatric Units
    b. Cost of Living Adjustment
    i. IPFs Located in Alaska and Hawaii
    ii. IPFs Located in California
    c. Disproportionate Share Intensity
    d. IPFs with Full-Service Emergency Departments
    D. Other Proposed Adjustments and Policy Changes
    1. Outlier Policy
    a. Statistical Accuracy of Cost-for-Change Ratios
    b. Adjustments of IPF Outlier Payments
    2. Interrupted Stays
    3. Stop-Loss Provision
    4. Physician Recertification Requirements
VII. Implementation of the IPF PPS
    A. Transition Period
    1. Existing Providers
    2. New Providers
    B. Claims Processing
    C. Annual Update
VIII. Future Refinements
IX. Comments Beyond the Scope of the Final Rule
X. Provisions of the Final Rule
XI. Collection of Information Requirements
XII. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    1. Budgetary Impacts
    2. Impacts on Providers
    3. Results
    a. Facility Type
    b. Location
    c. Teaching Status Adjustment
    d. Census Region
    e. Size
    4. Effect on the Medicare Program
    5. Effect on Beneficiaries
    6. Computer Hardware and Software
    C. Alternatives Considered
Regulation Text
Addendum A: Proposed Inpatient PPS Adjustments
Addendum B: Wages
Addendum C: ``Code First'' List

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:

BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000 
(Pub. L. 106-554)
CMS Centers for Medicare & Medicaid Services
DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders 
Fourth Edition--Text Revision
DRGs Diagnosis-related groups
FY Federal fiscal year
HCRIS Hospital Cost Report Information System
ICD-9-CM International Classification of Diseases, 9th Revision, 
Clinical Modification
IPFs Inpatient psychiatric facilities
IPPS Hospital Inpatient Prospective Payment System
IRFs Inpatient rehabilitation facilities
LTCHs Long-term care hospitals
MedPAR Medicare provider analysis and review file

[[Page 66923]]

MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (Pub. L. 108-173)
PIP Periodic interim payments
PPS Prospective Payment System
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248)

I. Background

A. General and Legislative History

    When the Medicare statute was originally enacted in 1965, Medicare 
payment for inpatient hospital services was based on the reasonable 
costs incurred in furnishing services to Medicare beneficiaries. 
Section 223 of the Social Security Act Amendments of 1972 (Pub. L. 92-
603) amended section 1861(v)(1) of the Social Security Act (the Act) to 
set forth limits on reasonable costs for inpatient hospital services. 
The statute was later amended by section 101(a) of the Tax Equity and 
Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97-248) to limit 
payment by placing a limit on allowable costs per discharge.
    The Congress directed implementation of a prospective payment 
system (PPS) for acute care hospitals in 1983, with the enactment of 
Public Law 98-21. Section 601 of the Social Security Amendments of 1983 
(Pub. L. 98-21) added a new section 1886(d) to the Act that replaced 
the reasonable cost-based payment system for most inpatient hospital 
services with a PPS.
    Although most inpatient hospital services became subject to the 
PPS, certain specialty hospitals were excluded from the PPS and 
continued to be paid reasonable costs subject to limits imposed by 
TEFRA. These hospitals included psychiatric hospitals and psychiatric 
units in acute care hospitals, long-term care hospitals (LTCH), 
children's hospitals, and rehabilitation hospitals and rehabilitation 
units in acute care hospitals. Cancer hospitals were added to the list 
of excluded hospitals by section 6004(a) of the Omnibus Budget 
Reconciliation Act of 1989 (Pub. L. 101-239).
    The Congress enacted various provisions in 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 (BBRA) (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-
554) to replace the cost-based methods of reimbursement with a PPS for 
the following excluded hospitals:
    <bullet> Rehabilitation hospitals and rehabilitation units in acute 
care hospitals.
    <bullet> Psychiatric hospitals and psychiatric units in acute care 
hospitals.
    <bullet> Long term care hospitals.
    The BBA also imposed national limits (or caps) on hospital-specific 
target amounts (that is, annual per discharge limits) for these 
hospitals until cost reporting periods beginning on or after October 1, 
2002. A detailed description of the TEFRA payment methodology is 
provided in section B.1. of this final rule.
    Section 124 of the BBRA mandated that the Secretary--(1) develop a 
per diem PPS for inpatient hospital services furnished in psychiatric 
hospitals and psychiatric units (hereinafter referred to as inpatient 
psychiatric facilities (IPFs)); (2) include in the PPS an adequate 
patient classification system that reflects the differences in patient 
resource use and costs among psychiatric hospitals and psychiatric 
units; (3) maintain budget neutrality; (4) permit the Secretary to 
require psychiatric hospitals and psychiatric units to submit 
information necessary for the development of the PPS; and (5) submit a 
report to the Congress describing the development of the PPS.
    Section 124 of the BBRA also required that the PPS for IPFs be 
implemented for cost reporting periods beginning on or after October 1, 
2002. In general, the creation of a prospective payment system requires 
an extraordinary amount of lead-time in order to conduct the research 
that is required to create a completely new payment system. For 
example, we must create data files, develop models to test individual 
variables and those variables' ability to explain costs, as well as 
perform extensive empirical analysis of the collected data.
    With respect to the creation of the IPF PPS, more lead time than 
usual was necessary. This is because the research we had conducted 
before the passage of the BBRA dated back to the 1980s and was focused 
on developing a per discharge IPF PPS. The research efforts to develop 
a discharged-based IPF PPS, however, failed to adequately explain cost 
variation among psychiatric cases. Because diagnosis in psychiatry is 
complicated and the criteria for diagnosis and treatment are less well 
defined in psychiatry than in general medicine and surgery, developing 
an IPF PPS was more elusive. Moreover, there have been significant 
changes in mental health treatment, for example, new medications and 
outpatient treatment options. Thus, to develop an adequate patient 
classification system that reflects the differences in patient resource 
use and costs, we had to embark on numerous courses of research that 
could be used as a possible foundation for the proposed IPF PPS.
    When we began the process of developing a proposed IPF PPS, we 
believed pursuing an assessment instrument, incorporating key 
indicators of functional status, was the most logical place to begin. 
This approach is consistent with the approach we followed in developing 
patient classification systems for other Medicare prospective payment 
systems (for example., home health agencies, skilled nursing 
facilities, and inpatient rehabilitation facilities). Our 
administrative data was inadequate to develop other patient 
classification systems because, although it provides useful information 
on diagnoses, services, and procedures, it does not include many 
patient and clinical characteristics and functional status indicators, 
which have been established as key components of a patient 
classification system. Therefore, to obtain the patient-level data we 
needed to develop an assessment-based patient classification system, we 
contracted with the University of Michigan's Public Health Institute in 
September 2002. We selected this contractor because it had developed a 
protocol assessment instrument, precursors of which had shown promise 
in explaining variation in resource utilization among psychiatric 
patients. Although there continues to be progress in completing the 
initial phase of this research, that is, adoption of an initial 
assessment instrument for pilot testing, we are unable to delay 
implementation of the IPF PPS until the draft assessment instrument is 
completed.
    Also, in our effort to meet the requirements of section 124 of the 
BBRA, we also pursued a second research project with the Health, 
Economics, Research, Inc. (now known as RTI 
International<SUP>[reg]</SUP>). RTI International<SUP>[reg]</SUP> 
embarked on a research project to identify patient characteristics and 
modes of practice believed to account for variation in per diem cost. 
It became apparent that, despite everyone's best efforts, the ongoing 
research projects being conducted by the University of Michigan and RTI 
International<SUP>[reg]</SUP>, could not be completed in time for us to 
engage in notice and comment rulemaking and achieve implementation of 
the IPF PPS by October 1, 2002.
    In addition, shortly before October 1, 2002, the American 
Psychiatric Association (APA) informed us that The Health Economics and 
Outcomes

[[Page 66924]]

Research Institute (THEORI) of the Greater New York Hospital 
Association had developed a potential IPF PPS classification model that 
was based on our currently available administrative data. Based on the 
model presented to us by the APA, we immediately began our own vigorous 
review of the ``APA'' model. We note, however, that although the 
information shared with us by the APA was extremely valuable in our 
formulation of a proposed IPF PPS, it came too late for us to be able 
to do the following: (1) Perform the analysis required to ensure that a 
system based on our administrative data would fulfill the statutory 
mandate of section 124 of the BBRA; and (2) engage in notice-and-
comment rulemaking and implement the IPF PPS by October 1, 2002. As 
soon as we completed an analysis of the information presented by the 
APA and of our administrative data, we published the proposed IPF PPS 
regulation.
    Initially, the proposed rule provided for a 60-day comment period. 
However, due to the complexity and scope of the proposed rule and 
because the public requested additional time to examine the rule so 
that it could provide meaningful comments, we extended the public 
comment period. The intricacy and complexity of the issues presented in 
the public comments required us to perform further substantial analysis 
to adequately address the issues raised by commenters, as well as our 
duty to satisfy section 124 of the BBRA. We have made every effort to 
complete this final rule as quickly as possible.
    (We note that, even though the IPF PPS described in this final rule 
is effective for cost reporting periods beginning on or after January 
1, 2005 and compliance with the IPF PPS requirements is required for 
cost reporting periods beginning on or after January 1, 2005, we will 
not have computer system changes in place that are necessary to 
accommodate claims processing under the IPF PPS until April 4, 2005 
(claims processing updates will occur on the first Monday following 
April 1, 2005). Therefore, claims submitted after January 1, 2005, but 
before April 4, 2005, will be paid as if the TEFRA rate was still in 
effect. Payments will be reconciled with the appropriate IPF PPS 
amount. We have instructed the fiscal intermediaries (FIs) to reconcile 
the payments that are made to IPFs for covered inpatient hospital 
services furnished to Medicare beneficiaries for cost reporting periods 
beginning on or after January 1, 2005, until the date of the systems 
implementation on April 4, 2005, with the amounts that are payable 
under the IPF PPS system by May 1, 2005.
    Since IPFs will receive payment under the IPF PPS starting with 
their first cost reporting period beginning on or after January 1, 
2005, only those IPFs with cost reporting periods beginning on or after 
January 1, 2005 but before April 1, 2005 will experience payment 
reconciliation.

Requirements for Issuance of Regulations

    Section 902 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) amended section 1871(a) of the Act and 
requires the Secretary, in consultation with the Director of the Office 
of Management and Budget, to establish and publish timelines for the 
publication of Medicare final regulations based on the previous 
publication of a Medicare proposed or interim final regulation. Section 
902 of the MMA also states that the timelines for these regulations may 
vary but will not exceed 3 years after publication of the preceding 
proposed or interim final regulation except under exceptional 
circumstances.
    This rule finalizes provisions set forth in the November 28, 2003 
proposed rule (68 FR 66920). In addition, this final rule has been 
published within the 3-year time limit imposed by section 902 of the 
MMA. Therefore, we believe that the final rule is in accordance with 
the Congress' intent to ensure timely publication of final regulations.

B. Overview of the Payment System for Inpatient Psychiatric Hospitals 
and Psychiatric Units Before the BBRA

1. Description of the TEFRA Payment Methodology
    Hospitals and units that are excluded from the hospital inpatient 
prospective payment system (IPPS) under section 1886(d)(1)(B) of the 
Act are paid for their inpatient operating costs under the provisions 
of the TEFRA (Pub. L. 97-248).
    The TEFRA provisions are found in section 1886(b) of the Act and 
implemented in regulations at 42 CFR 413. TEFRA established payments 
based on hospital-specific limits for inpatient operating costs. As 
specified in Sec.  413.40, TEFRA established a ceiling on payments for 
hospitals excluded from the IPPS. The ceiling on payments is determined 
by calculating the product of a facility's base year costs (the year in 
which its target reimbursement limit is based) per discharge, updated 
to the current year by a rate-of-increase percentage, and multiplied by 
the number of total current year discharges. A detailed discussion of 
target amount payment limits under TEFRA can be found in the final rule 
concerning the IPPS published in the Federal Register on September 1, 
1983 (48 FR 39746).
    The base year for a facility varied, depending on when the facility 
was initially determined to be an IPPS excluded provider. The base year 
for facilities that were established before the implementation of the 
TEFRA provision was 1982. For facilities established after the 
implementation of the TEFRA provision, facilities were allowed to 
choose which of their first 3 cost reporting years would be used in the 
future to determine their target limit. In 1992, the ``new provider'' 
period was shortened to 2 full years of cost reporting periods (Sec.  
413.40(f)(1)).
    Excluded facilities whose costs were below their target amounts 
would receive bonus payments equal to the lesser of half of the 
difference between costs and the target amount, up to a maximum of 5 
percent of the target amount, or the hospital's costs. For excluded 
hospitals whose costs exceeded their target amounts, Medicare provided 
relief payments equal to half of the amount by which the hospital's 
costs exceeded the target amount up to 10 percent of the target amount. 
Excluded facilities that experienced a more significant increase in 
patient acuity could also apply for an additional amount as specified 
in Sec.  413.40(d) for Medicare exception payments.
2. BBA Amendments to TEFRA
    The BBA amendments to section 1886 of the Act significantly altered 
the payment provisions for hospitals and units paid under the TEFRA 
provisions and added other qualifying criteria for certain hospitals 
excluded from the IPPS. A complete explanation of these amendments can 
be found in the final rule concerning the IPPS we published in the 
Federal Register on August 29, 1997 (62 FR 45966).
    The BBA made the following changes to section 1886 of the Act for 
TEFRA hospitals:
    <bullet> Section 4411 of the BBA amended section 1886(b)(3)(B) of 
the Act and restricted the rate-of-increase percentages that are 
applied to each provider's target amount so that excluded hospitals and 
units experiencing lower inpatient operating costs relative to their 
target amounts receive lower rates of increase.
    <bullet> Section 4412 of the BBA amended section 1886(g) of the Act 
to establish a 15-percent reduction in capital payments for excluded 
psychiatric and rehabilitation hospitals and units and LTCHs, for 
portions of cost reporting periods occurring during the period of

[[Page 66925]]

October 1, 1997, through September 30, 2002.
    <bullet> Section 4414 of the BBA amended section 1886(b)(3) of the 
Act to establish caps on the target amounts for excluded hospitals and 
units at the 75th percentile of target amounts for similar facilities 
for cost reporting periods beginning on or after October 1, 1997, 
through September 30, 2002. The caps on these target amounts apply only 
to psychiatric hospitals and rehabilitation hospital units and LTCHs. 
Payments for these excluded hospitals and units are based on the lesser 
of a provider's cost per discharge or its hospital-specific cost per 
discharge, subject to this cap.
    <bullet> Section 4415 of the BBA amended section 1886(b)(1) of the 
Act by revising the percentage factors used to determine the amount of 
bonus and relief payments and establishing continuous improvement bonus 
payments for excluded hospitals and units for cost reporting periods 
beginning on or after October 1, 1997. If a hospital is eligible for 
the continuous improvement bonus, the bonus payment is equal to the 
lesser of: (1) 50 percent of the amount by which operating costs are 
less than expected costs; or (2) 1 percent of the target amount.
    <bullet> Sections 4416 and 4419 of the BBA amended sections 1886(b) 
of the Act to establish a new framework for payments for new excluded 
providers. Section 4416 of the BBA added a new section 1886(b)(7) to 
the Act that established a new statutory methodology for new 
psychiatric and rehabilitation hospitals and units, and LTCHs. Under 
section 4416 of the BBA, payment to these providers for their first two 
cost reporting periods is limited to the lesser of the operating costs 
per case, or 110 percent of the national median of target amounts. This 
is adjusted for differences in wage levels, for the same class of 
hospital for cost reporting periods ending during FY 1996, updated to 
the applicable period.
3. BBRA Amendments to TEFRA
    The BBRA of 1999 refined some of the policies mandated by the BBA 
for hospitals and units paid under the TEFRA provisions. The provisions 
of the BBRA, amending section 1886(b)(3)(H) of the Act, were explained 
in detail and implemented in the IPPS interim final rule published in 
the Federal Register on August 1, 2000 (65 FR 47026) and in the IPPS 
final rule also published on August 1, 2000 (65 FR 47054).
    With respect to the TEFRA payment methodology, section 4414 of the 
BBA had provided for caps on target amounts for excluded hospitals and 
units for cost reporting periods beginning on or after October 1, 1997. 
Section 121 of the BBRA amended section 1886(b)(3)(H) of the Act to 
provide for an appropriate wage adjustment to these caps on the target 
amounts for certain hospitals and units paid under the TEFRA 
provisions, effective for cost reporting periods beginning on or after 
October 1, 1999 through September 30, 2002.
4. BIPA Amendments to TEFRA
    Section 306 of BIPA amended section 1886 of the Act by increasing 
the incentive payments for psychiatric hospitals and psychiatric units 
to 3 percent for cost reporting periods beginning on or after October 
1, 2000 and before October 1, 2001.

II. Provisions of the Proposed Regulations

    On November 28, 2003, we published a proposed rule in the Federal 
Register (68 FR 66920) as required by section 124 of the BBRA that 
proposed a PPS for Medicare payment of inpatient hospital services 
furnished in IPFs. The IPF PPS would replace the current reasonable 
cost-based payment system under the TEFRA provisions.
    We proposed to base the IPF PPS on data from the fiscal year (FY) 
1999 Medicare Provider Analysis and Review (MedPAR) file, which 
includes patient characteristics (for example, patients' diagnoses and 
age), and data from the FY 1999 Hospital Cost Report Information System 
(HCRIS), which includes facility characteristics (for example, location 
and teaching status). We proposed the following policies and 
methodology for the IPF PPS. We proposed to:
    <bullet> Add a new subpart N in 42 CFR 412 for the IPF PPS, and 
make conforming changes to parts 412 and 413 regarding the 
implementation of the IPF PPS.
    <bullet> Compute a standardized Federal per diem payment to be paid 
to all IPFs based on the sum of the national average routine operating, 
ancillary, and capital costs for each patient day of psychiatric care 
in an IPF adjusted for budget neutrality.
    <bullet> Adjust the Federal per diem payment to reflect certain 
patient and facility characteristics that were found in the regression 
analysis to be associated with statistically significant cost 
differences.
    <bullet> Provide patient-level adjustments for age, specified 
diagnosis-related groups (DRGs), and selected comorbidity categories.
    <bullet> Provide facility adjustments that include a wage index 
adjustment, rural location adjustment, and a teaching status 
adjustment.
    <bullet> Recognize variable per diem adjustments to account for the 
higher costs incurred in the early days of a psychiatric stay.
    <bullet> Adopt an outlier policy to target greater payment to the 
high cost cases.
    <bullet> Provide an interrupted stay policy for the purpose of 
applying the variable per diem adjustment and the outlier policy.
    <bullet> Implement the IPF PPS for IPF cost reporting periods 
beginning on or after April 1, 2004, with a 3-year transition period. 
We proposed that the first update would occur on July 1, 2005.
    <bullet> Include a coding policy that would require IPFs to report 
patient diagnoses using the International Classification of Diseases-
9th Revision, Clinical Modification (ICD-9-CM) code set.
    <bullet> Update a regulatory reference to the Diagnostic and 
Statistical Manual of Mental Disorders (DSM) from the Third Edition to 
the Fourth Edition, Text Revision (DSM-IV-TR).
    <bullet> Use the 1997-based excluded hospital with capital market 
basket to establish the labor-related share of the Federal per diem 
base rate, to calculate the budget neutrality adjustment, and to update 
the Federal per diem base rate.
    <bullet> Provide the annual update strategy for the IPF PPS.
    <bullet> Include research information for future refinement of the 
patient classification system.

III. Analysis of and Responses to Public Comments

    In the November 28, 2003 Federal Register (68 FR 66920), we 
published the proposed IPF PPS and provided for a 60-day comment 
period. On January 30, 2004, we published a notice in the Federal 
Register (68 FR 4464) extending the comment period for an additional 30 
days in response to public requests. The comment period that would have 
closed on January 27, 2004, was extended 30 days. Thus, the comment 
period for the proposed rule closed on February 26, 2004.
    We received 273 comments from hospital associations, psychiatric 
hospitals, providers, acute care hospitals, health research 
organizations, patient advocacy organizations, State associations, and 
physicians. We reviewed each commenter's letter and grouped related 
comments. Some comments were identical. After associating like 
comments, we placed them in categories based on subject matter or based 
on the section(s) of the regulation affected. Summaries of the public 
comments received and our responses to those comments are set forth 
below.

[[Page 66926]]

IV. Overview of the IPF PPS Proposed Payment Methodology

    In the November 2003 proposed rule, we proposed to establish a 
Federal payment for each patient day in an IPF derived from the 
national average daily routine operating, ancillary, and capital costs 
in IPFs. The Federal per diem payment would comprise a Federal per diem 
base rate adjusted by factors for patient and facility characteristics 
that account for variation in patient resource use. The Federal per 
diem base rate would be updated to the midpoint of the first year under 
the IPF PPS, standardized to account for the overall positive effects 
of the IPF PPS payment adjustments, and adjusted for budget neutrality.
    We proposed that psychiatric hospitals and psychiatric units paid 
under section 1886(b) of the Act would be paid under the IPF PPS for 
cost reporting periods beginning on or after April 1, 2004. We proposed 
that the IPF PPS would apply to inpatient hospital services furnished 
by Medicare participating entities in the United States that are 
classified as psychiatric hospitals or psychiatric units as specified 
in Sec.  412.22, Sec.  412.23, Sec.  412.25, and Sec.  412.27. As 
specified in Sec.  400.200, the United States means the 50 States, the 
District of Columbia, the Commonwealth of Puerto Rico, the Virgin 
Islands, Guam, American Samoa, and the Northern Mariana Islands.
    However, the following hospitals are paid under special payment 
provisions specified in Sec.  412.22(c) and, therefore, would not be 
paid under the IPF PPS:
    <bullet> Veterans Administration hospitals.
    <bullet> Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
    <bullet> Hospitals that are reimbursed in accordance with 
demonstration projects specified in section 402(a) of Public Law 90-248 
(42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 U.S.C. 
1395b-1(note)).
    <bullet> Non-participating hospitals furnishing emergency services 
to Medicare beneficiaries.
    We received a variety of comments on the proposed applicability 
requirements of the IPF PPS. In this final rule, we are adopting the 
proposed policies regarding applicability of the IPF PPS.
    Comment: One commenter recommended that CMS develop a separate 
payment system for government-operated IPFs. The commenter believes 
that these hospitals provide a different service than other psychiatric 
hospitals and psychiatric units.
    Several commenters requested that psychiatric units be excluded 
from the IPF PPS until a more equitable system can be created.
    Response: Section 124 of Public Law 106-113 requires the Secretary 
to implement a prospective payment system for psychiatric hospitals 
described in clause (i) of section 1886(d)(1)(B) of the Act and 
psychiatric units described in clause (v) of this section. Government-
operated psychiatric hospitals and psychiatric units fall within the 
definition of a psychiatric hospital and unit outlined in section 124 
of the BBRA to which this IPF PPS applies. Consequently, these 
entities, like all other psychiatric hospitals and units, must be paid 
under this system effective with the start of the implementation of the 
IPF PPS.
    With regard to the equity of the payment system, we believe that we 
are implementing an equitable prospective payment system based on the 
best data available.
    We also believe it is important to note that a per diem approach 
explains a significant percentage of the cost variation among inpatient 
psychiatric patients. We estimate that the final IPF PPS explains the 
33 percent variation in per diem cost among IPF cases. A commenter 
indicated that the combination of the explanatory power of a per diem 
system and the proposed adjustments on case level costs is 
approximately 80 percent. Our analysis confirmed the commenter's 
findings, however, we found the explanatory power of a per diem system 
and the final adjustment factors to be approximately 85 percent, 
solidifying our belief that the payment model combination we are using, 
a per diem system with adjustments based on case level costs, is 
equitable.
    Comment: One commenter questioned whether psychiatric units that 
are currently paid under the IPPS and do not meet the requirements of 
Sec.  412.22, Sec.  412.25, and Sec.  412.27 would be excluded from the 
IPF PPS. The commenter also asked whether these providers would be paid 
under the IPF PPS if they would meet the requirements of Sec.  412.22, 
Sec.  412.25, and Sec.  412.27. A few commenters asked if ``DRG-exempt 
status'' for psychiatric units would continue to be an option after the 
effective date of the IPF PPS.
    Response: If a hospital has a psychiatric unit that meets the 
requirements specified in Sec.  412.22, Sec.  412.25, and Sec.  412.27, 
the psychiatric unit is excluded from the IPPS (that is, DRG-exempt). 
The IPF PPS will replace the reasonable cost-based payments currently 
paid to excluded psychiatric hospitals and units for cost reporting 
periods beginning on or after January 1, 2005. Once the IPF PPS is 
implemented, hospitals will be paid under the IPF PPS for all patients 
admitted to the excluded psychiatric unit.
    Comment: One commenter recommended that critical access hospitals 
(CAHs) be allowed cost-based reimbursement for services in their 
psychiatric units. If a hospital or unit treats psychiatric patients 
but it does not meet the statutory definition of a psychiatric hospital 
or unit, then the IPF PPS would not apply.
    Response: Section 405(g)(2) of the MMA specifies that the amount of 
payment for services in psychiatric units of a CAH described in section 
1820(c)(2)(E) of the Act shall be equal to the amount that would 
otherwise be made if the services were inpatient hospital services 
provided in a distinct part psychiatric unit. Therefore, we have 
amended Sec.  413.70(e) to clarify that, effective for cost reporting 
periods beginning on or after January 1, 2005, certified psychiatric 
units in CAHs will be paid under the IPF PPS. We believe the statute is 
very clear concerning methodology.
    Comment: Several commenters requested an exceptions process through 
which an IPF could seek additional payment.
    Response: We believe that the final IPF PPS explains a sufficient 
amount of the cost variation among IPF patients and that an exceptions 
process is not necessary.
    More importantly, when we become aware of patient or facility 
characteristics that lead to higher per diem costs, we would propose to 
establish an adjustment factor to the IPF PPS so that all IPFs that 
qualify could benefit from the adjustment as part of routine claims 
processing rather than through an exceptions process through which an 
individual IPF could request additional payment. Therefore, we will be 
accounting for their differences in costs.

V. Development of the Budget-Neutral Federal Per Diem Base Rate

    In the proposed rule, we proposed that the IPF PPS be based on a 
standardized Federal per diem base rate calculated from IPF average per 
diem costs and adjusted for budget-neutrality. We proposed that the 
Federal per diem base rate would be used as the standard payment per 
day for the IPF PPS. In addition, the Federal per diem base rate would 
be adjusted by the applicable wage index factor and the patient-level 
and facility-level adjustments that are applicable to the stay.

[[Page 66927]]

A. Calculation of the Average Per Diem Cost

    To calculate the proposed Federal per diem base rate, we estimated 
the cost per day for--(1) routine services from FY 1999 cost reports 
(supplemented with FY 1998 cost reports if the FY 1999 cost report is 
missing); and (2) ancillary costs per day using data from the FY 1999 
Medicare claims and corresponding data from facility cost reports.
    For routine services, the per diem operating and capital costs were 
used to develop the base for the psychiatric per diem amount. The per 
diem routine costs were obtained from each facility's Medicare cost 
report. To estimate the costs for routine services included in the 
proposed Federal per diem base rate calculation, we added the total 
routine costs (including costs for capital) submitted on the cost 
report for each provider and divided it by the total Medicare days.
    Some average routine costs per day were determined to be aberrant, 
that is, the costs were extraordinarily high or low and most likely 
contained data errors. The following method was used to trim 
extraordinarily high or low cost values in order to improve the 
accuracy of our results.
    First, the average and standard deviations of the total per diem 
cost (routine and ancillary costs) were computed separately for cases 
from psychiatric hospitals and psychiatric units. Separate statistics 
were computed because we did not want to systematically exclude a 
larger proportion of cases from the higher cost psychiatric units. 
Before calculating the means, we trimmed cases from the file when 
covered days were zero or routine costs were less than $100 or greater 
than $3,000. We selected these amounts because we believe this range 
captured the grossly aberrant cases. Elimination of the grossly 
aberrant cases would prevent the means from being distorted.
    Second, we trimmed cases when the provider's total cost per day was 
outside the generally-accepted statistical trim points of plus or minus 
3.00 standard deviations from the respective means for each facility 
type (psychiatric hospitals and psychiatric units). If the total cost 
per day was outside the trim value, we deleted the data for that 
provider from the per diem rate development file because it helped 
eliminate skewing of the data. After trimming the data, the average 
routine cost per day in FY 1999 was calculated to be $495.
    For ancillary services, we calculated the costs by converting 
charges from the FY 1999 Medicare claims into costs using facility-
specific, cost-center specific cost-to-charge ratios obtained from each 
provider's applicable cost reports. We matched each provider's 
departmental cost-to-charge ratios from their Medicare cost report to 
each charge on their claims reported in the MedPAR file. Multiplying 
the total charges for each type of ancillary service by the 
corresponding cost-to-charge ratio provided an estimate of the costs 
for all ancillary services received by the patient during the stay.
    For those departmental cost-to-charge ratios that we considered to 
be aberrant because they were outside the generally-accepted 
statistical trim points of plus or minus 3.00 standard deviations from 
the facility-type mean, we replaced the individual cost-to-charge 
ratios for each department with the median department cost-to-charge 
ratio by facility type (psychiatric hospital or psychiatric unit). We 
considered using the mean of the cost to-charge ratio as the 
substitution value, but because the distribution of ratios of cost-to-
charges is not normally distributed and there is no limit to the upper 
ceiling of the ratio, the mean ratio would be overstated due to the 
higher values on the upper tail of the bell curve. Therefore, we chose 
the median by facility type as a better measure for the substitution 
value when the facility's actual cost-to-charge ratio was outside the 
trim values.
    After computing the estimated costs of applying the applicable 
cost-to-charge ratios, and, when appropriate, the median cost-to charge 
ratio, to the total ancillary charges for each patient stay, we 
determined the average ancillary amount per day by dividing the total 
ancillary costs for all stays by the total number of covered Medicare 
days. Using this methodology, the average ancillary cost per day in FY 
1999 was calculated to be $67.
    Adding the average ancillary costs per day ($67) and the average 
routine costs per day including capital costs ($495) provides the 
estimated average per diem cost for each patient day of inpatient 
psychiatric care in FY 1999 ($562). We used the above described 
procedures to calculate the average per diem cost in this final rule as 
well.
    Comment: Several commenters recommended that CMS use more current 
data for the final IPF PPS. The commenters suggested that CMS use the 
FY 2002 MedPAR data and the FY 2002 HCRIS data, supplemented with FY 
2001 cost report data when necessary.
    A few commenters indicated it would be preferable to use the most 
current cost report data, with an appropriate audit adjustment factor, 
if necessary.
    Response: We used the best available data when we developed the 
proposed rule. We are continuing to use the best data available for 
this final rule. Specifically, we calculated the average cost per day 
using FY 2002 claims and cost report data supplemented with FY 2001 
cost report data if the FY 2002 cost report was missing. Using FY 2002 
data and the methodology described above, we calculated the per diem 
cost for each patient day of inpatient psychiatric care in an IPF in FY 
2002. We note that currently, less than 50 percent of the hospitals 
have filed their FY 2003 cost reports. Therefore, we believe that FY 
2002 cost report data provides the best available information for this 
final rule.

B. Determining the Update Factors for the Budget-Neutrality Calculation

    Section 124(a)(1) of the BBRA requires that the IPF PPS be budget 
neutral. In other words, the amount of total payments under the IPF 
PPS, including any payment adjustments, must be projected to be equal 
to the amount of total payments that would have been made if the IPF 
PPS were not implemented. Therefore, in the proposed rule as well as in 
this final rule, we have calculated the budget-neutrality factor by 
setting the total estimated PPS payments to be equal to the total 
estimated payments that would have been made under the TEFRA 
methodology had the IPF PPS not been implemented.
    In the proposed rule, we based the rate setting calculations and 
estimated impacts on an April 1, 2004 implementation date. However, in 
order to create a more efficient process of updates for the various 
Medicare payment systems, we proposed to establish a July 1 annual 
update cycle for the IPF PPS. We also indicated we would not update the 
rates on July 1, 2004 because we believed there would be an 
insufficient time under the new IPF PPS to generate data that would be 
useful in updating the IPF PPS. As a result, we calculated the proposed 
Federal per diem base rate to be budget neutral for the 15-month period 
April 1, 2004 through June 30, 2005.
    In this final rule, we calculated the final Federal per diem base 
rate to be budget neutral during the implementation period under the 
IPF PPS. As in the proposed rule, we will use a July 1 update cycle. 
Similar to the proposed rule, we will not update the IPF PPS during the 
first year of implementation because we believe there would be an 
insufficient amount of time under the IPF PPS to generate data useful 
in updating the system. Thus, the implementation period for the

[[Page 66928]]

final IPF PPS is the 18-month period January 1, 2005 through June 30, 
2006. As a result, we updated the Federal per diem base rate to the 
midpoint of the January 1, 2005 through June 30, 2006, implementation 
period (that is, October 1, 2005).
1. The 1997-Based Excluded Hospital with Capital Market Basket
    Since FY 2003, the 1997-based excluded hospital with capital market 
basket has been used to establish the rates-of-increase for excluded 
hospitals and units paid under TEFRA. As a result, in the proposed 
rule, we proposed to use the 1997-based excluded hospital capital 
market basket to update the Federal per diem base rate to the midpoint 
of the implementation period under the IPF PPS, to establish the labor-
related share for applying the wage index (see section V. of this final 
rule), and to update the Federal per diem base rate after the 
implementation period (see section V. of this final rule).
    In the proposed rule, we explained that we periodically rebase 
(moving the base year for the structure of costs), and revise (changing 
data sources, cost categories, or price proxies used) the market basket 
to reflect more current cost data. We provided a detailed comparison of 
the 1992-based excluded hospital with capital market basket that had 
been in effect prior to October 1, 2002 to the rebased and revised 
1997-based excluded hospital with capital market basket.
    In the proposed rule, we explained that the operating portion of 
the 1997-based excluded hospital with capital market basket is derived 
from the 1997-based excluded hospital market basket. The methodology 
used to develop the operating portion was described in the IPPS final 
rule published in the Federal Register on August 1, 2002 (67 FR 50042 
through 50044). In brief, the operating cost category weights in the 
1997-based excluded hospital market basket were determined from the 
1997 Medicare cost reports, the 1997 Business Expenditure Survey from 
the Bureau of the Census and the 1997 Annual Input-Output data from the 
Bureau of Economic Analysis. As was discussed in the IPPS final rule, 
we made two methodological revisions in developing the 1997-based 
excluded hospital market basket: (1) Changing the wage and benefit 
price proxies to use the Employment Cost Index (ECI) wage and benefit 
data for hospital workers; and (2) adding a cost category for blood and 
blood products.
    As we indicated in the proposed rule (68 FR 66926), when we add the 
weight for capital costs to the excluded hospital market basket, the 
sum of the operating and capital weights must still equal 100.0. 
Because capital costs account for 8.968 percent of total costs for 
excluded hospitals in 1997, operating costs must account for 91.032 
percent. Each operating cost category weight in the 1997-based excluded 
hospital market basket was multiplied by 0.91032 to determine its 
weight in the 1997-based excluded hospital with capital market basket.
    The aggregate capital component of the 1997-based excluded hospital 
market basket (8.968 percent) was determined from the same set of 
Medicare cost reports used to derive the operating component. The 
detailed capital cost categories of depreciation, interest, and other 
capital expenses were also determined using the Medicare cost reports. 
There are two sets of weights for the capital portion of the market 
basket. The first set of weights identifies the proportion of capital 
expenditures attributable to each capital cost category, while the 
second set represents relative vintage weights for depreciation and 
interest. The vintage weights identify the proportion of capital 
expenditures that is attributable to each year over the useful life of 
capital assets within a cost category (see the IPPS final rule on 
August 1, 2002 (67 FR 50045 through 50047), for a discussion on how 
vintage weights are determined).
    The cost categories, price proxies, and base-year FY 1997 weights 
for the excluded hospital with capital market basket are presented in 
Table 1 below. The vintage weights for the 1997-based excluded hospital 
with capital market basket are presented in Table 1(A) below.
BILLING CODE 4120-03-P

[[Page 66929]]

[GRAPHIC] [TIFF OMITTED] TR15NO04.439


[[Page 66930]]


[GRAPHIC] [TIFF OMITTED] TR15NO04.440

BILLING CODE 4120-03-C
    In the proposed rule (68 FR 66928) we described an analysis we 
conducted to ensure that the excluded hospital with capital market 
basket provides a reasonable measure of the price changes facing IPFs. 
We conducted an analysis of annual percent changes in the market basket 
when the weights for wages, pharmaceuticals, and capital in IPFs were 
substituted into the 1997-based excluded hospital with capital market 
basket. Other cost categories were recalibrated using ratios available 
from the IPPS market basket. Our analysis found that on average between 
1995 and 2002, the excluded hospital with capital market basket 
increased at nearly the same average annual rate (3.4 percent) as the 
market basket with IPF weights for wages, pharmaceuticals, and capital 
(3.5 percent). This difference is less than the 0.25 percentage point 
criterion that determines whether a forecast error adjustment is 
warranted under the IPPS update framework.
    Based on this analysis, we believe that the excluded hospital with 
capital market basket is doing an adequate job of reflecting the price 
changes facing IPFs. For this reason, in this final rule we are 
adopting the 1997-based excluded hospital with capital market basket to 
update the Federal per diem base rate to the midpoint of the IPF PPS 
implementation period, to establish the labor-related share of the 
Federal per diem base rate, and to update the IPF PPS after the 
implementation period.
2. Calculating the Budget-Neutrality Adjustment Factor
    Many commenters stated that they were concerned that the data used 
in the proposed rule were not current and did not reflect an accurate 
view of the services provided to Medicare psychiatric patients. The 
data sources we used to calculate the proposed budget-neutrality factor 
were the best data available for IPFs at that time and included FY 1999 
cost report data and FY 1999 Medicare claims data from the June 2001 
update of the MedPAR files. We updated the data for each IPF to the 
midpoint of the proposed 15-month implementation period (April 1, 2004 
through June 30, 2005) and used the projected market basket update 
factors for each applicable year. For this final rule, we used FY 2002 
data, the best data available.
a. Cost Report Data for January 1, 2005 Through June 30, 2006
    In the proposed rule, we proposed to update each IPF's cost to the 
midpoint of the proposed implementation period April 1, 2004 through 
June 30, 2005. We explained that to calculate the operating costs, we 
would use the applicable percentage increases to the TEFRA target 
amounts for FY 1999 through FY 2002 in accordance with Sec.  
413.40(c)(3)(vii) and the full excluded hospital market-basket 
percentage increase for FY 2003 and later in accordance with Sec.  
413.40(c)(3)(viii).
    In this final rule, in order to determine each provider's projected 
operating cost for the IPF PPS implementation period adopted in this 
final rule, we updated each IPF's per diem cost in FY 2002 to the 
midpoint of the implementation period January 1, 2005 through June 30, 
2006. We used the most recent projection of the full percentage 
increase in the 1997-based excluded hospital market basket index for FY 
2003 and later in accordance with Sec.  413.40(c)(3)(viii).
    Comment: A few commenters recommended that CMS project IPF

[[Page 66931]]

operating and capital costs using the full TEFRA market basket indexes.
    Response: We used FY 1999 data in the proposed rule. In order to 
update the data to the midpoint of the proposed implementation period, 
we applied the cap imposed by section 4414 of the BBA in accordance 
with Sec.  413.40(c)(3)(vii). The BBA caps sunset after FY 2002. Since 
we used the FY 2002 cost reports to project TEFRA costs and payments in 
this final rule, we used the full excluded hospital market basket 
indexes to project the costs and payments to the midpoint of the IPF 
PPS implementation period in accordance with Sec.  413.40(c)(3)(viii).
    Since the IPF PPS includes both the operating and capital-related 
costs, we projected the capital-related cost under the TEFRA system as 
well. We used the excluded capital market basket to project the 
capital-related costs under the TEFRA system. Table 2 below summarizes 
the excluded hospital market basket (without capital) and the excluded 
capital market basket indexes.
[GRAPHIC] [TIFF OMITTED] TR15NO04.441

b. Estimate of Total Payments Under the TEFRA Payment System
    Consistent with the proposed rule, in this final rule, we estimated 
payments for inpatient operating and capital costs under the current 
TEFRA system using the following methodology:

Step 1: IPF's Facility-Specific Target Amount

    The facility-specific target amount for an IPF was calculated based 
on the IPF's allowable inpatient operating cost per discharge for the 
base period, excluding capital-related, non-physician anesthetist, and 
graduate medical education costs. We updated the target amount using 
the rate-of-increase percentages specified in Sec.  413.40(c)(3)(viii).

Step 2: Calculating Each IPF's TEFRA Payments for Inpatient Operating 
Services

    Under the TEFRA system, an IPF's payment amount for inpatient 
operating services is the lower of--
    <bullet> The hospital-specific target amount multiplied by the 
number of Medicare discharges (the ceiling); or
    <bullet> The hospital's average inpatient operating cost per case 
multiplied by the number of Medicare discharges.
    In addition, under the TEFRA system, payments may include a bonus 
or relief payment, as follows:
    <bullet> IPFs whose net inpatient operating costs are lower than or 
equal to the ceiling would receive the lower payment of--(1) the net 
inpatient operating costs plus 15 percent of the difference between the 
inpatient operating costs and the ceiling; or (2) the net inpatient 
operating costs plus 2 percent of the ceiling.
    <bullet> IPFs whose net inpatient operating costs are greater than 
the ceiling, but less than 110 percent of the ceiling, would receive 
the ceiling payment.
    <bullet> IPFs whose net inpatient operating costs are greater than 
110 percent of the ceiling would receive the ceiling payment plus the 
lower of--(1) 50 percent of the difference between the 110 percent of 
the ceiling and the net inpatient operating costs; or (2) 10 percent of 
the ceiling payment.

Step 3: IPF Payments for Capital-Related Costs

    Under the TEFRA system, in accordance with section 1886(g) of the 
Act, Medicare allowable capital-related costs are paid on a reasonable 
cost basis. Each IPF's payment for capital-related costs is taken 
directly from the cost report and updated for inflation using the 
excluded capital market basket.

Step 4: IPF Total Operating and Capital-Related Costs Under the TEFRA 
Payment System

    Once estimated payments for inpatient operating costs were 
determined (including bonus and relief payments, as appropriate), we 
added the TEFRA adjusted operating payments and capital-related cost 
payments together to determine each IPF's total payments under the 
TEFRA payment system.
c. Payments Under the IPF PPS Without a Budget-Neutrality Adjustment
    Consistent with the proposed rule, in this final rule, we used the 
1997-based excluded hospital with capital market basket to trend the FY 
2002 base year data to the midpoint of the IPF PPS implementation 
period and, for the purpose of applying a wage index adjustment, to 
establish the labor-related portion of the Federal per diem base rate.
    In this final rule, by trending the cost using the applicable 
market basket increase factors, we updated the average per diem cost to 
the midpoint of the January 1, 2005 through June 30, 2006 
implementation period. The updated average cost per day of $724.43 was 
then used in the payment model to project future payments under the IPF 
PPS.
    The next step is to apply the associated wage index and all 
applicable patient-level and facility-level adjustments to determine 
the appropriate IPF PPS payment amount for each stay in the final 
payment model file.
C. Standardization of the Federal Per Diem Base Rate
    We must standardize the IPF PPS payments in order to account for 
the overall positive effects of the final IPF PPS payment adjustment 
factors. The proposed standardization factor was calculated to be 17 
percent. However, in the proposed rule, we included a 19-percent 
budget-neutrality adjustment and a 2-percent outlier adjustment, and

[[Page 66932]]

did not identify the percentage of the overall budget-neutrality 
adjustment that was attributable to standardization.
    As was done in the proposed rule and in this final rule, to 
standardize the IPF PPS payments, we compared the IPF PPS payment 
amounts calculated from the psychiatric stays in the FY 2002 MedPAR 
file to the projected TEFRA payments from the FY 2002 cost report file 
updated to the midpoint of the IPF PPS implementation period. The 
standardization factor was calculated by dividing total estimated 
payments under the TEFRA payment system by estimated payments under the 
IPF PPS. The standardization factor was calculated to be 0.8367. As a 
result, the $724.43 Federal per diem base rate was reduced by 16.33 
percent.
D. Calculation of the Budget Neutrality Adjustment
    As we noted above, in the proposed rule we identified a 19-percent 
budget-neutrality factor, but did not break it out into separate 
components. In this final rule, we are identifying each component of 
the budget neutrality adjustment, that is, the outlier adjustment, 
stop-loss adjustment, and behavioral offset.
1. Outlier Adjustment
    Since the IPF PPS payment amount for each IPF includes applicable 
outlier amounts, using an approach consistent with the proposed rule, 
we reduced the standardized Federal per diem base rate to account for 
aggregate IPF PPS payments estimated to be made as outlier payments. 
The appropriate outlier amount was determined by comparing the adjusted 
prospective payment for the entire stay to the computed cost per case. 
If costs were above the prospective payment plus the adjusted fixed 
dollar loss threshold, an outlier payment was computed using the 
applicable risk-sharing percentages, as explained in greater detail in 
section VI.D.1. of this final rule. The outlier amount was computed for 
all stays, and the total outlier amount was added to the final IPF PPS 
payment. The outlier adjustment was calculated to be 2 percent. As a 
result, the Federal per diem base rate includes a reduction of 2 
percent.
2. Stop-Loss Provision Adjustment
    As explained in detail in section VI.D.3. of this final rule, we 
will provide stop-loss payments to ensure that an IPF's total PPS 
payments are no less than a minimum percentage of their TEFRA payment, 
had the IPF PPS not been implemented. As with outlier payments, in this 
final rule, we reduced the standardized Federal per diem base rate by 
the percentage of aggregate IPF PPS payments estimated to be made for 
stop-loss payments.
    The stop-loss payment amount was determined by comparing aggregate 
prospective payments that the provider would receive under the IPF PPS 
to aggregate TEFRA payments that the provider would have otherwise 
received without implementation of the IPF PPS. If an IPF's aggregate 
IPF PPS payments are less than 70 percent of its aggregate payments 
under TEFRA, a stop-loss payment was computed for that IPF. The stop-
loss payment amounts were computed for those IPFs that were projected 
to receive the payments, and the total amount was added to the final 
IPF PPS payment amount. In our calculation, we needed to include a 
reduction of 0.39 percent in the standardized Federal per diem base 
rate to maintain budget neutrality in the final IPF PPS.
    We note that the 0.39 percent adjustment due to the stop-loss 
provision is temporary in nature. This adjustment will be removed after 
the transition because, as explained in section IV.D.3. of this final 
rule, the stop-loss provision is applicable only during the transition 
period.
3. Behavioral Offset
    As explained in the proposed rule, we expect that once the IPF PPS 
is implemented, IPFs may experience usage patterns that are 
significantly different from those they currently experience. For 
example, since the IPF PPS is a per diem system, IPFs might have an 
incentive to keep patients in the facility longer to maximize their use 
of beds or to receive outlier payments. In addition, the current TEFRA 
payment system does not depend on coding a principal diagnosis; 
however, payment will depend on properly coding the principal diagnosis 
under the IPF PPS. Therefore, we expect that IPFs will have an 
incentive to comprehensively code for the presence of comorbidities and 
ultimately the coding practice of IPFs should improve once the IPF PPS 
is implemented.
    As a result of these behavioral changes, Medicare may incur higher 
payments than assumed in our calculations. These effects were taken 
into account when we calculated the proposed budget-neutral Federal per 
diem base rate. Accounting for these effects through an adjustment is 
commonly known as a behavioral offset.
    Based on accepted actuarial practices and consistent with the 
assumptions made under the Inpatient Rehabilitation Facility PPS, we 
assumed in determining the behavioral offset, that IPFs would regain 15 
percent of potential ``losses'' and augment payment increases by 5 
percent. We applied this actuarial assumption, which is based on our 
historical experience with new payment systems, to the estimated 
``losses'' and ``gains'' among the IPFs.
    Comment: A few commenters disagreed with CMS's concern that the IPF 
PPS would provide an incentive for IPFs to increase length of stay. 
They stated that the incentive to increase length of stay already 
exists under the current TEFRA payment system. The commenters stated 
that under TEFRA, the longer the stay, the higher the payment as long 
as the hospital stays under its TEFRA limit.
    Commenters stated that despite this incentive, length of stay has 
continuously declined over the last decade. One commenter mentioned 
that IPFs use clinical practice guidelines used by Quality Improvement 
Organizations, rather than Medicare reimbursement standards, to 
determine when a patient is ready for discharge.
    Several commenters stated that they do not foresee any significant 
increase in length of stay for psychiatric admissions and recommended 
that CMS adopt a smaller behavioral offset initially. They suggested 
that the length of stay could easily be monitored by CMS and adjusted 
in the future, if necessary.
    Response: Since per diem payment systems pay on a per day basis 
rather than a per discharge basis, there is an incentive to keep 
patients more days. Therefore, we believe that including a behavioral 
offset will make our calculations and impact analysis more accurate. We 
will monitor the extent to which current practice in IPFs changes such 
as how the average length of stay is affected by implementation of a 
per diem payment system and may propose adjustments to the behavioral 
assumptions, accordingly.
    In addition to the length of stay, the final IPF PPS payment model 
depends on the accurate coding of diagnoses for the DRG and comorbidity 
adjustments. We expect that IPFs will try to code diagnoses for each 
stay more accurately after the implementation of the IPF PPS in order 
to receive payment adjustments. This behavior change could result in 
significantly higher Medicare payments to IPFs than we assumed when we 
calculated the final Federal per diem base amount.
    The behavioral offset for the final IPF PPS was calculated to be 
2.66 percent. As a result, we reduced the standardized Federal per diem 
base rate

[[Page 66933]]

by 2.66 percent to maintain budget neutrality.
    To summarize, the proposed Federal per diem base rate with an 
outlier adjustment and budget neutrality with a behavioral offset was 
calculated to be $530. This amount included a 2-percent reduction to 
account for proposed outlier payments and a 19 percent reduction to 
account for budget neutrality and the behavioral offset to the Federal 
per diem base rate otherwise calculated under the methodology as 
described above. Of that 19-percent reduction, 17 percent is 
attributable to standardization, and 2 percent is attributable to the 
behavioral offset (see section V.C. of this final rule for an 
explanation of standardization).
    Using the FY 2002 data for this final rule, the final budget-
neutral Federal per diem base rate with an outlier adjustment, a stop 
loss provision with a behavioral offset is calculated to be $575.95. 
This amount includes a 16.33-percent reduction from $724.43 to account 
for standardization to the projected TEFRA per diem payment for the 
implementation period, a 2-percent reduction to account for outlier 
payments, a 0.39-percent reduction to account for stop-loss payments 
and a 2.66-percent reduction to account for the behavioral offset.

VI. Cost Regression Used To Develop Payment Adjustment Factors

    In the proposed rule, we provided a detailed description of the 
data file used for the regression analysis, our trimming methods, and 
the limitations associated with IPFs reporting routine per diem costs 
as an average. As a result of the regression analysis, we proposed 
patient-level payment adjustments for age, DRG assignment based on 
patients' principal diagnoses, selected comorbidities, and a day of 
stay adjustment (the variable per diem adjustments) to reflect higher 
resource use in the early days of an IPF stay. We also proposed 
facility-level payment adjustments for wage area and rural location, 
and a teaching status adjustment.
    Comment: One commenter stated that the regression models used in 
the proposed rule may not have appropriately modeled the data. The 
commenter believes that data entered into the regression model(s) are 
of a hierarchical nature, namely patients within facilities. Therefore, 
within a facility they cannot be considered independent observations, a 
requirement of simple regression models. To account for the fact that 
patients are nested within hospitals, hierarchical linear models need 
to be used. This will allow the covariance structure to be modeled. The 
commenter also believes that this will allow facility level variables 
to be modeled in the appropriate place. The commenter stated that 
although this would have to be explored, a model might estimate average 
facility costs while individual variability attributable to the 
patients and their covariates would be estimated separately.
    Response: There are two parts to our response to this comment. The 
first part addresses why our data are not well-suited for the use of 
hierarchical linear models. The second part addresses the potential 
consequences for the payment adjustment factors of using ordinary least 
squares to estimate the cost regression instead of a method applicable 
for hierarchical linear models. We use ordinary least squares in the 
proposed rule as well as in this final rule.
    First, the commenter is correct that, in principle, multi-level or 
hierarchical linear models would be appropriate for cost data that 
varied among patients within psychiatric facilities (commonly referred 
to as within group variation) and among psychiatric facilities 
(commonly called between group variation). However, in our cost data, 
each facility assigns the same per diem routine cost to all of its 
patients. As a result, there is no per diem routine cost variation 
among patients within the same facility, and, since routine costs are a 
large proportion of total cost, our measure of routine cost contains 
relatively little within group variation. In our data, ancillary cost 
differences are the only source of within group variation in per diem 
cost. This constraint substantially limits our ability to model patient 
effects within facilities. We concluded that under these circumstances, 
we are not able to meaningfully estimate a hierarchical linear model 
and that the data could be appropriately modeled using ordinary least 
squares.
    Second, there are two potential consequences of using ordinary 
least squares to estimate the cost regression rather than a statistical 
method applicable for hierarchical models. According to statistical 
theory, the first consequence is that the standard errors of the 
regression coefficients may differ in the 2 cases. These differences 
could influence the conclusions drawn from tests of statistical 
inference about the role of the regression's independent variables (for 
example, patient age and length of stay) in explaining variation in per 
diem costs. The significance of this problem is that, potentially, we 
might develop a payment adjustment based on a variable that we believe 
to be a significant determinant of per diem cost, when we would not 
have developed a payment adjustment for that variable if we had 
estimated the cost regression using a statistical technique that would 
yield more accurate standard errors. To test whether this problem 
applies to our cost regression, we estimated the regression using a 
method applicable to hierarchical models.
    As noted by the commenter, the advantage of hierarchical linear 
models is that they allow modeling of the covariance structure. The 
method we used (the SAS procedure named Proc Mixed) allows the user to 
select among alternative models of the data's covariance structure. 
Among the options in Proc Mixed, we used a random effects model with 
``compound symmetry'' as a compromise between the assumptions of 
ordinary least squares and the completely unstructured case, which 
imposes no assumptions on the covariance structure. The results of this 
test were, as predicted by statistical theory, that the standard errors 
from Proc Mixed often differed from those estimated using ordinary 
least squares. However, there was no change in the conclusions drawn 
from statistical inference tests because the variables that were 
significant using ordinary least squares remained highly significant 
using Proc Mixed. As a result, both statistical techniques imply that 
the same variables are important determinants of per diem cost and, 
hence, potential candidates for payment adjustment factors.
    The second potential statistical consequence of using ordinary 
least squares rather than a hierarchical model method to estimate the 
cost regression is that the size of the regression coefficients of the 
independent variables may be different. In turn, differences in 
regression coefficients will produce differences in sizes of the 
payment adjustment factors. However, statistical theory does not 
predict that the ordinary least squares estimates are subject to 
statistical bias. Furthermore, statistical theory implies that very 
large sample sizes such as ours will improve the accuracy of ordinary 
least squares estimates. Therefore, statistical theory does not imply 
that the regression coefficients estimated using ordinary least squares 
are necessarily less accurate than those estimated with Proc Mixed or a 
similar method.
    Based on the three considerations just described, we believe that 
the statistical methods we used in the proposed and final rule enabled 
us to model the data appropriately. That is, although in principle our 
data is hierarchical, in

[[Page 66934]]

practice, it does not contain the full extent of variation at the 
patient and facility levels that would yield meaningful hierarchical 
modeling. In addition, our conclusions about which variables are 
important in explaining cost variation are not affected by our use of 
ordinary least squares. Finally, statistical theory of hierarchical 
modeling does not imply that there is necessarily a problem with the 
size of the regression coefficients obtained from ordinary least 
squares.
    Comment: A commenter stated that CMS estimated a ``structural 
model'' rather than a ``payment model'' by including variables in the 
regression that were not used as payment adjustors (size and the 
occupancy rate). The commenter acknowledged that there is some debate 
about which type of model is most appropriate in constructing payment 
systems, but expressed the opinion that the ``research and policy 
community'' believes that payment models are preferred to structural 
models.
    Response: This commenter is referring to two different approaches 
in using cost regressions to develop payment adjustments. In the 
``payment model'' approach, the only independent variables included in 
the cost regression are those variables that are used as payment 
adjustments. In the ``structural model'' approach, all variables that 
are hypothesized to be important determinants of cost are included in 
the cost regression, whether or not they are going to be used as 
payment adjustments. Omitting ``structural'' variables from the cost 
regression will affect the sizes of the regression coefficients for 
``payment'' variables if the omitted variables are correlated with some 
or all of the payment variables, which will in turn affect the 
magnitude of the payment adjustment factors. If omitted structural 
variables are completely uncorrelated with any of the payment 
variables, omission of the structural variables from the cost 
regression will lower the overall explanatory power of the regression, 
but will not affect the sizes of the regression coefficients for the 
payment variables. Debate over whether the payment or the structural 
approach is preferred generally centers on the case when one or more 
structural variables are positively correlated with one or more payment 
variables. In this case, the payment approach will result in paying for 
some of the effects of the omitted structural variable(s) via the 
payment adjustments of some of the payment variables. That is, the 
payment adjustment factors for some payment variables will be greater 
than they would have been had the structural model been used. The 
structural approach will result in smaller payment adjustment factors 
for some payment variables because the effects of the omitted 
structural variables are not reflected in the regression coefficients 
of those payment variables, but rather are captured by the regression 
coefficients of the structural variables included in the cost 
regression.
    We believe the commenter is questioning whether CMS included 
variables in the cost regression that were not used as payment 
adjustors. The two variables cited in the comment are measures of 
facility size and occupancy. In fact, in neither the proposed nor the 
final rule did we include facility size in our cost regression. We 
followed the payment model approach with respect to the size variable 
because facility size has never been regarded as an acceptable payment 
variable in any of our prospective payment systems since it is a 
variable over which a facility has a substantial degree of control. 
However, in adopting the payment model approach for the size variable, 
we are allowing the effects of size to increase payment adjustment 
factors to the extent that facility size is positively correlated with 
acceptable payment variables. For example, small facilities that are 
small because of other factors such as rural location will be 
compensated for their higher costs due to those factors. Therefore, 
adopting a structural payment model approach would have adversely 
penalized small facilities and we recognize that small facilities may 
be important providers of psychiatric services in many circumstances. 
In the case of the occupancy rate, we adopted the structural approach 
and included the variable in the regression. Whether a facility is 
large or small, we think that it is appropriate to control for 
variations in the occupancy rate in estimating the effects of the 
payment variables on per diem cost to avoid compensating facilities for 
inefficiency associated with underutilized fixed costs.
    Comment: A commenter asked whether the age and comorbidity 
variables identified the same groups of patients, and as a result, 
whether by including both variables in our regression, we were making 
the same adjustment twice.
    Response: Although the presence of comorbidities is more common 
among the elderly, the age and comorbidity variables do not identify 
exactly the same groups of patients. In the proposed rule, the age 
variable grouped all patients over age 65 in the same category and the 
comorbidity variables identified 17 different conditions. Comorbidities 
were present for patients under age 65 as well as those over age 65. 
Further, since we identified 17 separate comorbid categories, some 
elderly patients have no comorbidities, others have a single 
comorbidity, and still others may have multiple comorbidities. 
Including the age and comorbidity variables in the regression does not 
measure the same adjustment twice, but rather utilizes the fact that 
the variables are not perfectly correlated to measure separate effects 
for age and comorbidities.
    Comment: One commenter recommended that CMS compare the 
relationship between costs per day among the various types of IPFs to 
the same relationship among types of SNFs.
    The commenter stated that hospital-based SNFs have higher per diem 
costs than freestanding SNFs, but the shorter lengths of stay for 
hospital-based SNFs result in approximately equal per case costs for 
freestanding and hospital-based SNFs.
    Response: The government-operated psychiatric hospitals have 
relatively low per diem costs, relatively long lengths of stay, and 
relatively high per case costs. However, among the other main types of 
psychiatric facilities (non-profit hospitals, for-profit hospitals, and 
psychiatric units), there is a direct relationship between per diem and 
per case costs because lengths of stay are very similar for these types 
of facilities. Psychiatric units have the highest per diem and per case 
costs, followed by non-profit hospitals, and last by for-profit 
hospitals.
    Comment: A few commenters suggested that CMS adopt the DRG 
methodology used under the IPPS instead of utilizing adjustment factors 
for age, comorbidities, and DRG assignment. The commenters believe that 
by using this method, the DRGs would be established for cases with and 
without the presence of comorbidities and for various age categories.
    Response: As we discussed in the proposed rule, adopting a patient 
classification system based on diagnosis alone may not explain the wide 
variation in resource use among IPF patients. There is no indication 
that regrouping the psychiatric DRGs as the commenter suggests will 
explain more of the variation in per diem cost than the methodology we 
are adopting.
    Since the DRGs are also used to pay inpatient psychiatric cases 
treated outside the distinct part psychiatric unit, we believe that 
before any basic changes to the DRG structure could be proposed, we 
would first need to conduct a thorough examination of the

[[Page 66935]]

potential effects on both the IPPS and the IPF PPS. We have not 
conducted such an approach because there was insufficient time, and we 
did not want to delay implementing the IPF PPS.
    Comment: Several commenters described a recent study in which the 
researchers regrouped psychiatric diagnoses and comorbidities and 
included variables for certain activity of daily living deficits 
(toileting, transferring, and personal hygiene), patient dangerousness 
(strong suicide or assaultive tendencies), and patients who undergo 
electroconvulsive therapy (ECT). The commenters recommended that we 
adopt the study findings in the final IPF PPS.
    Response: Although the commenters did not explicitly identify the 
study, we believe that they are referring to the CMS funded RTI 
International<SUP>[reg]</SUP> (trade name of Research Triangle 
Institute) study of inpatient psychiatric care that was designed to 
complement the development of the IPF PPS. RTI 
International<SUP>[reg]</SUP> addressed two major limitations of the 
administrative claims and cost report data available to CMS for the IPF 
PPS.
    First, the administrative data only captures the uniform routine 
daily cost assigned to each patient treated in the same facility, so 
that no variation in routine daily cost can be observed for patients in 
the same facility, but who have different resource requirements. This 
artificial reduction in cost variation may impede efforts to accurately 
identify and measure the effects of certain patient characteristics. 
Second, the patient characteristics collected on the claims are limited 
to demographic and diagnostic information and do not include other 
characteristics that may be more important in explaining resource use.
    The RTI International<SUP>[reg]</SUP> study is noteworthy for its 
success in dealing with these two issues. First, RTI 
International<SUP>[reg]</SUP> developed a measure of cost per patient 
day that captured variations in patients' daily resource use both 
within and across facilities. This task was accomplished by collecting 
information on the time spent in various activities by patients and 
facility staff over the course of a 3-shift day for a period of 7 days. 
After converting the staff time data to daily patient costs, RTI 
International<SUP>[reg]</SUP> was able to go beyond the potential 
constraints of administrative data to study differences among patients 
across days of the stay.
    Second, RTI International<SUP>[reg]</SUP> collected a small set of 
patient characteristics that are not in CMS administrative data. They 
were able to test the importance of these variables in explaining cost 
variation. Most important among these factors were certain activities 
of daily living (toileting, transferring, and personal hygiene) and 
patient dangerousness (strong suicidal or assaultive tendencies).
    Like virtually all studies that collect primary data for a sample 
population, RTI International<SUP>[reg]</SUP> faced choices about how 
to obtain the most useful information possible with the limited funds 
available. RTI International<SUP>[reg]</SUP> collected information for 
4,149 Medicare patient days of care delivered to 834 unique Medicare 
patients in 40 facilities. We believe that RTI's sample is large enough 
to provide reliable information about the types of patients treated in 
all psychiatric facilities. However, the sample is small compared to 
even the typical 10 or 20 percent samples of the MedPAR data, and data 
collection costs made it uneconomical to sample all types of IPFs. In 
particular, rural facilities and small and government-operated 
hospitals could not be represented as robustly as other types of IPF 
providers.
    In addition, although they collected data for 7 days in each 
facility, it was uneconomical to collect information for entire stays 
in a large number of cases. Also, in order to limit the costs of data 
collection, RTI International<SUP>[reg]</SUP> did not collect ancillary 
service use, but instead relied on claims data for this information.
    The findings of the RTI International<SUP>[reg]</SUP> study have 
played an important role in the development of the IPF PPS in several 
ways. First, RTI International<SUP>[reg]</SUP> analysis of its daily 
cost variable supports the use of the administrative data in developing 
the IPF PPS without being seriously misled about the relative 
importance of different variables. For example, both sets of analysis 
found age to be very important in explaining per diem cost variation. 
Although RTI International<SUP>[reg]</SUP> elected to group diagnoses 
differently than using DRGs, both analyses supported prior findings 
that diagnosis plays a limited role in explaining cost variation. RTI 
International<SUP>[reg]</SUP> also found ECT to be an important cost 
factor.
    However, many other variables commonly thought to affect cost 
either produced inconsistent results or were found to have a minor 
effect, once more important factors were taken into account. Among 
these variables were cognitive impairment, risk of falls, Global 
Assessment of Function (GAF) score, gender, dual diagnosis, and number 
of medications.
    Second, RTI International<SUP>[reg]</SUP>'s analysis of cost 
variation by day of stay proved a very useful point of comparison for 
the variable per diem adjustment factors that we present in this rule. 
Third, the RTI International<SUP>[reg]</SUP> study provides us with a 
starting point for future refinements of the IPF PPS. As noted above, 
RTI International<SUP>[reg]</SUP>'s identification of certain patient 
characteristics not currently collected in the administrative data is 
very helpful for starting the process of considering whether we might 
want to collect some or all of these data items in the future. As a 
result of this research, we did not choose to adopt adjustment 
variables for activity of daily living deficits or patient 
dangerousness. We discuss the adjustment for patients who undergo ECT 
in section VI.B.6.of this final rule.
    Comment: One commenter expressed the opinion that the regression 
results for the age and diagnosis variables would not be skewed by the 
inability of CMS routine cost variable to capture cost variations among 
patients within the same facility. The commenter further predicted that 
the research conducted by RTI International<SUP>[reg]</SUP> would find 
that elderly psychiatric patients use fewer resources than younger 
patients.
    Response: The commenter's prediction that RTI 
International<SUP>[reg]</SUP> would find that elderly psychiatric 
patients use fewer resources than younger patients was not supported. 
RTI International<SUP>[reg]</SUP> found, as we did in our cost 
regressions, that elderly patients are more costly than younger 
patients. There is no way to directly test the commenter's assertion 
that our regression results are not affected by the limitations of our 
routine cost variable. In addition, since the RTI 
International<SUP>[reg]</SUP> data was able to capture cost variations 
among patients within the same facility and RTI 
International<SUP>[reg]</SUP> had results similar to ours about the 
effects of diagnosis and age on per diem costs, this consistency in 
results leads us to believe our regression were accurate.

A. Final Regression Analysis

    In this final rule, in order to ensure that the IPF PPS would be 
able to account adequately for each IPF's case-mix, we performed an 
extensive regression analysis of the relationship between the per diem 
costs and both patient and facility characteristics to determine those 
characteristics associated with statistically significant cost 
differences. For characteristics with statistically significant cost 
differences, we used the regression coefficients of those variables to 
determine the size of the corresponding payment adjustments.
    The final IPF PPS payment adjustments were derived from a 
regression analysis of 100 percent of the

[[Page 66936]]

FY 2002 MedPAR data file because this was the best data available. The 
MedPAR data file used for the final regression analysis contains 
483,038 cases that have a LOS of 1 day or more. We deleted 8,012 (1.66 
percent) from this file because cost report or reasonable routine cost 
data for certain IPFs were not available. In order to include as many 
IPFs as possible in the regression, we substituted the FY 2001 Medicare 
cost report data for routine cost and ancillary cost-to-charge ratios 
(using the FY 2001 Medicare cost report data).
    For the remaining 475,026 cases, we used the same method to trim 
extraordinarily high or low cost values that we used for the per diem 
rate development file and in the proposed regression analysis (see 
section V.A. of this final rule).
    The trimming criteria eliminated another 3,490 cases, leaving 
471,536 cases that were used in the final regression.
    We computed a per diem cost for each Medicare inpatient psychiatric 
stay, including routine operating, ancillary, and capital components 
using information from the FY 2002 MedPAR file and data from the FY 
2002 Medicare cost reports.
    To calculate the cost per day for each inpatient psychiatric stay, 
routine costs were estimated by multiplying the routine cost per day 
from the IPF's FY 2002 Medicare cost report by the number of Medicare 
covered days on the FY 2002 MedPAR stay record. Ancillary costs were 
estimated by multiplying each departmental cost-to-charge ratio by the 
corresponding ancillary charges on the MedPAR stay record. The total 
cost per day was calculated by summing routine and ancillary costs for 
the stay and dividing it by the number of Medicare covered days for 
each day of the stay.
    Since we will pay for emergency department (ED) costs of IPFs with 
qualifying EDs and IPFs that are part of hospitals with qualifying EDs, 
as described in section VI.B.5.b. of this final rule, through a 
specific adjustment to the day one variable per diem adjustment factor, 
ED costs were excluded from the dependent variable used in the cost 
regression. ED costs were excluded in order to remove the effects of ED 
costs from other payment adjustment factors with which ED costs may be 
correlated. We need to remove the effects on other payment adjustments 
to avoid overpaying ED costs. Removing ED costs from the regression has 
no effect on the calculation of the Federal per diem base rate or on 
budget neutrality because ED costs were not excluded from those 
calculations.
    The log of per diem cost, like most health care cost measures, 
appears to be normally distributed. Therefore, the natural logarithm of 
the per diem cost was the dependent variable in the regression 
analysis. We included variables in the regression to control for 
psychiatric hospitals that do not bill ancillary costs and for ECT 
costs that we will pay separately (see the section VI.A. of this final 
rule).
    The per diem cost was adjusted for differences in labor cost across 
geographic areas using the FY 2005 hospital wage index unadjusted for 
geographic reclassifications, in order to be consistent with our use of 
the market basket labor share in applying the wage index adjustment.
    We computed a wage adjustment factor for each case by multiplying 
the Medicare 2005 hospital wage index based on MSA definitions defined 
by OMB in 1993 for each facility by the labor-related share (.72528) 
and adding the non-labor share (.27472). We used the 1997-based 
excluded hospital with capital market basket to determine the labor-
related share. The per diem cost for each case was divided by this 
factor before taking the natural logarithm (that is, a standard 
mathematical practice accepted by the scientific community). The 
payment adjustment for the wage index was computed consistently with 
the wage adjustment factor, which is equivalent to separating the per 
diem cost into a labor portion and a non-labor portion and adjusting 
the labor portion by the wage index.
    With the exception of the teaching adjustment, the independent 
variables were specified as one or more categorical variables. Once the 
regression model was finalized based on the log normal variables, the 
regression coefficients for these variables were converted to payment 
adjustment factors by treating each coefficient as an exponent of the 
base e for natural logarithms, which is approximately equal to 2.718. 
The payment adjustment factors represent the proportional effect of 
each variable relative to a reference variable.

B. Patient-Level Adjustments

    We proposed adjustments for the DRG assignment of the patient's 
principal diagnosis, selected comorbidities, and patient age. The 
proposed rule included a discussion regarding a gender variable, 
however, we did not propose a gender adjustment.
1. Adjustment for DRG Assignment
    In the proposed rule, we proposed adjustment factors for 15 
diagnosis-related groups (DRGs). The adjustment factors were expressed 
relative to the most frequently reported DRG (DRG 430) and were derived 
from the proposed regression analysis. We did not propose payments 
under the IPF PPS for all DRGs that contain a psychiatric ICD-9-CM code 
because for some DRGs, there were too few psychiatric cases to obtain a 
reliable adjustment factor.
    In this final rule, we are providing payment under the IPF PPS for 
all DRGs that contain a psychiatric ICD-9-CM code. However, as 
discussed later in this section, we are not providing a DRG adjustment 
for these cases.
    We proposed that IPFs would continue to report diagnoses using the 
ICD-9-CM coding system. In addition, we specified that current 
regulations at Sec.  412.27 require that a psychiatric unit admit only 
those patients who have a principal diagnosis that is listed in the 
Diagnostic and Statistical Manual of Mental Disorders (DSM) or 
classified in Chapter Five (``Mental Disorders'') of the ICD-9-CM. We 
requested public comment on whether we should continue to reference the 
DSM. The DSM is currently in its fourth edition, text revision (DSM-IV-
TR).
    We received a significant number of public comments expressing 
support for the DSM, including several requesting that we permit IPFs 
to report diagnoses using DSM codes. Many comments asserted that the 
DSM provides a common language for psychiatrists and other health care 
professionals and sets forth diagnostic criteria for mental disorders 
and ways of measuring and reporting severity. Others agreed that the 
DSM established validity and provides standardized definitions.
    Comment: One commenter indicated that Chapter Five of the ICD-9-CM 
is too limited to be the only diagnostic codes considered and that 
symptoms that are commonly treated in inpatient psychiatry include DSM 
codes that are not in the ICD-9-CM. Another commenter suggested that 
CMS use a combination or subset of diagnostic codes that includes codes 
that appear in both Chapter Five of the ICD-9-CM and the DSM-IV-TR.
    One commenter expressed concern that misalignment between the DSM-
IV-TR and the ICD-9-CM codes would cause underpayment of certain cases. 
The commenter recommended that CMS develop a modifier to the ICD-9-CM 
code to ensure that DSM codes

[[Page 66937]]

crosswalk to the most appropriate case mix weight.
    Response: We agree that the DSM serves an essential function in the 
diagnosis and treatment of mental illness. For this reason, we are 
retaining the reference to the DSM in Sec.  412.27 and updating the 
reference of the DSM-III-TR to the DSM-IV-TR. As explained in the 
proposed rule, we acknowledge that the DSM is routinely used by 
clinical staff to diagnose patients and plan treatment, while the ICD-
9-CM coding system is currently used for reporting diagnostic 
information for payment purposes. However, the Standards for Electronic 
Transaction final rule published in the Federal Register on August 17, 
2000 (65 FR 50312), identifies the ICD-9-CM as the designated code set 
for reporting diseases, injuries, impairments, other health related 
problems, their manifestations, and causes of injury, disease, 
impairment, or other health-related problems. As a result, the DSM 
codes may not be reported on Medicare claims.
    Several commenters included examples of ICD-9-CM codes that do not 
crosswalk to the DSM-IV-TR, as well as DSM-IV-TR definitions and codes 
that do not crosswalk to the ICD-9-CM. Preliminary analysis of the 
codes confirmed the commenters' findings. We considered the possibility 
of using a modifier to crosswalk certain ICD-9-CM codes to their 
respective DSM-IV-TR counterpart, but found this method to be too 
complex and cumbersome for the purposes of billing since each ICD-9-CM 
code would require a modifier.
    More importantly, as we previously explained in section VI of this 
final rule, we believe it is essential to maintain the same diagnostic 
coding for IPFs that is used under the IPPS for providing the same 
psychiatric care. For these reasons, we are not limiting the Chapter 
Five ICD-9-CM diagnosis codes that may be reported by IPFs under the 
IPF PPS at this time. We intend to continue our analysis as we 
implement the IPF PPS to ensure that we identify the appropriate ICD-9-
CM codes for coding of patients' principal diagnoses.
    We will reconsider these coding issues as we develop the FY 2006 
hospital IPPS proposed rule in order to maintain consistent coding 
rules for all psychiatric cases.
    Comment: One commenter asked why CMS used the existing DRGs, rather 
than developing new groupings for the DRG classification system based 
on current data. This commenter also asked whether the DRGs would 
change if they were designed to explain differences in cost per day, 
rather than cost per case.
    Response: We did not attempt to modify the DRG classifications. 
(see section VI of this final rule for a detailed explanation). Our 
rationale for proposing to use the existing DRGs to group IPF PPS cases 
is that the DRGs are currently used to pay inpatient psychiatric cases 
under the hospital IPPS.
    Instead of explicitly attempting to adapt the DRGs to a per diem 
system by changing the DRG definitions, we analyzed whether there was 
empirical support for using the existing DRGs. Specifically, we tested 
whether the DRGs contributed explanatory power to the explanation of 
differences in per diem costs. Although previous research indicates 
that diagnosis plays a limited role in explaining cost variation for 
psychiatric care, existing DRGs provide an acceptable degree of 
explanatory power.
    Additional research will be needed to determine how the DRG 
classification system or payment weights under the IPPS would change if 
they were redesigned to measure cost per day.
    Comment: One commenter requested that CMS delay implementation of 
the IPF PPS until the ICD-10-CM is adopted for Medicare billing 
purposes.
    Response: The National Committee on Vital and Health Statistics 
(NCVHS) has recommended that HHS, under its HIPAA responsibilities, 
prepare a proposed regulation to require that the ICD-10-CM be adopted 
as the HIPAA standard code set to replace the ICD-9-CM. HHS is 
assessing the NCVHS recommendation. We do not believe it is appropriate 
to tie implementation of the IPF PPS to another initiative that has not 
been developed.
    Comment: Many commenters requested that CMS adopt the clinical 
structure of the DSM (the DSM diagnostic categories) to classify IPF 
cases rather than the DRG classification system. A few commenters 
suggested that CMS use a modified version of the DSM diagnostic 
categories.
    Response: We tested various groupings of diagnoses. Our data 
analysis indicated that regrouping the ICD-9-CM codes into the DSM 
diagnostic categories or other similar categories raised the 
explanatory power of the payment model by less than one-half of one 
percent. Thus, the DRGs and the DSM diagnostic categories explain the 
same amount of per diem cost differences. Moreover, the research 
conducted by THEORI, a research component of the Greater New York 
Hospital Association, confirmed our results. Therefore, since we were 
unable to detect a measurable difference in the explanatory power of 
the DSM and DRGs with respect to the grouping of the ICD-9-CM codes, we 
are finalizing the DRG approach.
    As mentioned earlier, we are concerned about establishing a 
different classification scheme for IPF PPS than is used for 
psychiatric discharges under IPPS. We are also concerned about the 
fiscal burden associated with establishing a separate classification 
system for the IPF PPS.
    As a result, this final rule includes adjustment factors for the 
DRG assigned to the claim. The coefficient values and adjustment 
factors were derived from the final regression analysis. The adjustment 
factors are expressed relative to DRG 430. See Table 3 at the end of 
this section and Addendum A.
    Comment: Commenters overwhelmingly disagreed with the proposed 
policy to only pay for a limited selection of psychiatric diagnoses 
under the IPF PPS. The commenters indicated that all DRGs containing 
psychiatric codes should be recognized in the final IPF PPS. Other 
commenters recommended that CMS add a new DRG ``Other Psychiatric 
Diagnosis'' to include the ICD-9-CM diagnosis codes that are excluded 
when crosswalked to the DSM-IV-TR.
    Response: As we explained earlier in this section, we agree that 
the IPF PPS should recognize all ICD-9-CM psychiatric codes regardless 
of their DRG assignment. Therefore, we will provide the Federal per 
diem base rate payment under the IPF PPS for claims with a principal 
diagnosis included in Chapter Five of the ICD-9-CM or the DSM-IV-TR. 
However, only those claims with diagnoses that group to a psychiatric 
DRG will receive a DRG adjustment. Although the IPF will not receive a 
DRG adjustment for a principal diagnosis not found in one of our 
identified 15 psychiatric DRGs, the IPF will still receive the Federal 
per diem base rate and all other applicable adjustments. Since there 
are only a few non-psychiatric DRGs that contain one or two rarely used 
psychiatric codes, whose frequencies were so low that we were unable to 
calculate an adjustment, we believe this is an equitable way to pay for 
these cases.
    We have not established a new DRG for these psychiatric ICD-9-CM 
codes that are assigned to non-psychiatric DRGs. Rather, we plan to 
monitor the data from these other codes and, if indicated through data 
analysis, may consider proposing revisions to this policy in the 
future.
    Comment: One commenter requested that we revise the DRG adjustment 
factor to 1.00 for DRG 433 Alchohol/Drug Abuse or Dependence, Left 
Against

[[Page 66938]]

Medical Advise. The commenter indicated that the 0.88 proposed 
adjustment factor would be insufficient to cover the extensive 
diagnostic procedures, complex treatment, and monitoring these patients 
often needed.
    The commenter also indicated that since the total reimbursement for 
these patients is directly related to their length of stay, there 
should be no penalty attached to the DRG assignment.
    Response: Our analysis did not indicate or reflect that a 1.00 
adjustment was appropriate. The analysis, a cost regression analysis 
that used hospital claims data resulted in 0.88 adjustment factor for 
DRG 433 Alchohol/Drug Abuse or Dependence, Left Against Medical Advise. 
Unlike IPPS that uses DRG weights as the basis for payment, the IPF PPS 
payment is based on a Federal per diem base rate and numerous 
additional payment adjustments. In addition to DRG adjustments, the IPF 
PPS payment includes payment adjusters to accommodate differing lengths 
of stays (the variable per diem adjustment) that is intended to account 
for the increased cost in the early days of an inpatient stay. For more 
information on the variable per diem adjustments, see section VI.B.5 of 
this preamble.
    Comment: A commenter asked for clarification as to the 
classification of substance abuse as a psychiatric condition.
    Response: Substance abuse is not only included in Chapter Five 
(Mental Disorders) of the ICD-9-CM and defined in the DSM-IV-TR 
(Substance-Related Disorders) but is also included in the Psychiatric 
Boards, which physicians take to become Board Certified in the field of 
psychiatry. However, substance abuse is rarely the primary diagnosis 
for inpatient psychiatric treatment, and in those rare cases, there are 
generally mitigating factors to justify why the patient cannot be 
treated in an outpatient setting. To be covered as an inpatient 
hospital service, it must meet the criteria for being medically 
necessary.
[GRAPHIC] [TIFF OMITTED] TR15NO04.442

2. Comorbidities
    In the proposed rule, we proposed 17 comorbidity categories and 
identified specific ICD-9-CM codes that would generate a payment 
adjustment. Our intent was to identify conditions that would require 
comparatively more costly treatment during an IPF stay than other 
comorbid conditions.
    We specifically solicited comments on other conditions that may be 
expected to increase the per diem cost of care in IPFs. In response, we 
received a number of comments regarding our proposed comobidity 
adjustments. A number of commenters expressed support that the proposed 
IPF PPS recognized the increased cost associated with comorbid medical 
conditions. Others identified what they believe to be flaws in the 
analysis used to develop the proposed comorbidity adjustments. A 
majority of the commenters indicated that hospitals design specialized 
programs with highly trained staff to treat Medicare beneficiaries who 
are disabled or geriatric psychiatric patients. The commenters stated 
that the proposed comorbidity adjustments are inadequate to capture 
these coexisting medical and psychiatric conditions requiring treatment 
during a hospital stay.
    We also received comments offering suggestions on how we could 
improve the comorbidity list. The suggestions ranged from a request for 
addition of a single ICD-9-CM code to a request for comorbidity 
categories to account for every ICD-9-CM and DSM-IV-TR diagnosis.
    Comment: Commenters expressed concern that payment for treating 
complex cases would decrease because the proposed comorbidity list does 
not include the conditions seen in their patient populations. Several 
comments stated that most psychiatric patients are treated for multiple 
common conditions and illnesses (for example, heart conditions, 
stroke), none of which would trigger a payment adjustment under the 
proposed IPF PPS.
    Other commenters stated that the proposed comorbidity list includes 
mostly acute medical conditions that would require transfer to an acute 
care hospital. One commenter indicated that the adjustment proposed for 
renal failure should be much higher. Many commenters stated that the 
range of diagnostic codes proposed for adjustment often did not include 
all the ICD-9-CM codes within a diagnostic category. For example, the 
list of codes under diabetes did not include all the diabetes codes.
    Response: We have reconsidered our approach to the comorbidity 
adjustments and have revised the comorbidity list. We analyzed the FY 
2002 data to determine the prevalence of the diagnoses suggested most 
often in the public comments (for example,

[[Page 66939]]

hypertension, chronic constructive pulmonary disease, and urinary tract 
infection). In an attempt to address the commenters concerns, we had 
CMS staff physicians and FI Medical Directors who are psychiatrists 
review the list of proposed comorbidities and cost and frequency data 
on all ICD-9-CM diagnoses codes that had been submitted on the FY 2002 
claims.
    We explained to the CMS staff physicians and FI Medical Directors 
that the data used in calculating the Federal per diem base rate for 
both the proposed rule and the final rule included all the costs for 
comorbid diagnoses submitted in the FY 2002 claims. Therefore, the cost 
for providing patient care (for example, medications, and routine 
nursing care required for the common conditions seen in the psychiatric 
population and recommended for comorbidity adjustment by the commenters 
(that is, heart conditions or strokes) are included already in the 
Federal per diem base rate and a comorbidity adjustment for their 
presence was unnecessary.
    One significant issue raised by the CMS physician and FI Medical 
Director panel was the extent of medical treatment permitted in a 
psychiatric unit. In the secure environment of a psychiatric unit, 
common treatments such as IV antibiotics therapy would not be permitted 
as they could compromise patient safety. The prohibition of items that 
present a potential risk as a mechanism to inflict injury on oneself or 
others is strictly enforced. Thus, for many medical treatments for the 
more complex and costly comorbid, medical, or surgical conditions the 
psychiatric patient would be required to be moved to a medical floor 
for treatment with one-on-one staff observation. Consequently, since 
the patient would no longer be a patient of the IPF, it would be 
unnecessary to give the IPF an adjustment for such a case.
    The intent of the comorbidity adjustments is to provide additional 
payments for a concurrent medical or psychiatric condition that is 
expensive to treat. The physicians determined that the high cost of 
certain diagnoses is related to the cost of the therapy to treat the 
diagnoses. For example, the cost to treat a patient with a malignant 
neoplasm is related primarily to the cost of the therapy to treat the 
tumor, whether it is chemotherapy or radiation therapy, or both. As a 
result, we have added two ICD-9-CM V codes, one for chemotherapy 
(V58.0) and for one radiation treatment (V58.1). We are also requiring 
that, in order to receive the comorbidity adjustment for malignant 
neoplasm, IPFs will need to code the ICD-9-CM code for the specific 
malignant neoplasm from the ICD-9-CM chapter 2 codes (140-239) and one 
of the two ICD-9-CM procedures codes (chemotherapy ((V58.0)) or 
radiation treatment ((V58.1)) to indicate the treatment modality the 
patient received.
    Based on the clinical expertise of the CMS physicians and FI 
Medical Directors, we made numerous changes to the list of ICD-9-CM 
codes eligible for a comorbidity adjustment. These changes include 
adding one new category entitled, ``Developmental Disabilities,'' 
deleting the ``HIV'' category and moving it into the ``Infectious 
Diseases'' category, and changing the titles of two categories from 
``Malignant Neoplasms'' to ``Oncology Treatments'' and for 
``Atherosclerosis of extremity with Gangrene'' to ``Gangrene.''
    In response to comments requesting adjustment for Developmental 
Disabilities and the results of the regression analysis on the FY 2002 
data, the higher cost of caring for patients with developmental 
disabilities indicated a comorbidity adjustment of 1.04 was 
appropriate. The regression analysis of FY 2002 data would have 
provided the same adjustment for the ``HIV'' category as for the 
``Infectious Disease'' category. Therefore, we merged the two 
categories under the ``Infectious Disease'' category with an adjustment 
factor of 1.07. The ``Malignant Neoplasm'' category was modified to 
``Onocology Treatments'' since the CMS staff physicians and FI Medical 
Directors believed the higher cost was related to the treatment of the 
neoplasms rather than the presence of the tumor. We are also requiring 
that the treatment code be included on the claim form to receive the 
1.07 comorbidity adjustment. The last category change was in the title 
of ``Atheroscleosis of Extremity with Gangrene to ``Gangrene'' to 
account for the higher cost of a patient with gangrene regardless of 
the cause.
    The design of the IPF PPS with Federal per diem base rate, together 
with the numerous available adjustments, outlier policy, and stop loss 
policy during the 3-year transition should prevent the facility from 
being disadvantaged by decrease in payment for their more complex 
patients.
    We are providing below a table that compares the proposed 
comorbidity categories to the categories we are adopting in this final 
rule.
BILLING CODE 4120-03-P

[[Page 66940]]

[GRAPHIC] [TIFF OMITTED] TR15NO04.443

BILLING CODE 4120-03-C

[[Page 66941]]

    Comment: Several commenters suggested that CMS include all 
psychiatric and non-psychiatric diagnoses submitted on the claim, 
whether they are designated as the primary or secondary.
    Response: Billing instructions require hospitals to enter the ICD-
9-CM code for the patient's principal diagnosis. The code must be the 
full ICD-9-CM diagnosis code, including all five digits when 
applicable. The principal diagnosis is the condition established after 
study to be chiefly responsible for this admission. Even though another 
diagnosis may be more severe than the principal diagnosis, the hospital 
enters the principal diagnosis. Entering any other diagnosis as 
principal on the claim form may result in incorrect DRG assignment and 
cause the hospital to be incorrectly paid. The hospital is also 
instructed to enter the full ICD-9-CM codes for up to 8 additional 
conditions if they co-existed at the time of admission or develope 
subsequently, and which had an effect upon the treatment or the length 
of stay. These codes may not duplicate the principal diagnosis.
    The regression analysis established the DRG adjustment factors 
based on the principal diagnoses reported by hospitals and the 
comorbidity category adjustments based on the all the diagnoses 
reported by hospitals as other diagnoses. The principal diagnoses were 
used to establish the DRG adjustment and were not accounted for in 
establishing the comorbidity category adjustments, except where ICD-9-
CM ``code first'' instructions apply. A description of the ``code 
first'' instructions appears in the next section of this final rule.
    Comment: Several commenters indicated that the comorbidity 
adjustment factors did not take into account the extensive workup their 
patients require, such as the need for additional ancillary services 
(for example, specific medical or neurological examinations, 
specialized laboratory and radiological tests, supplies, medications, 
and consultations). In many instances, the commenter stated that these 
additional services are needed to identify the numerous physical 
conditions that exacerbate or first present as psychiatric symptoms.
    Response: The adjustment factors for the proposed comorbidity 
categories were derived from the proposed regression analysis. 
Similarly, the final adjustment factors for the final comorbidity 
categories were derived from the final regression analysis. With regard 
to the additional ancillary services the commenters' patients require 
to establish their principal diagnoses, the variable per diem 
adjustments discussed in section VI.B. 5. of this final rule are 
intended to account for higher per diem costs early in an inpatient 
stay.
    Comment: Commenters expressed concern that the comorbidity policy 
does not account for the costs associated with social issues (for 
example, poverty, lack of housing, poor nutrition, lack of primary 
medical care, and the cost of involuntary commitments and guardianship 
hearings). The commenters also expressed concern that the comorbidity 
policy does not account for the costs of patients with hearing, sight, 
and mobility disabilities or when English is not the patient's primary 
language.
    Response: Most of the social issues identified by the commenters 
are not captured in the FY 2002 IPF claims data. As a result, we are 
not able to determine whether the psychiatric hospitalizations of 
patients with various social issues are more costly on a per diem basis 
than other psychiatric patients. Because we lack data that indicates 
IPFs that treat patients with various social issues are more costly on 
a per diem basis, we are not providing an adjustment in these cases.
    We note that codes are currently available that describe some of 
the social issues that impact care delivery and management. For 
example, there are V codes to indicate that the patient has problems 
with sight (V41.0), problems with hearing (V41.2), or lack of housing 
(V60.0). Even though we have codes for problems with sight, hearing, or 
lack of housing, we had too few cases to be able to extrapolate any 
valuable empirical data that the presence of these codes correlated to 
higher per diem costs. We encourage IPFs to code all relevant diagnoses 
that impact the resources associated with their patient population for 
future analysis.
    We note that one of the fields on the claim form indicates if 
patients were referred to the IPF by law enforcement or if the 
commitment were court ordered (FL 20 item 8, court/law enforcement). As 
a result, we were able to analyze the impact on per diem cost. The 
results of our analysis are included in section VI of this rule with 
other patient variables considered.
    Comment: One commenter stated that diagnostic data alone may not be 
descriptive enough to supply the information CMS is seeking regarding 
comorbidities.
    Response: Section 124 of the BBRA provides authority for CMS to 
require IPFs to submit additional data. We are not mandating new 
reporting requirements at this time, however, we may establish new 
reporting requirements based on results of the research underway to 
refine the IPF PPS.
    Comment: One commenter asked how the comorbidity adjustment would 
be applied if a patient has multiple diagnoses within the same 
comorbidity category.
    Response: IPFs may only receive one adjustment factor for each 
comorbidity category. However, if a patient has multiple diagnoses in 
several categories, the adjustment factors for each applicable category 
are multiplied by the Federal per diem base rate. The following is an 
example illustrating how payment would be made under the IPF PPS for a 
patient with multiple comorbidities

    .Example: A 68 year old Female Caucasian presents at a qualified 
ED and is subsequently admitted to a non-teaching inpatient 
psychiatric facility within the ``I'll Feel Better Hospital'' in 
rural Smalltown, North Dakota. The ED is determined to be full-
service and the patient had not been discharged from an IPPS stay. 
The patient had a primary diagnosis of Neurotic Depression (IDC-9-CM 
code 3004) DRG 426 Depressive Neuroses, and comorbid conditions of 
Obstructive Chronic Bronchitis without exacerbation 491.20, and 
mechanical complication of Tracheostomy ICD-9-CM code (ICD-9-CM code 
519.02), Diabetes with ophthalmic manifestations (ICD-9-CM code 
250.53), and Diabetes with peripheral circulatory manifestations 
(ICD-9-CM code 250.73). The patient length of stay was 10 days. In 
addition, the patient did not receive ECT during her inpatient stay.

[[Page 66942]]

[GRAPHIC] [TIFF OMITTED] TR15NO04.444

Calculate Total Wage Adjusted Rate:

    Step 1: Multiply the Wage Index Factor (for North Dakota) by the 
Labor Portion of the Federal base rate to get the Adjusted Labor 
Portion of the Federal per diem base rate = (0.7743 x 417.73 = 
$323.45).
    Step 2: Add the Adjusted Labor Portion of the Federal Base Rate to 
the Non-Labor Portion of the Federal per diem base rate to get the 
Total Wage Adjusted Rate = (323.45 + 158.22 = $481.67).

Apply Facility- and Patient-Level Adjusters

    Step 1: Using the information in Addendum A, determine which 
facility- and patient-level adjustment factors are applicable.
    1. Teaching Adjustment: None.
    2. Rural Adjustment: North Dakota--1.17.
    3. COLA: None.
    4. DRG Adjustment: DRG 426--Depressive Neuroses--0.99.
    5. Age Adjustment: Age 68--1.10.
    6. Comorbidity (All comorbidity codes are cited as presented in the 
ICD-9-CM text)
    Comorbidity 491.20--Obstructive Chronic Bronchitis without 
exacerbation--None.
    Comorbidity 519.02: Mechanical complication of Tracheostomy--1.06.
    Comorbidity 250.53: Diabetes with ophthalmic--manifestations (Use 
additional code to identify manifestation as 362.02)--1.05.
    Proliferative Diabetic Retinopathy [not allowed as principal Dx-
``CODE FIRST'' underlying disease as DIABETES 250.5) and Comorbidity--
250.73--Diabetes with peripheral Circulatory--None 2nd in Category 
manifestations, (Use additional code to identify manifestation as 
443.81--Diabetic Peripheral angiopathy [not allowed as principal Dx-
``CODE FIRST'' underlying disease as DIABETES MELLITUS 250.7).
    7. ECT Treatments--None.
    Step 2. Multiply the applicable adjustment factors to determine the 
PPS Adjustment Factor. = (1.17 x 0.99 x 1.10 x 1.06 x 1.05 = 1.4181).
    Step 3. Calculate the Adjusted Per Diem.

Multiply the Total Wage Adjusted Rate by the PPS Adjustment Factor.
    = ($481.67 x 1.4181 = 683.06).

    Calculate the variable per diem adjustment.
    Step 1. Determine the number of days in the stay.
    Length of Stay: 10 days and the facility has a qualifying ED.

Day 1--1.31
Day 2--1.12
Day 3--1.08
Day 4--1.05
Day 5--1.04
Day 6--1.02

[[Page 66943]]

Day 7--1.01
Day 8--1.01
Day 9--1.00
Day 10--1.00

    Step 2. Multiply the Variable Per Diem Adjustment Factors by the 
Total Wage and PPS-Adjusted Per Diem for each day of the stay to get 
the Total Variable Per Diem Amounts for each day of the stay. (See 
multiplication in step 3 below.)
    Step 3. Add the Adjusted Variable Per Diem Amounts to get the Total 
Inpatient Psychiatric Facility PPS Payment.

Day 1 (adjustment factor 1.31) x 683.06 = $894.81
Day 2 (adjustment factor 1.12) x 683.06 = $765.03
Day 3 (adjustment factor 1.08) x 683.06 = $737.70
Day 4 (adjustment factor 1.05) x 683.06 = $717.21
Day 5 (adjustment factor 1.04) x 683.06 = $710.38
Day 6 (adjustment factor 1.02) x 683.06 = $696.72
Day 7 (adjustment factor 1.01) x 683.06 = $689.89
Day 8 (adjustment factor 1.01) x 683.06 = $689.89
Day 9 (adjustment factor 1.00) x 683.06 = $683.06
Day 10 (adjustment factor 1.00) x 683.06 = $683.06
Federal per diem payment amount $7,267.75
    Comment: A commenter asked if the comorbidity adjustments would be 
applied to each day of the stay regardless of the patient's length of 
stay. For example, poisoning and arteriosclerosis of the extremity with 
gangrene may have higher cost only for the early days of a stay.
    Response: The comorbidity adjustments are applied to each day of 
the stay. In estimating the cost impact of the comorbidity conditions, 
our dependent variable reflects the average cost per day over the 
entire stay. A significant effect on this cost variable for a 
comorbidity condition means that the average cost per day was higher 
for cases with the specific condition. Therefore, it is appropriate to 
apply the estimated effect to each day of the stay.
    We would be especially concerned if data analysis began to show 
longer lengths of stay for DRG 424 stays or significantly more DRG 424 
stays, with DRG 424 being the surgical DRG. We intend to monitor for 
changes in length of stay and the distribution of IPF cases across DRGs 
to ensure that the decision to pay all applicable adjustments 
throughout the stay does not lead to inappropriate increases in the 
length of stay or frequency of those cases.
    Comment: One commenter indicated that the comorbidity policy does 
not distinguish between dormant serious medical conditions and labor-
intensive procedures requiring additional behavioral and medical 
treatments during the IPF stay. Another commenter stated that when a 
non-psychiatric diagnosis exists in addition to a psychiatric 
diagnosis, the ICD-9-CM code for the non-psychiatric diagnosis should 
also be reported on the claim.
    Response: In Sec.  412.402 definitions, we proposed the following 
definition of comorbidity: ``Comorbidity means all specific patient 
conditions that are secondary to the patient's primary diagnosis and 
that coexist at the time of admission, develop subsequently, or affect 
the treatment received or the length of stay or both. Diagnoses that 
relate to an earlier episode of care that have no bearing on the 
current hospital stay are excluded.'' A serious medical condition that 
does not require treatment during the hospital stay must not be 
reported as a secondary or tertiary diagnosis and will not qualify for 
a comorbidity adjustment. We are retaining the proposed comorbidity 
definition in this final rule.
    Comment: One commenter recommended that we provide an adjustment to 
reflect the increased staffing, greater frequency of comorbid 
conditions, and longer length of stay for developmentally disabled 
patients.
    Response: We analyzed the frequency and costs in the FY 2002 claims 
data associated with developmentally disabled patients. We identified 
relevant claims by the presence of an ICD-9-CM code in the 317 through 
319 range entered as a diagnosis in addition to a psychiatric principal 
diagnosis. We found that per diem costs associated with inpatient 
psychiatric stays of developmentally disabled mentally ill patients, 
are approximately 4 percent higher than stays for other patients. As a 
result of this analysis, we are establishing a new comorbidity category 
to reflect the higher per diem costs of developmentally disabled 
patients. The final IPF PPS comorbidity categories and adjustment 
factors are presented in the table below and Addendum A.

BILLING CODE 4120-03-P

[[Page 66944]]

[GRAPHIC] [TIFF OMITTED] TR15NO04.445

BILLING CODE 4120-03-C
3. Other Coding Issues
    We received several comments related to discrepancies with 
established coding conventions.
    Comment: One commenter requested that CMS specify that hospitals 
must follow the ICD-9-CM Official Guidelines for Coding and Reporting 
and the Coding Clinic for ICD-9-CM. In addition, the commenter 
advocated the use of certified coding professionals to assign and 
validate codes and assist in the development of hospital coding policy.
    Response: We agree with the commenter about the value of certified 
coding professionals. The ICD-9-CM Official Guidelines for Coding and 
Reporting was developed and approved by the Cooperating Parties for 
ICD-9-CM: The American Hospital Association, the American Health 
Information Management Association, the Centers for Medicare & Medicaid 
Services (formerly the Health Care Financing Administration or HCFA) 
and the National Center for Health Statistics to be used as a companion 
document to the official version of the ICD-9-CM as

[[Page 66945]]

published by the Department of Health and Human Services and the Coding 
Clinic for ICD-9-CM, published by the American Hospital Association. In 
addition, this decision is consistent with the Standards for Electronic 
Transaction final rule (65 FR 50312). The ICD-9-CM Official Guidelines 
for Coding and Reporting can be found at www.cdc.gov/nchs/data/ics9/icdguide.pdf.
    Comment: Several commenters requested that CMS provide detailed 
information about medical necessity requirements to support an IPF 
stay. The commenters expressed concern that IPFs are not experienced 
with medical review and the need to document medical necessity to 
support the stay. The commenters believe that in the absence of clear 
national standards for determining medical necessity, IPFs will be 
subject to various local coverage decisions promulgated by FIs.
    Other commenters were concerned about the potential of differential 
access to inpatient psychiatric care depending on the geographic 
location of the IPF and how each FI interprets medical necessity. These 
commenters suggested that CMS incorporate safeguards against clinically 
unrealistic, inefficient, or inappropriate medical review practices by 
FIs. The commenters recommended that CMS include a mechanism for 
impartial appeal of FI decisions to ensure appropriate payment of IPF 
claims.
    Response: Inpatient psychiatric services are intended for patients 
that require more intense services than can be provided in an 
outpatient setting. As a result, the patients admitted to an IPF must 
require intensive, comprehensive, multimodal treatment including 24 
hours per day of medical supervision and coordination because of the 
mental disorder. The need for 24 hours of supervision may be due to the 
need for patient safety, psychiatric diagnostic evaluation, potential 
severe side effects of psychotropic medication associated with medical 
or psychiatric comorbidities, or evaluation of behaviors consistent 
with an acute psychiatric disorder for which a medical cause has not 
been ruled out.
    The acute psychiatric condition being evaluated or treated by 
inpatient psychiatric hospitalization must require active treatment, 
including a combination of services (for example, intensive nursing and 
medical interventions, psychotherapy, occupational and patient 
education). Patients must require inpatient psychiatric hospitalization 
services at levels of intensity and frequency exceeding what may be 
rendered in an outpatient setting including partial hospitalization 
programs.
    If a provider receives a medical necessity denial, they have the 
right to appeal the FI's determination that the inpatient hospital 
services were not reasonable and necessary. A request for 
reconsideration must be in writing and filed with the FI. The provider 
should contact their FI for additional information on the appeal 
process. The prescribed form to request an FI reconsideration ``MCS-
2649, Request for Reconsideration of Part A Health Insurance Benefits'' 
is located on the CMS web site at www.cms.hhs.gov/forms.
    Comment: Several commenters indicated that the proposed rule 
included coding policies that were inconsistent with the ICD-9-CM 
Official Guidelines for Coding and Reporting with respect to the 
designation of primary and secondary diagnoses (the ``code first'' 
policy).
    Response: In the proposed rule, we inadvertently failed to include 
the ICD-9-CM instructions pertaining to the code first diagnosis codes. 
The introduction of the ICD-9-CM text includes ``Instructional 
Notations'' in which ``code first'' underlying disease is explained. 
This instruction is for codes that are not intended to be used as a 
principal diagnosis or for those codes that are not to be sequenced 
before the underlying disease. The note requires that the underlying 
disease (etiology) be coded first (identified as the principal and 
diagnosis) with the code the note is applied to being coded second. 
This note appears only in the Tabular List (Volume 1).
    The ICD-9-CM Official Guidelines for Coding and Reporting includes 
the following instructional guidance regarding the code first policy:
    ``(1) The guidelines identify codes that have both an underlying 
etiology and multiple body system manifestations due to the underlying 
etiology. The coding convention requires the underlying condition be 
sequenced first followed by the manifestation. Whenever a combination 
exists, there is a ``use additional code'' note at the etiology code, 
and a ``code first'' note at the manifestation code. These 
instructional notes indicate the proper sequencing order of the codes, 
that is, etiology followed by manifestation.
    (2) ``Code first'' notes are also under certain codes that are not 
specifically manifestation codes but may be due to an underlying cause. 
When a ``code first'' note is present and an underlying condition is 
present, the underlying condition should be sequenced first.
    (3) Code, if applicable any causal condition first, notes indicate 
that this code may be assigned as a principal diagnosis when the causal 
condition is unknown or not applicable. If a causal condition is known, 
then the code for that condition should be sequenced as the principal 
or first-listed diagnosis.
    (4) Multiple codes may be needed for late effects, complications 
and obstetrics to more fully describe a condition. See the specific 
guidelines for these conditions for further instruction.''
    For example, diagnosis code 294.1 Dementia in Conditions Classified 
Elsewhere is designated as a code first diagnosis and appears in the 
ICD-9-CM as follows:

294.1 Dementia in Conditions Classified Elsewhere

    Code first any underlying physical condition, as:
    Dementia in:

Alzheimer's disease (331.0)
Cerebral lipidosis (330.1)
Dementia with Lewy bodies (33.82)
Dementia with Parkinsonism (331.81)
Epilepsy (345.0-345.9)
Frontal dementia (331.19)
Frontotemporal dementia (331.19)
General paresis [syphilis] (094.1)
Hepatolenticular degeneration (275.1)
Huntington's chorea (333.4)
Jacob-Creutzfeldt disease (046.1)
Multiple sclerosis (340)
Pick's disease of the brain (331.11)
Polyarteritis nodosa (446.0)
Syphilis (094.1)

    In accordance with the ICD-9-CM Official Guidelines for Coding and 
Reporting, when a primary (psychiatric) diagnosis code has a ``code 
first'' note, the provider would follow the instructions in the ICD-9-
CM text. For example, 294.1, Dementia in conditions classified 
elsewhere states ``code first any underlying physical condition as:'' 
the provider would then code the appropriate physical condition, for 
example, 333.4 Huntington's chorea as the primary diagnosis and 294.1 
as the secondary diagnosis. The submitted claim goes through the CMS 
processing system that will identify the primary diagnosis code as non-
psychiatric and search the secondary codes for a psychiatric code to 
assign a DRG code for adjustment. The system will continue to search 
the secondary codes for those that are appropriate for comorbidity 
adjustment.
    A list of ICD-9-CM codes identified as code first is provided in 
Addendum C.
    Comment: A commenter questioned whether IPFs would be required to 
report ICD-9-CM procedure codes.

[[Page 66946]]

    Response: IPFs will be required to report those ICD-9-CM codes 
indicated in the billing instructions. As mentioned above, the only 
unique coding will be for oncology treatment which requires the ICD for 
the specific neoplasm and the appropriate treatment V code V580 
chemotherapy or V581 radiation. In addition, as discussed in section 
VI.B.5.C. of this final rule, we are providing additional payments for 
patients who undergo ECT treatments. In order to receive the additional 
payments, IPFs will have to report the ICD-9-CM procedure code for ECT 
(code 90870) and indicate the number of ECT treatments the patient 
received during the IPF stay. We encourage IPFs to provide as much 
information on the claim form to describe the services furnished to 
validate the principal diagnosis for payment purposes.
    Comment: One commenter asked if delirium is considered a primary, 
secondary, or medical condition. The commenter also asked if delirium 
should be considered an adjustment disorder.
    Response: Coding decisions are based on how the physician describes 
the diagnosis. The physician needs to indicate the type or cause of the 
delirium, which will determine whether the delirium is psychiatric 
diagnosis, a psychiatric secondary diagnosis (comorbidity), or a 
medical comorbid condition. According to the ICD-9-CM, delirium is 
listed as caused by medical conditions, substance or alcohol abuses, or 
with psychosis. Delirium is primarily located in the 290 series of ICD 
codes. If the physician indicates that the patient's diagnosis is 
``delirium, delirious'' the ICD-9-CM index would refer to ICD-9-CM code 
780.09--Alteration in consciouusness--Other. However, if the physician 
specifies that the delirium is acute, then the ICD-9-CM code is 293.0--
Delirium Due to Condition Classified Elsewhere, and if the Delirium is 
caused by alcohol abuse, the ICD-9-CM code is 291.0--Alcohol withdrawal 
delirium. We recommend that the commenter review the ICD-9-CM index 
under the term delirium (to determine the different types of 
diagnosis).
    We are not responsible for the determination of clinical definition 
and criteria. To establish how a condition is defined or identified, 
providers should review a text of psychiatric diagnoses. We are 
providing the definition for delirium and adjustment reaction or 
disorder as defined in the ICD-9-CM (2004) for the convenience of the 
reader.
    Delirium is defined as ``Transient organic psychotic condition with 
a short course in which there is a rapidly developing onset of 
disorganization of higher mental processes manifested by some degree of 
impairment of information processing, impaired or abnormal attention, 
perception, memory, and thinking. Clouded consciousness, confusion, 
disorientation, delusions, illusions, and often vivid hallucination 
predominate in the clinical picture.''
    Adjustment reaction or disorder is defined as ``Mild or transient 
disorders lasting longer than acute stress reactions which occur in 
individuals of any age without any apparent preexisting mental 
disorder. Such disorders are often relatively circumscribed or 
situation-specific, are generally reversible, and usually last only a 
few months. They are usually closely related in time and in content to 
stresses such as bereavement, migration, or other experiences. 
Reactions to major stress that last longer than a few days are also 
included. In children, such disorders are associated with no 
significant distortion of development.''
    In review of the DSM diagnostic criteria, delirium is not included 
in the ``Adjustment Disorder'' category. Based on the ICD-9-CM 
definition and the DSM diagnostic criteria, we would not expect 
delirium to be identified as an adjustment disorder.
    Comment: One commenter asked how to code multiple addictions, for 
example, drug and alcohol, or two drug diagnoses.
    Response: We encourage IPFs to code all diagnoses requiring active 
treatment during the IPF stay. The ICD-9-CM index entry for addiction 
provides several sub-terms to direct the coder to the most appropriate 
ICD-9-CM code. The ICD-9-CM code for alcohol dependence is 303.9. 
However, the ICD-9-CM indicates under code 303.9 that a fifth digit is 
required based on whether the physician inidicates that the dependence 
is continuous, episodic, in remission, or there is no information, that 
is, unspecified.
    Separate codes are listed for drug addiction. The index refers 
coders to ``see dependence''. Under dependence, there are a variety of 
codes depending upon the specific addiction. The coder would enter as 
many codes as required to cover all the patient's dependencies (drug 
and alcohol). However, as noted above, only one comorbidity adjustment 
per comorbidity category will be paid under the IPF PPS.
    Comment: Several commenters requested clarification of specific 
ICD-9-CM codes they suspected were erroneous.
    Response: We agree with the commenters and acknowledge that we made 
the following typographical errors in the proposed rule:
    <bullet> In Table 3 (68 FR 66931), in the Infectious Disease 
category, the correct range of codes is 07950 through 07959.
    <bullet> In table 7 (68 FR 66941), the correct adjustment for 
Diabetes is 1.10 and the correct adjustment factor for Chronic Renal 
Failure is 1.14.
4. Patient Age
    We proposed a 13 percent payment adjustment for patients 65 years 
of age and over to reflect the additional costs associated with 
treating elderly patients. We received a wide range of comments about 
the proposed age adjustment. In general, the comments favored the 
creation of additional age groups and payment adjustments.
    Comment: Commenters requested clarification on how the proposed 13 
percent differential between age groups was calculated. The commenters 
stated that the proposed adjustment factor is too low and does not 
reflect the current cost required to treat the elderly.
    Several commenters recommended that CMS revise the age groupings to 
include a payment adjustment for patients under 14 years of age, under 
40 years of age, 55 to 64 years of age, and 75 years of age and over. 
Other commenters suggested a payment adjustment for patients 65 years 
of age and over with increments added for each additional 5 years in 
age.
    Response: As indicated in the proposed rule (68 FR 66931), the 13 
percent differential was calculated using the same cost regression that 
was used to estimate the payment adjustments for the other variables 
included in the proposed payment system. The dependent variable was the 
natural logarithm of average cost per day for each inpatient stay. The 
regression included a single variable for persons 65 years of age and 
over to estimate the relative cost per day of persons 65 years of age 
and over compared to persons less than 65 years of age. Since the cost 
variable was in logarithms, the age coefficient in the cost regression 
was then raised to the power of the base e to convert it to the 
relative payment factor, 1.13.
    In response to the public comments to create additional age payment 
adjustments (under 14 years of age and under 40 years of age, 55 to 64 
years of age, and over 75 years of age), we updated our analysis of the 
impact of age on per diem cost by expanding the age variable (that is, 
the range of ages for payment adjustments). Since we have relatively 
few cases for persons under 40 years of age (and virtually no cases for 
persons under 14 years of age), we

[[Page 66947]]

combined all persons under 40 years of age into a single category. 
Similarly, all persons over 80 years of age were placed in a single 
category. For patients in between 40 and 80 years of age, we 
categorized cases into 5-year intervals. As indicated in the proposed 
rule, the cost per day increases with increasing age. With the 
exception of the 40 through 44 age group, all the older age groups are 
more costly than the under 40 years of age group, the differences 
increase for each successive age group, the differences among the age 
groups increase for each successive age group, and the differences are 
statistically significant.
    Based on these results, in this final rule we are expanding the 
relative adjustment factor for age from the single factor for patients 
65 years of age and over to 8 adjustment factors beginning with age 
groupings 45 and under 50 years of age to patients 80 years of age and 
over. The magnitudes of these factors are shown in Table 6 below and in 
Addendum A. We are also adopting as final the same methodology we used 
in the proposed rule (that is, cost regression analysis) except we are 
using an updated and revised regression based on FY 2002 data and the 
age groupings described above (that is, 5 year intervals and 8 
adjustment factors).
[GRAPHIC] [TIFF OMITTED] TR15NO04.446

5. Variable Per Diem Adjustments
    Cost regressions indicate that the per diem cost declines as the 
length of stay increases. Therefore, we proposed adjustments to account 
for ancillary and certain administrative costs that occur 
disproportionately in the first days after admission to an IPF. As we 
explained in the proposed rule, we examined the per diem cost over a 
range of 1 to 14 days. According to the FY 1999 MedPAR data file, the 
per diem costs were highest on day 1 and declined for days 2 through 8 
as follows. Per diem costs for days 9 and thereafter remained 
relatively constant. The proposed cost regression analysis was used to 
determine the proposed payment adjustment factors. Relative to a stay 
of 9 or more days, we proposed a variable per diem adjustment of 26 
percent for day 1, a 12-percent adjustment for days 2 through 4, and a 
5-percent adjustment for days 4 through 8. No variable per diem 
adjustments would be made after the 8th day.
    We received multiple comments on the proposed variable per diem 
adjustments, primarily dealing with the amount of the proposed payment 
adjustments and the breakpoints for the adjustments.
    Comment: One commenter asked how CMS determined the cost per day 
for the different lengths of stay. Another commenter recommended more 
justification of the method used to control for length of stay. 
Specifically, this commenter asked whether CMS tested alternative 
breakpoints for the length of stay categories and whether CMS 
considered other approaches for estimating the relationship between per 
diem cost and length of stay. One commenter objected to the proposed 
length of stays blocks, in which days 2 through 4 and days 5 through 8 
would be paid at the same rate rather than declining smoothly for each 
successive day. The commenter believes that the proposed approach 
creates incentives to terminate or unnecessarily extend the length of 
stay.
    Response: As indicated in the proposed rule, the relationship 
between cost per day and length of stay was estimated within the same 
cost regression used to derive other payment adjustments. First, we 
defined variables for each stay's length of stay (from 1 to 14 days). 
The effects of the first 14 days on cost were measured relative to 
stays of more than 14 days. Based on the results of this regression, we 
considered payment breakpoints for each day up through 14 days. Based 
on the size and pattern of variation of the regression coefficients for 
the individual day coefficients (that is, the magnitude of decline), we 
decided to group the days into the categories presented in the proposed 
rule (that is, day 1, days 2 through 4, days 5 through 8, and days 9 
and thereafter). We then re-estimated the cost regression including the 
first 3 of these groups and stays of more than 8 days as the reference 
group.
    As a result of converting the regression coefficients to payment 
factors, we proposed to pay the first day of each stay 26 percent more 
than the Federal per diem base rate. Similarly, we proposed to pay days 
2 through 4 of each stay 12 percent more than the Federal per diem base 
rate and days 5 through 8 about 5 percent more than the Federal per 
diem base rate. The Federal per diem base rate implicitly reflects the 
cost of stays with more than 8 days.
    We used regression analysis to estimate the average differences in 
per diem cost among stays of different length. Regression analysis 
simultaneously controls for cost differences associated with the other 
variables (for example, age, DRG, and presence of specific 
comorbidities). The regression coefficients measure the relative 
average cost per day for stays of differing lengths compared to a 
reference group's length of stay. In the proposed rule, the variable 
per diem adjustment factors derived from the regression coefficients 
were applied to specific days within the stay. As indicated above, we 
proposed to pay all stays 26 percent more than the Federal per diem 
base rate for day 1, 12 percent more than the base payment amount for 
days 2 through 4, and 5 percent more than the base payment amount for 
days 5 through 8.
    To accurately measure the relative cost of specific days within the 
stay, we need estimates of the additional or marginal (not average) 
cost of those

[[Page 66948]]

days. Using the relative average cost differences as if they were 
marginal cost differences will result in overpayment for the days with 
payment factors greater than 1.00. The reason for the overpayment is 
that, using a 4-day stay as an example, the average cost per day over 
the 4 days already contains the higher marginal costs of the preceding 
3 days. In paying more than the 4-day average cost per day for days 1 
through 3, we would be paying more than the total cost of the stay.
    In reconsidering the variable per diem adjustments for this final 
rule, we re-evaluated the length of stay breakpoints in the regression 
and the method of applying the regression results for payment. Using 
the FY 2002 MedPAR data, we re-estimated the cost regression, expanding 
the number of length of stay categorical variables from 1 through 14 to 
1 through 30 days in order to potentially allow payments to decline in 
smaller, more increments over a wider range of days. From the 
regression, we derived factors indicating the average cost per day, for 
example, a 1-day stay, a 2-day stay, and a 3-day stay, relative to a 
stay of more than 22 days.
    Since the variable per diem adjustments are applied to all IPFs 
stays, the adjustments should reflect daily cost differences 
experienced by all types of IPFs, and not cost differences among 
different types of IPFs with different lengths of stay. Therefore, we 
also tested the sensitivity of the regression coefficients to the 
inclusion of the government-operated IPF stays, which tend to have 
longer lengths of stay than the other types of IPFs. For example, about 
one-third of all government-operated IPF stays are longer than 22 days, 
compared to only 10 to 13 percent of stays in for-profit or non-profit 
hospitals or in psychiatric units. We found that our coefficients 
varied little depending on whether cases from government-operated IPFs 
were included or excluded.
    CMS-funded research by RTI International<SUP>[reg]</SUP>, which was 
not available for the proposed rule, provides additional information 
about the variation in relative marginal costs by day of the stay. RTI 
International<SUP>[reg]</SUP> examined the variation in routine 
resource use across days within stays in its study of a sample of 
patients from 40 facilities. RTI International<SUP>[reg]</SUP> 
constructed a measure of a patient's routine cost for each of 7 days 
during which they were collecting data within a facility.
    As a result, RTI International<SUP>[reg]</SUP> data has a 
significant advantage compared to the MedPAR data that was available at 
the time of the proposed rule for examining cost variation by day-of-
stay. Specifically, RTI International<SUP>[reg]</SUP> data enabled them 
to estimate a relationship between per diem cost and the day-of-stay 
that is consistent with the way we used the variable per diem 
adjustment factors for payment. In addition, since RTI 
International<SUP>[reg]</SUP> did not average daily routine costs over 
the entire length of stay, its estimates should provide a better 
approximation of the relationship of marginal cost than we were able to 
construct. RTI International<SUP>[reg]</SUP> did not collect 
information on ancillary usage by day-of-stay. In constructing its 
measure of daily total cost, RTI International<SUP>[reg]</SUP> 
allocated 1 day of average ancillary costs from the matching MedPAR 
stay record. RTI International<SUP>[reg]</SUP> used the same 
breakpoints that we used for the proposed rule.
    In the table below, we compare the revised CMS adjustment factors 
with the RTI International<SUP>[reg]</SUP> day-of-stay relative 
weights. Both sets of factors were scaled to set the day-9 (the median 
length of stay) factor equal to 1.00. The two series of factors are 
very similar, with the biggest differences occurring for days 2 to 4 
and for day 19 and beyond. The differences for days 2 to 4 may be due 
to how the two methods handle ancillary costs, especially our exclusion 
of ED costs from the cost variable used in our regression analysis. The 
differences for day 19 and beyond probably are a result of the fact 
that RTI International<SUP>[reg]</SUP> only estimated specific day 
effects for the first 14 days.
    Overall, the similarity of the adjustment factors gives us 
confidence that our variable per diem adjustment factors are reasonably 
accurate. The revised factors are also responsive to the comment that 
the variable per diem adjustments should decline more continuously than 
those presented in the proposed rule. Therefore, in this final rule we 
are using the updated variable per diem adjustment factors in adjusting 
per diem payments by day-of-stay. We note that the variable per diem 
adjustment are made in a budget-neutral manner.

[[Page 66949]]

[GRAPHIC] [TIFF OMITTED] TR15NO04.447

    Comment: Several commenters recommended that CMS re-evaluate the 
decision to have no variable per diem adjustment paid after the 8th 
day. The commenters requested that we re-examine the analysis 
supporting the conclusion that ``per diem costs for days 9 and 
thereafter remain relatively consistent with the median length of 
stay.''
    A few commenters expressed concern that averages were used in all 
analyses except for the proposed variable per diem adjustments that 
were based on the median length of stay. The commenters believe use of 
the median creates distortions and requested that CMS analyze the 
impact if the variable per diem adjustments were based on the average 
length of stay.
    Response: We re-evaluated the decision to make no variable per diem 
adjustments to the Federal per diem base rate beyond the eighth day. We 
examined the per diem cost relationship for the first 30 days of the 
stay and found that beyond day 22, there was no consistent continuing 
pattern of decline. In addition, since the proportion of stays longer 
than 21 days is relatively small, there is relatively high statistical 
variability in the estimates of declining cost increases beyond day 22, 
which makes the estimates less reliable. As a result of that analysis, 
we found that the average per diem cost continued to decline until the 
twenty second day. Therefore, in this final rule we are extending the 
variable per diem adjustments through day 22. The adjustment for day 22 
would be applied to any days after day 21.
    We believe the commenter misunderstood the role of the median 
length of stay in the variable per diem adjustment factors. As 
indicated in the proposed rule, the median length of stay serves only 
as a point of reference for the variable per diem adjustment factors 
relative to the Federal per diem base rate (the day for which the 
factor equals the base amount). In addition, the actual magnitudes of 
the variable adjustment factors were not affected by using the median 
in this manner because the median had no impact on the cost regression 
from which the variable per diem adjustment factors are derived. The 
Federal per diem payment would be the same no matter which day of the 
stay (the median, the mean, or some other day) was used as the 
reference point. In this final rule, we are adopting as final the same 
methodology proposed to calculate the variable per diem adjustments.
    Comment: A few commenters expressed concern that the lack of 
variability in average daily charges results in understating the effect 
of the length of stay variable.
    Response: We disagree with the commenters. The RTI 
International<SUP>[reg]</SUP> research evaluated the variation of per 
diem cost by day of the stay using a measure of routine cost that 
varied according to the day of the stay. In addition, the comparison of 
RTI International<SUP>[reg]</SUP> results and our results did not 
support the commenters' concerns that the variable per diem adjustment 
factors are understated.
    Comment: Many commenters recommended increasing the per diem 
adjustment factor for day 1, or for the first several days of care.
    One commenter recommended that in order to avoid the significant 
impact the proposed rule would have on high cost per discharge-short 
length of stay providers, the variable per diem adjustments for the 
first days of the stay should be weighted higher. The commenter 
recommended that CMS double the adjustments to 52 percent for day 1, 24 
percent for days 2 through 4, and 10 percent for days 5 through 8.
    Other commenters recommended that days 2 and 3 receive the same 
adjustment factor as day 1. However, some commenters recommended that 
the per diem payment be uniform rather than variable throughout the 
patient's stay. They suggested that a higher per diem base payment 
amount for each day

[[Page 66950]]

of stay would be preferable and more in line with the distribution of 
costs over an inpatient episode.
    Response: These comments reflect a wide range of opinion about the 
appropriate range and magnitude of the variable per diem adjustment 
factors. We have updated and revised our variable per diem adjustment 
policy on the basis of our analysis of FY 2002 data and in response to 
public comments. In arriving at the final variable per diem 
adjustments, we have relied upon our empirical analysis, as previously 
described earlier in this section, to better approximate the additional 
costs of each successive day of the stay. We have also compared our 
results with the results of CMS-funded research by the RTI 
International<SUP>[reg]</SUP>. We believe that the outcome of the 
process we undertook to improve the variable per diem adjustment 
factors is a reasonably accurate, empirically-based set of adjustment 
factors.
    Comment: Several commenters expressed concern that the length of 
stay assumptions in the proposed rule did not take into consideration 
that certain interventions necessitate longer stays. A particular 
commenter indicated that medical safety standards for ECT dictate stays 
of more than 9 days.
    One commenter stated that the elderly and younger chronically 
mentally ill adults represent two groups with longer than average 
lengths of stay. Another commenter stated that length of stay might be 
increased by the inclusion of trainees in a patient's care.
    Response: We are not sure that we understand these comments. As 
required by the BBRA, the IPF PPS is a per diem system. As a result, 
the IPF PPS recognizes differences in length of stay and will pay the 
Federal per diem base rate and applicable adjustments for each day of 
the inpatient stay. Therefore, the IPF PPS accounts for differences in 
length of stay regardless of cause (including providing ECT or other 
factors).
    Comment: A few commenters recommended that CMS undertake a research 
inquiry into the added staffing costs for the first few days of a stay 
at an inpatient psychiatric unit or develop two per diems, one for 
routine patients and another for ``clinically determined critical 
patients.''
    Response: The RTI International<SUP>[reg]</SUP> study addressed the 
issue raised by this comment because it examined the variation in 
routine cost by day of the stay. RTI International<SUP>[reg]</SUP> 
studied this relationship for all the patients in its sample, which 
included the full range of patients treated in IPFs. In addition, we 
are not sure how we could define ``clinically determined critical'' 
patients, especially considering the common practice of admitting to 
psychiatric facilities only those patients whose medical needs have 
either been resolved or are sufficiently controlled as to require 
limited attention for the period of the psychiatric admission.
    Comment: One commenter expressed concern that CMS would 
misinterpret increases in IPF admissions that result from the planned 
transition of inpatient psychiatric care from government-operated 
facilities to community-based resources such as private hospitals.
    Response: Under the IPF PPS, both admissions referred to in the 
comment would be paid on a per diem basis, so that each facility (the 
government-operated facility and the private hospital) would be paid 
for the days of care it provides.
    Comment: One commenter recommended that CMS more accurately reflect 
the MedPAR data by using a variable Patient Day adjustment equal to the 
median value of 9 days, rather than limit the adjustments to days 1 
through 8.
    Response: By extending our analysis through 30 days, we more fully 
modeled the shape of the relationship between average per diem costs 
and length of stay and did not truncate the adjustments at either the 
median or the mean length of stay. As a result, the revised variable 
per diem adjustment factors presented in this final rule more 
accurately reflect the cost-day relationship than those we presented in 
the proposed rule.
    Comment: One commenter recommended that CMS provide more 
justification for the method used to control for length of stay.
    A few commenters expressed concern that use of the median length of 
stay significantly understates the length of stay for an IPF that 
accepts chronic psychiatric patients (for example, a government-
operated psychiatric hospital). The commenters believe that the 
proposed IPF PPS rewards acute psychiatric facilities for discharging 
patients quickly and provides an incentive for those facilities to 
discharge patients into government-operated IPFs.
    Response: We believe the commenter misunderstood the intent of the 
variable per diem adjustment policy, which is not to control for length 
of stay, but to better align the payment of each day of the say with 
its corresponding cost. Therefore, the facilities would have no 
incentive to either shorten or extend a patient's length of stay beyond 
what is clinically needed.
    We agree with the commenters that certain types of IPFs have 
lengths of stay greater than the median length of stay. The variable 
per diem adjustment factors are intended to track the relative costs an 
IPF needs to spend on a case throughout the days of a stay. Thus, a 
facility with a length of stay greater than the median, or the mean for 
that matter, should be adequately reimbursed for the cost of care 
provided to a Medicare beneficiary. As explained above, we do not 
believe that the final IPF PPS provides an incentive for early 
discharge from one type of IPF to a government-operated facility. In 
addition, our use of the median length of stay has no effect on the 
actual payment amounts for each day of the stay.
6. Other Patient-Level Adjustments
    Although we proposed specific patient-level adjustments, we 
recognized that there were other variables not collected on the claim 
form. Therefore, we requested public comments on other patient-level 
adjustments for the IPF PPS. In response to our request for public 
comments, we received numerous comments recommending that we consider 
the following other types of adjustments:
a. Gender
    We invited public comments on the appropriateness of including a 
gender variable as a payment adjustment.
    Comment: Several commenters stated that elderly female patients 
represent 68 to 70 percent of the population they serve and recommended 
that CMS recognize the cost differential in treating female patients.
    Response: We analyzed the FY 2002 data and found that the cost 
regression continues to imply that female patients are approximately 2 
percent more costly than male patients. However, as we found in the 
proposed regression analysis, adding an adjustment for gender increases 
the explanatory power of the patient model by less than one half of 1 
percent, which means that the addition of gender does very little to 
improve explanatory power of the overall model. In addition, we are 
unable to determine the extent to which the interaction of psychiatric 
unit status with age and gender indicates higher direct costs of 
treating the elderly and women, as opposed to other reasons for the 
higher costs of psychiatric units. However, to the extent that gender 
is correlated with age and DRGs, facilities will be partially 
reimbursed for gender-related costs, since gender was not included as a 
variable in the regression. Therefore, we are not adopting a patient-
level adjustment for gender.

[[Page 66951]]

b. Patients Admitted Through the Hospital's ED
    We received many comments recommending that we recognize the cost 
of ED services and provide a patient-level adjustment for patients who 
were admitted to a distinct part psychiatric unit through the 
hospital's ED.
    Comment: Many commenters recommended that CMS add a patient-level 
adjustment for patients who are admitted through the ED of the same 
hospital for inpatient psychiatric care.
    Response: Our analysis indicated these cases were more costly on a 
per diem basis than cases without an ED admission. However, we are not 
including an adjustment for patients admitted through the ED. We are 
concerned about creating an incentive for psychiatric units in acute 
care hospitals with EDs to ensure that all psychiatric patients are 
admitted through the ED. However, we are providing a facility-level 
adjustment for psychiatric hospitals, or psychiatric units of acute 
care hospitals, with qualifying ED. Additional information regarding 
the analysis of ED costs is included in section VI.B.5.b. of this final 
rule.
c. Patients Who Receive Electroconvulsive Therapy (ECT)
    We received numerous comments recommending that we include ECT as a 
patient-level adjustment because furnishing ECT treatment adds 
significantly to the cost of these IPF stays.
    Comment: Several commenters recommended that CMS include ECT 
(procedure code 90870) under DRG 424 (Operating room procedure with 
principal diagnosis of mental illness) that has an adjustment factor of 
1.22. One commenter suggested that DRG 430, ``Psychosis'' be 
disaggregated into two DRGs, ``Psychosis with ECT,'' incorporating the 
added costs for ECT treatment and ``Psychosis without ECT.''
    Other commenters recommended that CMS provide as an alternative, an 
add-on payment to the DRG for those patients who receive ECT 
treatments.
    Many commenters recommended modifying the payment structure to 
include a separate payment adjustment for ECT, which should be higher 
than the payment adjustment for DRG 424.
    Response: After reviewing the public comments, we analyzed cases 
with ECT using the FY 2002 MedPAR data. We were able to identify ECT 
cases by the presence of procedure code 90870. Our analysis indicated 
that ECT cases comprised about 6 percent of all cases, and that almost 
95 percent of ECT cases were treated in psychiatric units. Even among 
psychiatric units, ECT cases are concentrated among a relatively small 
number of facilities.
    Overall, approximately 450 facilities had cases with ECT. Among 
these facilities, we estimate the mean number of ECT cases per facility 
to be approximately 25. In addition, approximately one-half of the IPFs 
providing ECT had no more than 15 cases in FY 2002.
    Consistent with the comments we received about ECT, our analysis 
and review indicated that cases with ECT are substantially more costly 
than cases without ECT. On a per case basis, ECT cases are 
approximately twice as expensive as non-ECT cases ($16,287 vs. $7,684). 
Most of this difference is due to differences in length of stay (20.5 
days for ECT cases vs. 11.6 days for non-ECT cases). The ancillary 
costs per case for ECT cases are $2,740 higher than those for non-ECT 
cases.
    Based on this analysis, in this final rule we are providing an 
adjustment for each ECT treatment furnished during the IPF stay. In 
order to receive the payment adjustment, IPFs must indicate on their 
claims the revenue code and procedure code for ECT (Rev Code 901; 
procedure code 90870) and the number of units of ECT, that is, the 
number of ECT treatments the patient received during the IPF stay. 
Providing this data will ensure that facilities are appropriately 
reimbursed for the treatments they provided.
    After careful review and analysis of IPF claims, we were unable to 
separate out the cost of a single ECT treatment. Therefore, we are 
using the pre-scaled and pre-adjusted median cost for procedure code 
90870--developed for the hospital OPPS, based on hospital claims data.
    We used unadjusted hospital claims data under the OPPS, that is, 
the pre-scaled and pre-adjusted median hospital cost per treatment, to 
establish the ECT payment because we did not want the ECT payment under 
the IPF PPS to be affected by factors that are relevant to OPPS but not 
specifically applicable to IPFs. The median cost is then standardized 
and adjusted for budget neutrality. We will adjust the ECT rate for 
wage differences in the same manner that we adjust the per diem rate. 
The median cost for all hospital OPPS services are posted after 
publication of the hospital OPPS proposed and final rules at the 
following address: http://www.cms.hhs.gov/providers/hopps.
    As explained above, we decided to pay the median cost for an ECT 
treatment, posted as part of the calendar year (CY) 2005 OPPS update, 
which is based on CY 2003 outpatient hospital claims. The amount is 
$311.88. Using the same OPPS CY 2003 claims that were used to calculate 
the aforementioned ECT median, we were able to calculate the average 
number of ECT treatments for a given patient to be approximately 9. A 
rate of $311.88 per ECT treatment multiplied by 9 is very close to the 
$2740 difference in ancillary costs observed for ECT and non-ECT cases. 
Accordingly, we believe that the payment adjustments for ECT will 
appropriately and adequately provide payment for ETC services provided 
to IPF patients. After applying the standardization factor, behavioral 
offset, stop-loss adjustment, and outlier adjustment (as described in 
section V.C. of this final rule), the adjusted ECT payment is $247.96.
    We have established the ECT adjustment as a distinct payment under 
the PPS methodology, our preferred approach would be to include a 
patient level adjustment as a component of the model (for example, 
determined through the regression analyses) to account for the higher 
costs associated with ECT. We believe the approach will better control 
incentives towards over-utilization and be more consistent with the 
approach used for other patient level adjustments under the PPS. During 
the transition period we expect to collect more data on the number of 
ECT treatments per stay, and associated costs. We will utilize these 
data to evaluate alternative approaches for incorporating an adjustment 
for ECT in the payment system. We expect to complete this analysis 
during the first year of the transition and potentially propose changes 
at the time of the first annual update of the payment system.
    ECT is an intensive procedure. Therefore, we are concerned that 
including a payment adjustment for ECT treatments in the final IPF PPS 
could result in a rise in the use of ECT treatment. We will monitor 
this area to ensure that the increased payments do not lead to changes 
in the frequency of utilization.
d. Patients Involuntarily Committed to the IPF
    We did not proposed to provide a payment adjustment for patients 
who are involuntarily committed to an IPF. However, we received 
multiple comments encouraging us to recognize the additional costs 
associated with these patients.
    Comment: Several commenters indicated that patients involuntarily 
committed to an IPF often require costly court proceedings before 
treatment can

[[Page 66952]]

begin and that the hospital my incur cost for caring for these patients 
while awaiting the court decision.
    Other commenters identified patient management issues, for example, 
more frequent one-on-one staff attention and more complex discharge 
planning. A few commenters indicated that involuntarily committed 
patients are often uncooperative and difficult to treat. One commenter 
reported a 27 percent longer length of stay for involuntarily committed 
patients.
    Response: One of the fields on the claim form indicates if patients 
were referred to the IPF by law enforcement or if the commitment were 
court ordered (FL 20, item 8, court/law enforcement). As a result, we 
were able to analyze the FY 2002 claims data to determine if the costs 
identified by the commenters are evident in the claims. The data did 
not indicate that patients involuntarily committed to the IPF are more 
costly on a per diem basis. We note that many of the costs associated 
with involuntary commitments (for example, legal fees, staff time to 
accompany the patient to court, and transportation costs) are part of 
the hospital's average routine per diem cost.
    In addition, there are certain costs that are the responsibility of 
the court system or law enforcement, for example, where a court orders 
a 3-day psychiatric evaluation for a patient or where discharge is 
delayed pending court action. Thus, IPFs should be adequately 
reimbursed for patients involuntarily committed, even in the absence of 
a specific payment adjustment.
    Therefore, at this time we are not providing an adjustment for 
involuntarily committed patients.
e. Administrative Necessary Days
    We received several comments recommending that we recognize the 
cost of administrative necessary days for continued inpatient care when 
discharge is delayed due to a lack of community resources.
    Comment: Commenters indicated that hospitals would be unable to 
discharge a patient without an appropriate discharge plan. The 
commenters requested that CMS provide reimbursement for this type of 
situation.
    Response: Current hospital discharge planning requirements in Sec.  
482.43(a) and (b) require the discharge planning evaluation to include 
the likelihood of a patient needing post-hospitalization services and 
the availability of those services. Hospital personnel must complete 
the evaluation on a timely basis so that appropriate arrangements for 
post-hospital care are made before discharge, and to avoid unnecessary 
delays in discharge.
    In addition, Sec.  482.43(c)(4) requires that the hospital must 
reassess the patient's discharge plan if there are factors that may 
affect continuing care needs or the appropriateness of the discharge 
plan.
    Moreover, Sec.  412.27(c)(5) states, ``the record of each patient 
who has been discharged must have a discharge summary that includes a 
recapitulation of the inpatient's hospitalization in the unit and 
recommendations from appropriate services concerning follow-up or 
aftercare as well as a brief summary of the patient's condition on 
discharge.''
    Consequently, if an IPF determines that a patient needs post-
hospitalization placement, then a statement to this effect is expected 
to be included in their discharge plan. Furthermore, if a patient 
cannot be safely discharged without this post-hospitalization placement 
and this placement is not available, then the patient has not met their 
discharge objectives and requires continued active treatment.
    After careful review, we have decided not to provide additional 
payment for administrative necessary days for several reasons. Since 
claim data does not include coding or documentation for administrative 
data, we are unable to identify and discern the cost of these days. 
Therefore, we are unable to determine the extent to which the costs of 
administrative necessary days are included in the Federal per diem base 
payment amount.
    Finally, since the IPF PPS is a per diem payment methodology, we 
are concerned about inadvertently creating an incentive to 
unnecessarily delay discharge in order to receive additional payment 
for administrative necessary days.

C. Facility-Level Adjustments

    In the proposed rule, we proposed adjustments for the IPF's wage 
area, rural location, and teaching status.
1. Wage Index
    Due to the variation in costs and because of the differences in 
geographic wage levels, we proposed that payment rates under the IPF 
PPS be adjusted by a geographic wage index. We proposed to use the 
unadjusted, pre-reclassified hospital wage index to account for 
geographic differences in labor costs. In the proposed rule, we 
proposed to use the inpatient acute care hospital wage data to compute 
the IPF wage since there is not an IPF-specific wage index available. 
We believe that IPFs generally compete in the same labor market as 
acute care hospitals since the inpatient acute care hospital wage data 
should be reflective of labor costs of IPFs. We believe this to be the 
best available data to use as proxy for an IPF specific wage index. We 
proposed to adjust the labor-related portion of the proposed Federal 
per diem base rate for area differences in wage levels by a factor 
reflecting the relative facility wage level in the geographic area of 
the IPF compared to the national average wage level for these 
hospitals. We believe that the actual location of the IPF as opposed to 
the location of affiliated providers is most appropriate for 
determining the wage adjustment because the data support the premise 
that the prevailing wages in the area in which the IPF is located 
influence the cost of a case. Thus, in the proposed rule and in this 
rule, we are using the inpatient acute care hospital wage data without 
regard to any approved geographic reclassification as specified in 
section 1886(d)(8) or 1886(d)(10) of the Act. Specifically, in this 
rule, we are using the FY 2005 hospital wage index (unadjusted, pre-
reclassified) based on MSA definitions defined by OMB in 1993 (as 
opposed to the new MSA definitions that were used to define labor 
markets for the FY 2005 IPPS). Once we implement the IPF PPS, we will 
assess the implications of the new MSA definitions on IPFs. At the time 
of the proposed rule, the 2003 MSA definition had not been implemented 
for any medicare programs and consequently, were not proposed. We note 
that, after the publication of the IPF PPS proposed rule, new MSA 
definitions have been adopted for use in the IPPS. We, however, are not 
adopting those new definitions in this final rule. We expect that use 
of the new MSA (or labor market) definitions may have a significant 
impact on the wage index applied to IPFs and associated payments. Thus, 
before their use could be proposed, we would have to conduct a thorough 
analysis of their impact on the IPF PPS. Moreover, and most 
importantly, we believe it is appropriate to provide an opportunity for 
IPFs and other interested parties to comment on the use of the new 
definitions before proceeding with their possible application. We plan 
to publish in a proposed rule any changes that we consider for new 
labor market definitions, in order to provide the public with an 
opportunity to comment.
    Comment: Several commenters recommended that CMS apply the hospital 
wage index with geographic reclassifications in the same way that other 
hospital PPS adjust payments to reflect wage differences. Commenters

[[Page 66953]]

believe that the reclassification process ensures that areas that are 
geographically close to an MSA may compete to employ a sufficient 
amount of skilled healthcare workers. Other commenters believe that the 
pre-reclassified wage index may result in a potential decrease in 
payment, especially for psychiatric units within hospitals that draw 
from the same workforce as acute care hospitals.
    Response: The statute does not require geographic reclassification 
of other hospitals paid under TEFRA (for example, freestanding 
psychiatric hospitals) or other hospitals paid under different 
prospective payment systems. Geographic reclassifications are not 
recognized under the IRF or LTCH payment systems, and are not 
recognized under the final IPF PPS.
    Comment: A few commenters requested a modification to the portion 
of the payment that is adjusted by the wage index. The commenters 
stated that the proposed wage index should be applied to 72.8 percent 
of the Federal per diem base rate, as reflected in the proposed 1997-
based excluded hospital with capital market basket. Generally, 
commenters in wage areas with a wage index above 1.0 indicated that the 
proposed labor portion of the payment was too low and commenters in 
wage areas with a proposed wage index less than 1.0 indicated that the 
labor portion was too high.
    One commenter indicated that psychiatric care is more labor 
intensive than other modes of inpatient care, thus the commenter 
recommended that CMS research the costs of providing psychiatric care, 
and develop a labor adjustment that adequately compensates for the 
increased intensity of care for psychiatric patients.
    Response: In both the proposed rule and in this final rule, to 
account for wage differences, we first identified the proportion of 
labor and non-labor components of costs. We used the 1997-based 
excluded hospital market basket with capital to determine the labor-
related share of cost. We calculated the labor-related share as the sum 
of the weights for those cost categories contained in the 1997-based 
excluded hospital with capital market basket that are influenced by 
local labor markets. These cost categories include wages and salaries, 
employee benefits, professional fees, labor-intensive services, and a 
share of capital-related expenses.
    The labor-related share for the implementation period of the final 
IPF PPS (January 1, 2005 through June 30, 2006) is the sum of the 
relative shares which measure the relative importance of each labor-
related cost category for this period. It also reflects the different 
rates of price change for these cost categories between the base year 
(FY 1997) and this period. 0 labor-related components of operating 
costs (wages and salaries, employee benefits, professional fees, and 
labor-intensive services) is 68.818 percent, as shown below in Table 8. 
Since capital cost also contains a significant component of labor-
related cost, the labor-related share of total cost will be greater 
than the labor-related share of operating costs alone. The portion of 
capital cost that is influenced by local labor markets is estimated to 
be 46 percent. Because the capital accounts for 7.323 percent of the 
1997-based excluded hospital with capital market basket for the period 
January 1, 2005 through June 30, 2006, the labor-related share of 
capital cost is 46 percent of 7.323 percent. The result, 3.369 percent, 
is then added to the 68.818 percent calculated for operating costs to 
determine the labor-related share of total cost. The resulting labor-
related share that we are using in this IPF PPS rule is 72.247 percent. 
The table below shows that the labor-related share would have been 
72.571 percent if we had not rebased the excluded hospital with capital 
market basket using more recent 1997 data rather than using 1992 data. 
As shown in Table 8, rebasing results in a lowering of the labor-
related share by 0.324 percentage points.
    The base methodology used to calculate the labor-related share for 
IPFs is the same as that used for calculating the labor-rated share for 
IPPS, SNFs, HHAs, LTCH, and IRFs PPS. The difference is that except for 
the IPPS, we use the relative importance for the effective period in 
developing this share, which changes annually. For IPPS, the labor 
share remains constant until the market basket is rebased.
    CMS agrees with the commenter that it is important to have a market 
basket and labor share appropriate for use under the IPF PPS. We 
believe that using the excluded hospital with capital market basket 
accomplishes this goal. However, we indicated in the proposed rule that 
we plan to continue to study the feasibility of developing a market 
basket specific to IPF services. We hope that we may eventually be able 
to develop a market basket and labor-related share based primarily on 
IPF data (see 68 FR 66928).
[GRAPHIC] [TIFF OMITTED] TR15NO04.448

    The labor-related relative share of total cost in this rule changed 
from that in the proposed rule for two reasons. First, the labor-
related share of 72.247 in this rule comes from Global Insight's 2004: 
quarter 3 forecast, with historical data through 2004: quarter 2, while 
the proposed rule used data from the 2002: quarter 4 forecast, with 
historical data through 2002: quarter 3, to calculate the proposed 
labor share of 72.828. Second, in addition to using more historical 
data in a more recent forecast, there is a different implementation 
period in this final rule, meaning that different periods of data were 
used to calculate the labor-related relative importance in this rule.

[[Page 66954]]

    Comment: Several commenters requested that CMS establish a floor 
for the urban wage index so that an urban wage index would not fall 
below the wage index in a rural area in the same state. Another 
commenter requested that CMS apply the section of the MMA to the IPF 
PPS, which would limit an IPF's wage index to a minimum of 1.
    Response: We did not propose a wage index floor. We are unclear of 
what the commenter is referring to because there is no MMA provision 
that limits the hospital wage index to a minimum of 1.0. In order to be 
consistent with the wage area adjustments used in the PPS developed for 
other excluded hospitals, we did not apply a floor wage index under the 
IPF PPS.
    Comment: Many commenters suggested that CMS use more recent 
hospital wage data for the final IPF PPS.
    Response: We are also using the best available hospital wage index 
data in this final rule (that is, the wage data used to establish the 
FY 2005 IPPS wage index for the October 1, 2004). We will continue to 
use the best data available for future updates to the IPF PPS.
2. Rural Location
    We proposed a 16 percent payment adjustment for those IPFs located 
in a rural area. This adjustment was based on the proposed regression 
analysis, which indicated that the per diem cost of rural facilities 
was 16 percent higher than that of urban facilities after accounting 
for the influence of the other variables included in the regression. 
Many rural IPFs are small psychiatric units within small general acute 
care hospitals. In the proposed rule, we stated that small-scale 
facilities are more costly on a per diem basis because there are 
minimum levels of fixed costs that cannot be avoided, and they do not 
have the economies of size advantage.
    We received several comments regarding the proposed rural 
adjustment. Most commenters supported the rural adjustment and 
encouraged us to recognize the higher cost incurred in rural settings.
    Comment: Commenters expressed concern that despite the 16 percent 
adjustment to the Federal per diem base rate for IPFs located in rural 
areas Medicare payment would decrease for rural psychiatric units.
    Response: In implementing this rule, we updated our cost regression 
analysis using the most recent complete data available (that is, FY 
2002 data). Based on the results of our regression analysis, we are now 
providing a payment adjustment for IPFs located in rural areas of 17 
percent instead of the proposed 16 percent. The small change in the 
rural payment adjustment is largely the result of the adjustment we 
made to the cost data to account for the ED adjustment. A full 
description of the ED policy appears later in this section.
    As is the case with implementing any prospective payment system, 
since the payment rates are not directly tied to the costs of each 
individual facility, relatively high cost facilities may experience 
reductions in Medicare payments. However, our analysis of the impact of 
this rule during the first year of implementation (see section VIII of 
this final rule) show that on average rural facilities are expected to 
have a payment to cost ratio of 1.00. This means that Medicare payments 
during the first year of the IPF PPS transition are expected to be the 
same as they would have been had the IPF PPS not been implemented and 
IPFs continued to be paid 100 percent.
    Comment: Several commenters specifically expressed concern that the 
multipliers used for urban and rural facilities are inappropriate and 
do not adequately adjust for higher per bed cost in smaller facilities. 
In addition, several commenters encouraged CMS to add a reasonable 
payment adjustment for urban psychiatric units.
    Other commenters stated that if the proposed rules are adopted, 
hospitals may choose to close their psychiatric units.
    Response: We did not include an explicit payment adjustment for 
urban facilities in the proposed rule and we are not adopting one in 
this final rule. We are not including this type of adjustment factor 
since our adjustment for rural facilities is based on an explicit 
comparison of the relative per diem costs of rural and urban facilities 
after accounting for the effects of the other variables included in the 
regression as previously explained in the cost regression section of 
this final rule. The result of that comparison (as reflected in our 
cost regression) was that rural facilities are more costly than urban 
facilities, largely because rural facilities are smaller on average 
than urban facilities. In addition, because a variable reflecting 
facility size was not included in the cost regression, the rural 
payment adjustment factor may partially reflect the influence of size 
on per diem cost.
    As previously stated, we have not included an explicit payment 
adjustment factor to account for the higher per diem costs of small 
facilities, because we think that to do so is counter to the basic 
principle of prospective payment systems that payment adjustments 
should be based on characteristics that are not under the control of 
the facility. Specifically in the case of psychiatric units where a 
facility can choose how much of its inpatient psychiatric care it 
wishes to include in its Medicare certified unit, we would be concerned 
that a facility could reduce the size of its Medicare-certified unit in 
order to increase Medicare payments.
    We plan to monitor the impact of the IPF PPS on the financial 
status of psychiatric facilities. We are particularly concerned about 
potential effects of facility closures on beneficiaries' access to 
inpatient psychiatric care. As a result of this issue, we are adopting 
a stop-loss provision as part of the transition to assist all IPFs with 
revenue shortfalls during the transition period (see section V.C.3. of 
this final rule for a discussion of the stop-loss provision).
3. Teaching Adjustment
    We proposed to establish a facility level adjustment to the Federal 
per diem base rate for IPFs that are teaching institutions. In the 
past, we have made direct graduate medical education (GME) payments 
(for direct costs such as resident and faculty physician salaries, and 
other direct teaching costs) to teaching hospitals including those paid 
under the IPPS and those paid under the TEFRA rate of increase limits. 
However, we did not make separate indirect medical education (IME) 
payments to teaching hospitals paid under the TEFRA rate-of-increase 
limits because payments to these hospitals are based on the hospitals' 
reasonable costs. IME payments are authorized under the IPPS statute to 
be paid as an add-on to the IPPS per case payment, and there are no per 
case payments under the TEFRA system. In this final rule, we are 
establishing a facility-level adjustment for IPFs that are, or are part 
of, teaching institutions. The facility-level adjustment we are 
providing for teaching hospitals under the new IPF PPS parallels the 
IME payments paid under the IPPS. Both payments are add-on adjustments 
to the amount per case (there is now a per case payment to which the 
IPF teaching adjustment will be added) and both are based in part on 
the number of full-time equivalent (FTE) residents training at the 
facility.
    In the proposed rule, we proposed to calculate a teaching 
adjustment based on the IPF's ``teaching variable,'' which is one plus 
the ratio of the number of FTE residents training in the IPF divided by 
the IPF's average daily census (ADC). Based on our initial regression 
analysis, we proposed to raise the teaching variable to the .5215 
power. We also requested suggestions from the public regarding how to 
estimate IPFs' indirect teaching costs

[[Page 66955]]

and alternative methodologies to recognize the higher costs of teaching 
IPFs. However, we did not receive any suggestions on this issue.
    Accordingly, we are adopting our proposed formula for calculating 
the adjustment in this final rule. Based on the final regression 
analysis using FY 2002 data, we are raising the teaching variable from 
.5215 power to the .5150 power.
    We also indicated we were considering alternatives to limit the 
incentives for IPFs to add FTE residents for the purpose of increasing 
their teaching adjustment. We indicated that we were considering 
imposing a cap, similar to that established by sections 4621 and 4623 
of the BBA for the IPPS, and noted that these caps already apply to 
teaching hospitals, including IPFs, for purposes of direct GME payments 
according to regulations at Sec.  413.75 through Sec.  413.83.
    As indicated in the proposed rule (68 FR 66932), we were concerned 
about establishing an open-ended payment for the teaching adjustment 
because the BBA froze the number of residents that hospitals may count 
for both direct and indirect GME payments in order to reduce incentives 
for teaching institutions to add residents. We recognized that if we 
imposed no limits on the teaching adjustment under the IPF PPS, 
teaching programs in those facilities could grow and receive payments 
in a manner that is inconsistent with that in teaching hospitals paid 
under the IPPS. In addition, we were concerned that if a teaching 
hospital had a distinct part psychiatric unit and had a number of FTE 
residents above the amount recognized for reimbursement under the BBA 
limits, the hospital could potentially circumvent those limits by 
assigning residents to train in the IPF. For example, if a teaching 
hospital has 110 FTE residents of which only 100 are recognized for 
purposes of Medicare IME reimbursement under the BBA limits, the 
hospital could assign the excess 10 residents to its distinct part 
psychiatric unit where those FTE residents would be included for 
purposes of the teaching adjustment to the IPF PPS payments, which is 
similar in amount to IPPS IME payments. As a result, the hospital would 
be able to count all 110 FTE residents for purposes of calculating a 
teaching adjustment, in contradiction to the Congress' intent in 
establishing the BBA limits.
    We considered imposing a cap that would operate in a substantially 
similar manner to the BBA limits on the number of FTE residents that 
may be counted for purposes of making IPPS IME payments. The BBA cap 
operates by limiting the number of allopathic and osteopathic FTE 
residents that Medicare will recognize for the purposes of calculating 
IPPS IME payments to no more than the number of FTE residents in a 
teaching hospital's most recent cost reporting period ending on or 
before December 31, 1996. In addition, the BBA placed a cap on the 
entire resident-to-bed ratio used to calculate the IPPS IME payment so 
that a hospital's ratio in its current cost reporting period could not 
exceed the ratio from its previous cost reporting period.
    In response to public comments on the teaching adjustment, only one 
commenter agreed with the appropriateness of establishing a cap on the 
number of FTE residents that may be counted for purposes of the 
teaching adjustment under the IPF PPS. The majority of commenters was 
opposed to imposition of any resident cap and indicated that a cap 
would be arbitrary and burdensome.
    After carefully reviewing the public comments, we have decided to 
adopt a cap on the number of FTE residents that may be counted under 
the IPF PPS for the teaching adjustment. We made this decision in order 
to--(1) exercise our statutory responsibility under the BBA to prevent 
any erosion of the resident caps established under the IPPS that could 
result from the perverse incentives created by the facility adjustment 
for teaching under the IPF PPS; and (2) avoid creating incentives to 
artificially expand residency training in IPFs, and ensure that the 
resident base used to determine payments is related to the care needs 
in IPF institutions.
    In adopting the FTE resident cap for purposes of the IPF PPS 
teaching adjustment, we wish to emphasize that we are not limiting the 
number of residents teaching institutions can hire or train; we are 
limiting the number of residents that may be counted for purposes of 
calculating the IPF PPS teaching adjustment, and thus, the amount 
Medicare will pay for the teaching adjustment under the new IPF PPS.
    The FTE resident cap we are establishing will work identically in 
freestanding teaching psychiatric hospitals and in distinct part 
psychiatric units with GME programs. In order to establish the cap on 
the number of residents used in calculating the IPF PPS teaching 
adjustment, the following policies will apply.
    <bullet> Similar to the regulations for counting FTE residents 
under the IPPS as described in Sec.  412.105(f), we will calculate the 
``base year'' number of FTE residents that trained in the IPF based on 
the hospital's most recently filed cost report before November 15, 
2004. Residents with less than full-time status and residents rotating 
through the psychiatric hospital or unit for less than a full year will 
be counted in proportion to the time they spend in their assignment 
with the IPF (for example, a resident on a full-time, 3-month rotation 
to the IPF will be counted as 0.25 FTEs for purposes of counting 
residents to calculate the ratio). Hospitals can file adjusted cost 
report data with their FIs until the cost report is settled if they 
believe the resident counts as submitted on that cost report are 
incorrect. For purposes of determining an IPF's teaching adjustment 
under the IPF PPS, the number of FTE residents in the numerator cannot 
exceed the number of FTE residents in the hospital's most recently 
filed cost report.
    <bullet> The denominator used to calculate the teaching adjustment 
under the IPF PPS is the IPF's average daily census (ADC) from the 
current cost reporting period. As we indicated in the proposed rule, 
although a hospital's number of available beds is used in the 
denominator of the IPPS IME adjustment, the ADC is used in the 
denominator of the ratio used to compute the IME adjustment under the 
capital PPS as specified at Sec.  412.322. We are using the ADC for the 
teaching adjustment under the IPF PPS rather than the number of beds 
because the ADC is more closely related to the IPF's patient load, and 
thus, its need for interns and residents. As we stated in the proposed 
rule, we also believe the ADC is easier to define precisely and less 
subject to manipulation.
    Thus, under the IPF PPS, we are placing a cap on the number of FTE 
residents (that is, the numerator) used for purposes of computing the 
teaching adjustment, and not on the ADC (the denominator), or on the 
entire ratio. An IPF's FTE resident cap will ultimately be determined 
based on the final settlement of the hospital's cost report filed most 
recently before November 15, 2004. If a change is made to the base year 
cost report, the intermediary will reconcile any changes in IPF PPS 
teaching payments as appropriate.
    If a psychiatric hospital or unit has fewer FTE residents in a 
given year than in the base year, payments in that year will be based 
on the lower number. This approach is consistent with the IME 
adjustment under the IPPS. The hospital will be free to add FTE 
residents and count them for purposes of calculating the teaching 
adjustment until it returns to its base year FTE resident count.
    In this final rule, we are adopting the policy currently applied 
under the BBA

[[Page 66956]]

for IPPS teaching hospitals that start new teaching programs as 
specified in Sec.  413.79 (1) for new teaching IPFS and for teaching 
IPFs that start new programs. We note that under Sec.  
412.105(f)(1)(vi) concerning IME payments under the IPPS, hospitals 
that have shared residency rotational relationships may elect to apply 
their respective IME resident caps on an aggregate basis via a Medicare 
GME affiliation agreement. Our intent is not to affect affiliation 
agreements and rotational arrangements for hospitals that have 
residents that train in more than one hospital. We are not implementing 
a provision concerning affiliation agreements specifically pertaining 
to the FTE caps used in the teaching adjustment under the IPF PPS at 
this time. This is an area we expect to closely monitor, and we will 
consider allowing IPFs to aggregate and adjust their FTE caps through 
affiliation agreements in the future.
    We believe these policies fairly balance our responsibilities under 
the statute to assure appropriate enforcement of the BBA and the 
overall limits on payment adjustments for teaching hospitals with the 
greater precision that can be achieved by adjusting payments for 
teaching IPFs. We also believe that we have designed a cap that 
balances the need for limits with the unique conditions of teaching 
programs in freestanding psychiatric hospitals and in distinct part 
psychiatric units. We will, however, monitor the impact of these 
policies closely and consider changes in the future when appropriate.
    Comment: Several commenters indicated that a cap amounts to an 
absolute freeze on the number of residents that Medicare will recognize 
for payment purposes. In addition, the commenters stated that a cap 
allows only decreases and no increases in established resident counts 
at any time.
    Response: We acknowledge that the number of FTE residents will be 
frozen under the IPF PPS. As discussed above, we are adopting a cap on 
the number of FTE residents that may be counted under the IPF PPS 
teaching adjustment. This policy is to exercise our statutory 
responsibility under the BBA to prevent any erosion of the resident 
caps established under the IPPS that could result from the perverse 
incentives created by the facility adjustment for teaching hospitals 
under the IPF PPS. In addition, we wish to avoid creating incentives to 
artificially expand residency training in IPFs, and ensure that the 
resident base used to determine payments is related to the care needs 
in IPF institutions. Again, we will monitor the impact of these 
policies closely and consider changes in the future when appropriate.
    Comment: Several commenters were concerned that the administrative 
burden in reviewing resident counts back to 1996 cost reports would be 
excessive and recommended not imposing an FTE resident cap for the IPF 
PPS teaching adjustment for this reason.
    Response: The resident cap under the IPPS is based on the 
hospital's 1996 cost report. However, the resident cap we are 
establishing under the IPF PPS relies on the number of residents 
training in the IPF for the most recently filed cost report before 
November 15, 2004. In addition, establishing the IPF PPS resident cap 
does not require the hospitals to submit information not currently 
included in their cost reports. As a result, we do not believe there is 
a significant burden associated with establishing the IPF PPS resident 
cap.
    Comment: Several commenters asked if the teaching adjustment would 
be limited to those hospitals with a dedicated psychiatric teaching 
program. In addition, the commenters asked if the adjustment would also 
apply to hospitals that schedule rotations to the psychiatric unit from 
a non-psychiatric teaching program.
    Response: Under the IPPS, Medicare makes IME payments only for 
costs associated with residents in approved graduate medical education 
(GME) programs as defined in Sec.  412.105(f)(1)(i) that are approved 
by one of the organizations listed in Sec.  415.152, not residents in 
other types of teaching programs. Thus, IPFs that have residents in 
approved GME programs will receive the IME adjustment. The GME program 
could be a psychiatric teaching program or scheduled rotations to the 
IPF unit from a non-psychiatric teaching program.
    Comment: One commenter urged CMS to consider applying any cap on 
the number of interns and residents in a manner that is less sensitive 
to rapid declines in patient census. The commenter believes the use of 
the ratio of residents to ADC will negatively affect government-
operated IPFs.
    Response: Although we are unsure of the commenter's point, the 
commenter seems to be implying that the teaching adjustment would 
decline if there were a reduction in the IPF's ADC. However, a decrease 
in the ADC would result in an increase in the teaching adjustment.
    Comment: One commenter requested that CMS provide an example to 
show how the calculation of the teaching adjustment would be computed. 
The commenter requested that the example use a hypothetical resident 
count and ADC and the final teaching adjustment factor.
    Response: We were not able to present a single proportional factor 
that represents the payment adjustment for teaching as we did for most 
of the other payment variables (for example, age and rural location). 
The reason is because the teaching adjustment varies among teaching 
hospitals depending on the degree of their teaching intensity as 
measured by the ratio of interns and residents to the ADC.
    The following example shows a step-by-step calculation of the 
teaching adjustment for 2 teaching hospitals. Hospital A has an interns 
and residents to ADC ratio of 0.10. Hospital B has an interns and 
residents to ADC ratio of 0.20.
    Step 1: Add 1.0 to the interns and residents to ADC ratio:

Hospital A: 1.0 + 0.1 = 1.1
Hospital B: 1.0 + 0.2 = 1.2

    Step 2: Raise the factors in Step 1 to the power given by the 
regression coefficient for the teaching variable (.5150).

Hospital A: 1.1 x exp (.5150) = 1.050
Hospital B: 1.2 x exp (.5150) = 1.098

    The Step 2 results indicate that Hospital A's payment will be 5.1 
percent higher than the comparable payment for a non-teaching hospital 
and the Hospital B's payment will be 9.9 percent higher than the 
comparable payment for a non-teaching hospital.
    Step 3: Multiply the factors obtained in Step 2 by the appropriate 
per diem payment adjusted by all other relevant payment factors. For 
purpose of this example, the per diem payment is assumed to be $625 for 
both Hospital A and Hospital B.

Hospital A: $625 x 1.050 = $656.25
Hospital B: $625 x 1.098 = $686.25

    The step 3 results indicate that Hospital A's per diem payment 
would be $656.25 compared to $686.25 for Hospital B.
    Comment: A commenter questioned why CMS used the ratio of interns 
and residents to the ADC, rather than the ratio of interns and 
residents to the number of beds.
    Response: Using the ADC rather than the number of beds as the 
denominator of the teaching variable has two main advantages: Whereas 
there are many different and frequently imprecise ways of counting beds 
(licensed beds, available beds, staffed beds), the ADC is a single 
standard measure that hospitals know how to calculate. It is just the 
total number of patients days of care divided by 365, the number of 
days in the year.

[[Page 66957]]

    Average daily census, which reflects the number of occupied beds in 
a year, is a readily available, more consistent measure than the number 
of beds because patient days are more accurately measured than are 
beds. Because it is directly measured by patient days, ADC is also less 
subject to understatement in an effort to increase the value of the 
teaching variable and in turn, teaching payments.
4. Other Facility-Level Adjustments
    In the proposed rule, we indicated that we considered facility-
level adjustments for IPFs located in Alaska and Hawaii and an IPF's 
disproportionate share intensity. Other adjustment factors discussed in 
this section were requested in public comments.
a. Adjustment for Psychiatric Units
    In the proposed rule, we did not propose an adjustment for 
psychiatric units. We received a significant number of public comments 
expressing concern that the proposed IPF PPS is biased towards 
psychiatric hospitals and detrimental to psychiatric units. Therefore, 
the commenters requested that we provide an adjustment specifically for 
psychiatric units. We are not adopting an adjustment for psychiatric 
units in this final rule.
    Comment: Several commenters stated that the data analysis indicated 
that the average per diem cost in psychiatric units ($615) was 37 
percent higher than the average per diem cost in psychiatric hospitals 
($444). Although the proposed patient and facility adjustments account 
for 19 percent of the difference in average per diem costs, the 
commenters expressed concern that the proposed rule did not propose a 
specific adjustment for psychiatric units to account for the remaining 
18 percent difference in average per diem costs.
    Many commenters attribute the difference in average per diem cost 
to the types of patients admitted to psychiatric units and psychiatric 
hospitals. The commenters stated that patients admitted to psychiatric 
units generally present with multiple medical conditions in addition to 
severe or multiple psychiatric symptoms. In addition, EDs in acute care 
hospitals with psychiatric units serve as the portal for almost all 
psychiatric emergency patients, who usually are admitted to the 
psychiatric unit. As a result, psychiatric units have different 
patterns of care and staffing in order to treat patients with emergency 
psychiatric needs as well as comorbid medical conditions.
    The commenters stated that freestanding psychiatric hospitals are 
not equipped or staffed to treat patients with complex comorbid medical 
conditions and generally do not admit patients who require treatment of 
chronic physical illnesses or who are not medically stable. As a 
result, freestanding psychiatric hospitals have lower average per diem 
costs than psychiatric units.
    Many commenters recommended that we provide a Medicare-dependent 
IPF designation that would be applied to any IPF with at least an 80 
percent Medicare share of admissions. An organization representing 
small, rural IPFs provided information describing rural psychiatric 
units and the patients generally treated in these units. The commenter 
indicated that rural psychiatric units usually have 12 or fewer beds 
and treat a high proportion (at least 80 percent of total patient days) 
of Medicare beneficiaries. The material furnished by the organization 
indicated that approximately 54 percent of these hospitals are located 
in areas not adjacent to a metropolitan area and 15 percent are in 
``completely rural'' areas.
    The organization indicated that these small rural Medicare-
dependent units generally have average costs per day that are 27 
percent higher than the national average due to the acuity of the 
patients they serve. In addition, an analysis conducted by the 
organization indicates an 11.9 percent negative impact between current 
TEFRA payments and estimated payments under the proposed IPF PPS.
    Commenters also indicated that many of the psychiatric units are 
small, Medicare-dependent, and located in underserved rural and urban 
areas where they are the sole mental health provider. These commenters 
were concerned that inadequate Medicare payment would cause hospitals 
to close these units, resulting in diminished access to mental health 
services. The commenters stated that the proposed adjustments were 
insufficient and requested a specific adjustment for psychiatric units 
or, as an alternative, a temporary adjustment until we are able to 
refine the IPF PPS and account for more of the difference in average 
per diem cost.
    Response: As we discussed in the November 2003 proposed rule, we do 
not believe it is appropriate to pay an adjustment to all psychiatric 
units for all cases, regardless of the unit's cost, efficiency, or 
case-mix.
    With respect to providing an adjustment for psychiatric units, as 
explained previously in this final rule, the payment model we are 
adopting for IPFs explains approximately 33 percent of the variation in 
per diem cost among IPFs. As a result, we believe the IPF PPS will 
generate payments that are reasonably related to the per diem cost in 
psychiatric units. In addition, IPFs located in rural areas will 
receive an adjustment to account for higher per diem costs.
    Commenters stated that IPFs have many patients with longer stays or 
multiple co-morbidities. The IPF PPS provides a base payment amount and 
adjustments for each day of the stay and multiple co-morbidity 
categories as well as a variety of other adjustments, we believe IPF 
PPS payments to psychiatric units will adequate meet their costs.
    In addition, we are providing a stop-loss provision during the 3-
year transition period during which a stop-loss policy will be in place 
to ensure that small rural, Medicare-dependent, and urban psychiatric 
units get an IPF PPS payment amount that is no less than 70 percent of 
what they would have otherwise been paid under TEFRA had the IPF PPS 
not been implemented. This ``safety net'' will prevent an IPF from 
sustaining a significant financial ``loss'' by converting to the IPF 
PPS. Simultaneously, these providers will learn how to adjust their 
business structures efficiently under the IPF PPS framework. See 
section V.C. of this final rule.
b. Cost of Living Adjustment
i. IPFs Located in Alaska and Hawaii
    As indicated in the proposed rule, we did not propose a cost-of-
living adjustment (COLA) for IPFs located in Alaska and Hawaii. Based 
on the FY 1999 data, there were two psychiatric hospitals and no 
psychiatric units in Alaska and one psychiatric hospital and one 
psychiatric unit in Hawaii. Our analysis indicated that some IPFs in 
Alaska and Hawaii would ``profit'' from the proposed IPF PPS and other 
IPFs would experience a ``loss.'' Based on the limited number of cases 
in the analysis, we determined that the results were inconclusive and 
therefore we did not propose a COLA for IPFs located in Alaska and 
Hawaii.
    We received several comments requesting a COLA for IPFs located in 
Alaska and Hawaii. In response to the public comments, we analyzed the 
FY 2002 data. The FY 2002 data, unlike the FY 1999 data, demonstrated 
that IPFs in Alaska and Hawaii had costs disproportionately higher than 
IPFs across the nation. In the absence of a COLA, IPFs located in 
Alaska and Hawaii would receive payments under the IPF PPS that were 
far below their

[[Page 66958]]

cost. Thus, the results of our analysis conclusively demonstrate that a 
COLA for IPFs located in Alaska and Hawaii would improve payment equity 
for these facilities. As a result of this analysis, we are providing a 
COLA adjustment in this final IPF PPS based on the higher costs found 
in Alaska and Hawaii IPFs.
    Comment: A few commenters recommended that CMS provide a facility-
specific adjustment to the per diem payment amount to reflect the 
higher cost-of-living in Alaska.
    One commenter recommended using the 25 percent Alaska COLA used 
under hospital IPPS for non-labor costs as a proxy adjustment for IPFs 
located in Alaska. The commenter stated that, despite the lack of IPF 
cases to study, CMS recognizes the need for a COLA adjustment for 
hospitals in Alaska under the hospital IPPS. The commenter indicated 
that MedPAC recently recommended that CMS provide an adjustment to the 
non-labor costs of skilled SNFs located in Alaska and Hawaii.
    Response: As indicated above, we analyzed the cases in the FY 2002 
data and found that there are two IPFs in Alaska and four in Hawaii. 
Based on our analysis of the FY 2002 stays for these IPFs, we find that 
a COLA adjustment is warranted. However, the small number of cases from 
each IPF would make development of a facility-specific adjustment 
erroneous because, with few cases, a small number of extremely high-
cost or low-cost cases could easily overstate or understate the IPF's 
per diem cost. In general, the COLA would account for the higher costs 
in the IPF and will eliminate the projected loss that IPFs in Alaska 
and Hawaii would experience absent the COLA. We will make a COLA 
adjustment for IPFs located in Alaska and Hawaii by multiplying the 
non-labor share of the Federal per diem base rate by the applicable 
COLA factor based on the county in which the IPF is located. The COLA 
factors were obtained from the U.S. Office of Personnel Management and 
used in other PPS system. For the convenience of the reader, Table 8 
below lists the specific COLA for Alaska and Hawaii IPFs.

            TABLE 9--COLA Factors for Alaska and Hawaii IPFS
 

[GRAPHIC] [TIFF OMITTED] TR15NO04.449

ii. IPFs located in California
    Although we did not propose a cost-of-living adjustment for a 
specific State, we received a comment requesting that we provide an 
adjustment for California. We are not making a COLA to IPFs located in 
California as detailed below.
    Comment: One comment recommended that CMS establish a facility-
specific adjustment for psychiatric units located in California to 
reflect the higher resource costs associated with mandatory staffing 
ratios.
    Response: Although recently imposed State staffing ratios would not 
be evident in the FY 2002 data, we analyzed the FY 2002 MedPAR data to 
assess whether IPFs located in California have higher per diem cost 
than IPFs located in other States. We determined that after adjustment 
for facility mix, IPF per diem costs in California are slightly higher 
(1.6 percent). While we did not assess the variation for each State, we 
acknowledge that every State will have some variation from the average 
cost per day under the IPF PPS. We do not believe the slightly higher 
per diem cost in California warrants a special adjustment. There may be 
laws in other States that could create a cost difference greater or 
lower than California and it is not practical to account for all of the 
cost differences in every State resulting from State and local laws.
c. Disproportionate Share Intensity
    As indicated in the proposed rule, we did not propose an adjustment 
for disproportionate share hospital (DSH) status because the proposed 
regression analysis did not support an increase in payments. If we had 
proposed a payment adjustment for DSH facilities based on our empirical 
analysis, we would have proposed a reduction to the Federal per diem 
base rate paid to DSH facilities. Based on our analysis, we found a 
statistically significant negative relationship between per diem cost 
and DSH status. We did not believe that negative payment adjustment 
would be consistent with the intent of a DSH adjustment, which is 
intended to provide additional payments to providers to account for the 
costs of treating low-income patients. Therefore, we proposed no DSH 
adjustment.
    We received numerous comments regarding the DSH adjustments. Most 
of the commenters disagreed with the proposed rule and stated that our 
reason for not providing a DSH adjustment was inadequate. A significant 
number of comments recommended that we re-examine the regression 
analysis and include a favorable DSH adjustment in the IPF PPS final 
rule. Based on the analysis discussed below, we are not providing a DSH 
adjustment in this final rule.
    Comment: Several commenters stated that hospitals providing large 
amounts of care to low-income individuals often serve as key access 
points for low-income Medicare beneficiaries and other low-income 
patients requiring psychiatric care.
    Response: In the proposed rule, we indicated that we would continue 
to monitor whether we could find empirical evidence to indicate a 
relationship between disproportionate patient percentages and higher 
per diem costs to support the establishment of a DSH adjustments. We 
re-examined our regression analysis, as commenters requested, but did 
not find any relationship between DSH intensity and higher per diem 
costs. Our analysis of the FY 2002 data yielded the same results as our 
analysis of the FY 1999. Therefore in this final rule we are not making 
a DSH adjustment.
    Comment: One commenter stated that since CMS provided for a DSH 
adjustment in both the hospital IPPS and IRF PPS, IPFs should also 
receive this additional payment.
    Another commenter indicated that the reluctance to allow 
psychiatric hospitals to participate in DSH payments is

[[Page 66959]]

related to the belief that the DSH hospitals are low cost providers.
    Response: Consistent with the approach we have taken in the 
proposed rule and in this final rule, we believe that any IPF PPS DSH 
payment adjustment should be supported by data showing that DSH 
facilities experience higher per diem costs than other IPFs. Our data 
failed to demonstrate that the IPFs who serve a disproportionate number 
of low income patients have higher per diem costs. Therefore, we do not 
see a justification to make a DSH adjustment in the IPF PPS. Unlike 
IPFs, the IPPS and IRF PPS had data supporting the need for a DSH 
adjustment. IPPS and IRF PPS data showed that serving a 
disproportionate share of low income patients has a direct connection 
to higher facility costs.
    Comment: A commenter suggested that if government-operated 
hospitals bias the result, the analysis should be redone excluding 
those hospitals.
    Response: We believe the commenter misunderstood our statements in 
the proposed rule about the impact of government-operated hospitals in 
our analysis. Our intention was not that the government-operated 
hospitals might be responsible for the finding of a negative 
relationship between per diem cost and the DSH variable. Instead, we 
were emphasizing that many observers might think that the limitations 
of measuring DSH for government-operated hospitals (too low a value for 
their DSH variable) might explain why we found higher DSH intensity 
associated with lower cost. However, our finding was not attributable 
to the government-operated hospitals because we found the same negative 
relationship when we excluded them from the regression.
    Comment: Some commenters indicated that because Medicaid does not 
pay for services to certain individuals in an institution for mental 
diseases (IMD), low-income beneficiaries in psychiatric hospitals 
cannot be identified as Medicaid beneficiaries. In addition, the 
commenters believe that the Medicaid proportion will be biased 
downwards smaller than it should be.
    Response: In the proposed rule and in this rule, the basis for the 
decision not to provide a DSH adjustment is our inability to find a 
correlation between available measures of low-income patient 
percentages and higher per diem costs. As previously indicated, 
potential measurement error in the Medicaid proportion did not explain 
the lack of a positive correlation between per diem cost and DSH 
status. We recognize that inpatients in institutions for mental 
diseases may still be eligible for Medicaid for purposes of the 
calculation of the DSH percentage (although there might be little 
incentive for facilities to establish a patient's Medicaid eligibility 
when there is no Medicaid payment available). The fact remains that, 
with currently available data, we found no basis for a DSH adjustment.
    Comment: Several commenters asked how section 402 of the MMA would 
impact payments under the IPF PPS.
    One commenter recommended that CMS wait until after December 8, 
2004, to develop the IPF DSH factors (when the MMA is implemented and 
CMS begins to furnish DSH data to all hospitals). The commenter 
indicated that they expect the data to be a viable source of 
information that could be used to establish an appropriate DSH 
adjustment factor for the IPF PPS.
    Response: Section 402 of the MMA has no effect on the IPF PPS as it 
only applies to DSH under the IPPS. The commenter is apparently 
referring to section 951 of the MMA, which requires that the Secretary 
arrange to furnish subsection (d) hospitals (those hospitals subject to 
the hospital IPPS) with the data necessary to compute the number of 
patient days used in computing the disproportionate patient percentage. 
We acknowledge that it is possible for this requirement to improve the 
accuracy of the disproportionate patient percentages for hospitals at 
some future point in time. However, we are making our decision not to 
include a DSH adjustment based on the best available data. If better 
data becomes available that indicates a need for a DSH adjustment, and 
an appropriate methodology for such an adjustment, the issue can be 
addressed in a future rulemaking.
d. IPFs With Full-Service Emergency Departments (EDs)
    We did not propose an adjustment for IPFs with a qualifying ED. 
However, we received many comments requesting a facility adjustment for 
hospitals that maintain an ED and provide crisis management services. 
Several commenters recommended that IPFs with an ED should receive a 
facility-level adjustment empirically determined through the regression 
model. One commenter recommended a 20 percent adjustment factor for 
IPFs in hospitals with an ED.
    In this final rule, we are providing an adjustment to the Federal 
per diem base rate to account for the costs associated with maintaining 
a full-service ED. We conducted an analysis, as described below, to 
develop an appropriate payment adjustment to account for ED costs and 
to define the subset of IPFs that have, or are part of acute care 
hospitals that have, a full-service ED.
    The overhead costs associated with maintaining an ED are included 
in each IPF's routine cost amount, but since routine costs are reported 
as a average, we are unable to determine the portion of the routine 
cost directly attributable to ED costs. As an alternative, we analyzed 
cases admitted through the ED using FY 2002 claims data. ED cases were 
identified by the presence of ED or ambulance charges on the MedPAR 
record. We found that about one-third of all cases were admitted 
through the ED, and that 98 percent of the cases were treated in 
psychiatric units. Among the psychiatric hospitals and units with at 
least one admission from an ED, the ED admissions comprise about 43 
percent of all admissions.
    In analyzing the relative cost of ED and other admissions, we 
limited the comparison to IPFs with ED admissions to avoid attributing 
cost differences to ED admissions that are due to other unrelated 
factors. On a per case basis, ED admissions are actually slightly less 
expensive than other admissions ($7,672 versus $8,036). Most of the 
difference results from the fact that ED stays are about one day 
shorter than other psychiatric stays (10.6 days versus 11.5 days). The 
ED costs average about $198 per case, and the mean difference in 
ancillary costs per case (which includes ED costs) is about $196. Thus, 
the ED costs effectively account for all of the difference in ancillary 
costs per case between the ED and other admissions. On average, 
admissions through the ED do not appear to require any more ancillary 
services than other admissions except for the ED costs themselves.
    Although this analysis indicated that patients admitted through the 
ED were more costly on a per diem basis than cases without an ED 
admission, we are not including an adjustment for patients admitted 
through the ED. As explained previously, we are concerned about 
creating an incentive for psychiatric units in acute care hospitals 
with EDs to inappropriately admit all psychiatric patients through the 
ED of the acute care hospital in which it is located in order to 
receive a patient-level ED adjustment. An ED adjustment at the patient 
level would be approximately $200. To the extent a psychiatric unit 
ensured that all of its patients were admitted for inpatient 
psychiatric care through the ED of the acute care hospital in which it 
is located, even though admission through the ED was unnecessary and 
inappropriate, Medicare would be substantially overpaying for these 
cases.

[[Page 66960]]

    As an alternative, we have decided to provide a facility-level 
adjustment for IPFs, for both psychiatric hospitals and acute care 
hospitals with a distinct part psychiatric unit, that maintain a 
qualifying ED. We are providing the adjustment to psychiatric units in 
acute care hospitals because the costs of the ED are allocated to all 
hospital departments, including the psychiatric units. We intend that 
the adjustment only be provided to hospitals with EDs that are staffed 
and equipped to furnish a comprehensive array of emergency services and 
that meet the definition of a ``dedicated emergency department'' in 
Sec.  489.24 and the definition of ``provider-based entity'' in Sec.  
413.65. We are defining a full-service ED in order to avoid providing 
an ED adjustment to an intake unit that is not comparable to a full-
service ED with respect to the array of emergency services available or 
cost.
    However, where a psychiatric unit would otherwise qualify for the 
ED adjustment, but an individual patient is discharged from that acute 
care hospital, we would not apply the ED adjustment. The reason we 
would not give an ED adjustment in this case is that the costs 
associated with maintaining the ED would have already been paid through 
the DRG payment paid to the acute care hospital. Thus, if we provided 
an ED adjustment in this case, the hospital would be paid twice for the 
overhead costs of the ED.
    The ED adjustment will be incorporated into the variable per diem 
adjustment for the first day of each stay. That is, IPFs with 
qualifying EDs, will receive a higher variable per diem adjustment for 
the first day of each stay than will other IPFs.
    Three steps were involved in the calculation of the ED adjustment 
factor. First, we estimated of the proportion by which the ED costs of 
a case would increase the cost of the first day of the stay. Using the 
IPFs with ED admissions in 2002, we divided their average ED cost per 
stay admitted through the ED ($198) by their average cost per day 
($715), which equals 0.28. Second, we adjusted the factor estimated in 
step 1 to account for the fact that we will pay the higher first day 
adjustment for all cases in the qualifying IPFs, not just the cases 
admitted through the ED. Since on average, 44 percent of the cases in 
IPFs with ED admissions are admitted through the ED, we multiplied 0.28 
by 0.44, which equals 0.12. Third, we added the adjusted factor 
calculated in the previous 2 steps to the variable per diem adjustment 
derived from the regression equation that we used to derive our other 
payment adjustment factors. The first day payment factor from this 
regression is 1.19. Adding the 0.12, we obtained a first day variable 
per diem adjustment for IPFs with a qualifying ED equal to 1.31.

D. Other Proposed Adjustments and Policy Changes

1. Outlier Policy
    We proposed a 2 percent outlier policy to promote access to IPFs 
for those patients who require expensive care and to limit the 
financial risk of IPFs treating unusually costly cases. As explained in 
the proposed rule, we believe that it is appropriate to include an 
outlier policy in order to ensure that IPFs treating unusually costly 
cases do not incur substantial ``losses'' and promote access to care 
for patients requiring expensive care. Providing these additional 
payments to IPFs for costs that are beyond the IPF's control will also 
improve the accuracy of the payment system. Similar to the proposed 
rule, our payment simulations continue to support establishment of the 
outlier policy at 2 percent of total payments because it affords 
protection for vulnerable IPFs (and patients) while providing 
appropriate levels of payment for all other cases that are not outlier 
cases. The 2 percent target continues to provide an appropriate balance 
between patient access, IPF financial risk, and the payment rate 
reduction required for all cases to offset the cost of the policy.
    We proposed to make outlier payments on a per case basis rather 
than on a per diem basis because it is the overall financial ``gain'' 
or ``loss'' of the case, and not of individual days, that determines an 
IPF's financial risk and, as a result, access for unusually costly 
cases. In addition, because patient level charges (from which costs are 
estimated) are typically aggregated for the entire IPF stay, they are 
not reported in a manner that would permit accurate accounting on a 
daily basis.
    Thus, we proposed to make outlier payment for discharges in which 
estimated costs exceed an adjusted threshold amount ($4,200 multiplied 
by the IPF's facility adjustments, that is, wage area, rural location, 
teaching, and cost of living adjustment for IPFs located in Alaska and 
Hawaii) plus the total IPF adjusted payment amount for the stay. Where 
the case qualifies for an outlier payment, we proposed to pay 80 
percent of the difference between the estimated IPF's cost for the case 
and the adjusted threshold amount for days 1 through 8 of the stay, and 
60 percent of the difference for day 9 and thereafter. We established 
80 percent and 60 percent to lost sharing ratios because we were 
concerned that a single ratio established at 80 percent (like other 
Medicare hospital prospective payment systems) might provide an 
incentive under the IPF per diem system to increase length of stay in 
order to receive additional payments. After establishing the ratios, we 
determined the threshold amount of $4,200 through payment simulations 
designed to compute a dollar loss beyond which payments are estimated 
to meet the 2 percent outlier spending target. In this final rule, we 
adopted this proposed outlier policy methodology, with an adjusted 
threshold amount of $5700. The revised amount is based on updated 
simulations using more recent data (from FY 2002) and the modified 
policy for the loss sharing ratios (see below).
    In this final rule, we modified application of the loss-sharing 
provision of the outlier policy to pay 80 percent of the difference 
between the IPF's estimated cost for the case and the adjusted 
threshold amount for days 1 through 9 of the stay ( including median 
length of stay instead of days 1 through 8 up to the median length of 
stay) and 60 percent thereafter. As we explain above, we decided to 
reduce the 80 percent loss-sharing ratio by an additional 20 percent, 
resulting in a 60 percent loss sharing ratio for day 10 and thereafter. 
With this modification, we will pay 80 percent of the costs eligible 
for outlier payments for all cases whose length of stay is no greater 
than the median length of stay (9 days) of all Medicare inpatient 
psychiatric cases.
    In the proposed rule, we proposed a number of policies to ensure 
the accuracy and integrity of our outlier payments. We are adopting 
these policies in this final rule, as decribed below.
    Referring back to the payment calculation example in Section VI.B.2 
of this final rule, the total estimated payment for the case is 
$7267.75. The adjusted threshold amount is calculated below:
    Step 1: Multiply threshold by labor share and the wage area.

$5700 x 0.72528 (labor share) x 0.7743 (area wage index) = $3201.03

    Step 2: Add this number to the non-labor share threshold amount.

$5700 x 0.27472 (non-labor share) = $1565.90
$1565.90 + $3201.03 = $4766.93

    Step 3: Apply the other facility-level adjustments.

$4766.96 x 1.17 (rural adjustment) x 1.0 (teaching adjustment) = 
$5577.31

    Step 4: Calculate the adjusted threshold amount by adding the 
estimated payment amount to the amount above.


[[Page 66961]]


$5577.31 + $7267.75 = $12,845.06

    If estimated costs exceed the adjusted threshold amount 
($12,845.06), then the case will qualify for an outlier payment. If the 
IPF in the example reports charges of $21,000 and they have a cost-to-
charge ratio of 0.8, then the estimated cost of the case would be 
$16,800. The outlier amount is calculated below:
    Step 1: Calculate the difference between the estimated cost and the 
adjusted threshold amount.

$16,800--$12.845.06 = $3954.94

    Step 2: Divide by the length of stay (in our example, 10 days).

$3594.94 / 10 = $395.49

    Step 3: For days 1 through 9 of the stay, the IPF receives 80% of 
this difference.

$395.49 x 0.80 = $316.40
$316.40 x 9 days = $2847.60

    Step 4: For days 10 and beyond, the IPF receives 60% of the 
difference.

395 x 0.60 = $237.30 (in the example, the patient stays for 10 days, so 
the IPF receives the above amount for day 10 only).

    Therefore, the IPF in the example would receive a total outlier 
payment of $3084.90.

($2847.60 + $237.30).
a. Statistical Accuracy of Cost-to-Charge Ratios
    We believe that there is a need to ensure that the cost-to-charge 
ratio used to compute an IPF's estimated costs should be subject to a 
statistical measure of accuracy. Removing aberrant data from the 
calculation of outlier payments will allow us to enhance the extent to 
which outlier payments are equitably distributed and continue to reduce 
incentives for IPFs to under serve patients who require more costly 
care. Further, using a statistical measure of accuracy to address 
aberrant cost-to-charge ratios would also allow us to be consistent 
with the outlier policy under the hospital inpatient prospective 
payment system. Therefore, we are making the following two proposals:
    <bullet> We will calculate two national ceilings, one for IPFs 
located in rural areas and one for facilities located in urban areas. 
We will compute the ceiling by first calculating the national average 
and the standard deviation of the cost-to-charge ratios for both urban 
and rural IPFs.
    To determine the rural and urban ceilings, we will multiply each of 
the standard deviations by 3 and add the result to the appropriate 
national cost-to-charge ratio average (either rural or urban). We 
believe that the method explained above results in statistically valid 
ceilings. If an IPF's cost-to-charge ratio is above the applicable 
ceiling, the ratio is considered to be statistically inaccurate. 
Therefore, we will assign the national (either rural or urban) median 
cost-to-charge ratio to the IPF. Due to the small number of IPFs 
compared to the number of acute care hospitals, we believe that 
statewide averages used in the hospital inpatient prospective payment 
system, would not be statistically valid in the IPF context.
    In addition, the distribution of cost-to-charge ratios for IPFs is 
not normally distributed and there is no limit to the upper ceiling of 
the ratio. For these reasons, the average value tends to be overstated 
due to the higher values on the upper tail of the distribution of cost-
to-charge ratios. Therefore, we will use the national median by urban 
and rural type as the substitution value when the facility's actual 
cost-to-charge ratio is outside the trim values. Cost-to-charge ratios 
above this ceiling are probably due to faulty data reporting or entry, 
and, therefore, should not be used to identify and make payments for 
outlier cases because these data are clearly erroneous and should not 
be relied upon. In addition, we will update and announce the ceiling 
and averages using this methodology every year.
    <bullet> We will not apply the applicable national median cost-to-
charge ratio when an IPF's cost-to-charge ratio falls below a floor. We 
are adopting this policy because we believe IPFs could arbitrarily 
increase their charges in order to maximize outlier payments.
    Even though this arbitrary increase in charges should result in a 
lower cost-to-charge ratio in the future (due to the lag time in cost 
report settlement), if we propose a floor on cost-to-charge ratios, we 
will apply the applicable national median for the IPFs actual cost-to-
charge ratio. Using the national median cost-to-charge ratio in place 
of the provider's actual cost-to-charge ratio would estimate the IPF's 
costs higher than they actually are and may allow the IPF to 
inappropriately qualify for outlier payments.
    Accordingly, we will apply the IPF's actual cost-to-charge ratio to 
determine the cost of the case rather than creating and applying a 
floor. In such cases as described above, applying an IPF's actual cost-
to-charge ratio to charges in the future to determine the cost of the 
case will result in more appropriate outlier payments.
    Consistent with the policy change under the hospital inpatient 
prospective payment system, IPFs will receive their actual cost-to-
charge ratios no matter how low their ratios fall. We are still 
assessing the procedural changes that would be necessary to implement 
this change. For this final rule, we are finalizing the above described 
policies.
b. Adjustment of IPF Outlier Payments
    As discussed in the hospital inpatient prospective payment system 
final rule for outliers, we have implemented changes to the IPPS 
outlier policy used to determine cost-to-charge ratios for acute care 
hospitals, because we became aware that payment vulnerabilities exist 
in the current outlier policy. Because we believe the IPF outlier 
payment methodology is likewise susceptible to the same payment 
vulnerabilities, we are adopting the following changes:
    <bullet> Include in Sec.  412.424(c)(2)(v) a cross-reference to 
Sec.  412.84(i) that was included in the final rule published in the 
Federal Register on June 9, 2003 (68 FR 34515). Through this cross-
reference, FIs will use more recent data when determining an IPF's 
cost-to-charge ratio. Specifically, as provided in Sec.  412.84(i), FIs 
will use either the most recent settled IPF cost report or the most 
recent tentatively settled IPF cost report, whichever is later to 
obtain the applicable IPF cost-to-charge ratio. In addition, as 
provided under Sec.  412.84(i), any reconciliation of outlier payments 
will be based on a ratio of costs to charges computed from the relevant 
cost report and charge data determined at the time the cost report 
coinciding with the discharge is settled.
    Include in proposed Sec.  412.424(c)(2)(v) a cross reference to 
Sec.  412.84(m) (that was included in the final rule published in the 
Federal Register on June 9, 2003 (68 FR 34415) to revise the outlier 
policy under the hospital inpatient prospective payment system). 
Through this cross-reference, IPF outlier payments may be adjusted to 
account for the time value of money during the time period it was 
inappropriately held by the IPF as an ``overpayment.'' We also may 
adjust outlier payments for the time value of money for cases that are 
``underpaid'' to the IPF. In these cases, the adjustment will result in 
additional payments to the IPF. Any adjustment will be based upon a 
widely available index to be established in advance by the Secretary, 
and will be applied from the midpoint of the cost reporting period to 
the date of reconciliation.
    We received several comments on the proposed outlier policy. Most 
of the comments expressed support for the proposed outlier policy.
    Comment: Many commenters indicated that the outlier level is too 
low and that there should be a mechanism to appeal an outlier payment. 
The commenters

[[Page 66962]]

recommended establishing the outlier policy at 5 percent of the total 
IPF PPS.
    Response: We are maintaining a 2 percent outlier policy in the 
final IPF PPS. The 2 percent outlier target percentage is lower than 
the target outlier percentage of other prospective payment systems that 
contain outlier polices, which range from 3 percent in the inpatient 
rehabilitation PPS to 8 percent in the LTCH PPS. The target outlier 
percentage in IPPS is about 5 percent. However, these other systems are 
per case or per episode payment systems in which Medicare's payment 
does not automatically account for the higher costs associated with 
longer lengths of stay. In a per diem system, such as the IPF PPS, 
there is less of a need for outlier payments because it automatically 
adjusts payments for length of stay. Therefore, we believe that 2 
percent of total IPF PPS payment is appropriate. We estimate that 
approximately 5 percent of IPF cases would meet the fixed dollar loss 
threshold amount and qualify for an average outlier payment of $3,248.
    If the provider is dissatisfied with the amount of payment, they 
can invoke existing appeal rights.
    Comment: Several commenters recommended modifying the outlier 
calculation so that the proposed risk sharing percentage of 60 percent 
for the ninth and subsequent days is increased to 80 percent.
    Response: We proposed to reduce the risk sharing percentage from 80 
percent to 60 percent after the 8th day of the stay. The choice of the 
8th day was based on the fact that a single variable per diem 
adjustment was proposed for days 5 through 8, and we thought it 
appropriate to make the change in the risk sharing percentage change 
coincide with the change in the variable per diem adjustment factor. 
After analyzing new data and based on public comments, we have revised 
the variable per diem adjustment factors so that they vary continuously 
over the first 22 days of the stay. As a result, there is no longer any 
reason to make the change in the risk sharing percentage coincide with 
the variable per diem adjustment factors. In this final rule, we are 
changing the risk sharing percentage from 80 percent to 60 percent 
after the 9th day of the stay. We chose to include the 9th day in the 
80 percent risk sharing category because 9 days is the median length of 
stay. The median implies that one-half of the cases have a length of 
stay greater than 9 days, and the other half have a length of stay less 
than 9 days, which also can be interpreted as implying that the 
``typical'' case has a length of stay of 9 days. We will pay the 80 
percent risk sharing percentage for all cases whose length of stay is 
less than or equal to the length of stay of the typical case. We are 
reducing the risk sharing percentage for cases whose length of stay 
exceeds that of the typical case, because as we noted in the proposed 
rule (68 FR 66934), we are concerned that a single risk sharing 
percentage at 80 percent might provide an incentive to increase length 
of stay in order to received additional outlier payments. Reducing the 
amount Medicare shares in the loss of high cost cases provides an 
incentive for an IPF to contain costs once a case qualifies for outlier 
payments. The reduction from 80 percent to 60 percent is adequate to 
provide such an incentive, while maintaining a significant degree of 
risk sharing.
    Comment: Many commenters requested that CMS provide additional 
information to the sample calculation presented in the proposed rule. 
The commenters also recommended that CMS explain the circumstances 
under which an outlier would be paid (interim billing or at the time of 
discharge).
    Response: Since outlier payments will be made on a per-case basis, 
a determination as to whether a case qualifies for an outlier payment 
cannot be made until discharge. We are concerned about the potential 
for overpayments associated with IPF stays that may appear to qualify 
for outlier payments early in the stay, but do not meet the fixed 
dollar loss threshold once all costs and IPF PPS payments are 
considered. To avoid this situation, we proposed in Sec.  412.432(d), 
that additional payments for outliers are not made on an interim basis. 
Rather, outlier payments are made based on the submission of a 
discharge bill. We are adopting this provision in this final rule.
    Comment: Several commenters recommended clarification on the 
methodology for determining the cost-to-charge ratio, a clear 
definition of the numerator and denominator in the ratio, identifying 
the applicable worksheet location for data on costs and charges, as 
well as the appeal or comments that might be available when the 
national cost-to-charge ratios are published.
    Response: We intend to follow similar procedures as outlined in the 
IPPS final rule published in the Federal Register on June 9, 2003 (68 
FR 34498). IPF PPS outlier methodology requires the FI to calculate the 
provider's overall Medicare cost-to-charge ratio using the facility's 
latest settled cost report or tentatively settled cost report 
(whichever is from the later period), and associated data. Cost-to-
charge ratios will be updated each time a subsequent cost report is 
settled or tentatively settled. Total Medicare charges will consist of 
the sum of inpatient routine charges and the sum of inpatient ancillary 
charges including capital. Total Medicare costs will consist of the sum 
of inpatient routine costs (net of private room differential and swing 
bed cost) plus the sum of ancillary costs plus capital-related pass-
through cost only. Based on current Medicare cost reports and 
worksheet, specific FI instructions are described below.
    For freestanding IPFs, Medicare charges will be obtained from 
Worksheet D-4, column 2, lines 25 through 30, plus line 103 from the 
cost report. For freestanding IPFS, total Medicare costs will be 
obtained from worksheet D-1, Part II, line 49 minus (Worksheet D, Part 
III, column 8, lines 25 through 30, plus Worksheet D, Part IV, column 
7, line 101). Divide the Medicare costs by the Medicare charges to 
compute the cost-to-charge ratio.
    For IPFs that are distinct part psychiatric units, total Medicare 
inpatient routine charges will be estimated by dividing Medicare 
routine costs on Worksheet D-1, Part II, line 41, by the result of 
Worksheet C, Part I, line 31, column 3 divided by line 31, column 6. 
Add this amount to Medicare ancillary charges on Worksheet D-4, column 
2, line 103 to arrive at total Medicare charges. To calculate the total 
Medicare costs for distinct part units, data will be obtained from 
Worksheet D-1, Part II, line 49 minus (Worksheet D, part III, column 8, 
line 31 plus Worksheet D, Part IV, column 7, line 101). All references 
to Worksheet and specific line numbers should correspond with the 
subprovider identified as the IPF unit, that is the letter ``S'' is the 
third position of the Medicare provider number. Divide the total 
Medicare costs by the total Medicare charges to compute the cost-to-
charge ratio.
    If the provider is dissatisfied with the FI's cost-to-charge ratio 
determination, they can invoke their applicable appeal rights.
2. Interrupted Stays
    In the proposed rule, we proposed an interrupted stay policy based 
on our concern that IPFs could maximize inappropriate Medicare payment 
by prematurely discharging patients after they receive the higher 
variable per diem adjustments and then readmitting the same patient. 
Under the proposed policy, if a patient is discharged from an IPF and 
returns to the same IPF before midnight on the fifth consecutive day 
following discharge, the case is

[[Page 66963]]

considered to be continuous for applying the variable per diem 
adjustments and determining whether the case qualifies for outlier 
payments. Therefore, we would not apply the variable per diem 
adjustments for the second admission and would combine the costs of 
both admissions for the purpose of outlier payments. We proposed this 
policy in order to lower the incentive for a hospital to move patients 
among Medicare-covered sites in order to maximize Medicare payments. We 
received many public comments regarding the proposed interrupted stay 
policy. Most of the commenters requested that we delete the interrupted 
stay policy, provide an exception for discharges to an acute care 
hospital in order to receive medical or surgical services, for 
readmissions due to psychiatric decompensation, or shorten the duration 
of the interrupted stay policy. In this final rule, we are retaining 
the interrupted stay policy, but we are shortening the duration to 3 
days.
    Therefore, if a patient is discharged from an IPF and admitted to 
any IPF within 3 consecutive days of the discharge from the original 
IPF stay, the stay would be treated as continuous for purposes of the 
variable per diem adjustment and any applicable outlier payment.
    For example a patient is discharged from an IPF on March 10 after 
an initial stay of 7 days and is admitted to another IPF on March 12 
(before midnight of the 3rd consecutive day). The ``readmission'' is 
considered a continuation of the initial stay. Therefore day 1 of the 
readmission will be considered day 8 of the combined stay for purposes 
of the variable per diem stay and any applicable outlier payment.
    Comment: A few commenters stated that after a 5-day interruption, 
the patient would need a full workup similar to the admission process 
on the first day. One commenter stated that the proposed 5-day 
interrupted stay policy financially penalizes IPFs for ensuring that 
their patients receive necessary emergency medical care.
    Most commenters requested that we shorten the duration of the 
interrupted stay policy. Other commenters stated that a 5-day 
interrupted stay policy would require IPFs to hold claims and not bill 
Medicare until after the fifth day of discharge and that a 5-day 
interrupted stay policy could cause IPFs to delay readmissions to avoid 
the policy.
    Several commenters recommended that we reduce the duration of the 
interrupted stay policy to 3 days to coincide with the 72-hour rule for 
bundling of outpatient charges under IPPS. Other commenters suggested a 
3-day interrupted stay policy in order to be consistent with the 
interrupted stay policy in the IRF prospective payment system. However, 
a few commenters suggested that we extend the interrupted stay policy 
to readmissions to the IPF within 15 or 30 days of the patients 
discharge that would prompt a readmission review by the hospital's 
Quality Improvement Organization.
    Response: In the proposed rule, we indicated that an absence from 
the IPF of less than 5 days would not necessitate repeating many of the 
admission-related services such as psychiatric evaluations and the 
patient's medical history. After receiving public comments we 
reanalyzed the duration of the interrupted stay policy. We now agree 
that after a 5-day absence from the IPF there are psychiatric and 
laboratory tests that would need to be repeated. As a result, we have 
revised the duration of the interrupted stay policy in this final rule 
from 5 days to 3 days.
    Comment: Several commenters did not believe an interrupted stay 
policy was necessary to avoid inappropriate transfers and readmissions 
to the IPF. One commenter stated that adequate safeguards already 
exist, such as the physician certification and recertification 
requirements, significant medical malpractice risk of premature 
discharge, periodic review of practice patterns by local licensing and 
national accreditation bodies, and FI audits.
    Response: Despite the safeguards identified by the commenters, 
inappropriate transfers and readmissions of psychiatric patients 
continue to occur. For this reason, we continue to believe an 
interrupted stay policy is necessary to discourage inappropriate 
discharges and readmissions to IPFs.
    Comment: The majority of commenters requested that we provide an 
exception to the interrupted stay policy when a patient is discharged 
to an acute care hospital for medical care. The commenters maintain 
that the resources required to treat the patient at the time of 
readmission are of similar intensity to those required at the point of 
first admission. All assessments (including history and physical and 
psychiatric assessment) as well as the comprehensive treatment plan 
need to be reviewed and revised. In addition, the medical condition 
that required treatment must be addressed and incorporated into the 
ongoing treatment. One commenter suggested that discharges and 
subsequent readmissions to the IPF due to psychiatric decompensation 
should not be subject to the interrupted stay policy as well.
    Response: Although we agree that some additional resources will be 
expended by IPFs when a patient is readmitted, we believe the resources 
required to reassess a patient upon readmission would be greatly 
reduced after a 3-day interrupted stay compared to the proposed 5-day 
interrupted stay policy. In addition, since almost three fourths of 
IPFs are distinct part psychiatric units in acute care hospitals, we 
remain concerned about hospitals inappropriately shifting patients 
between the psychiatric unit and the medical unit, thus receiving both 
the full DRG payment for the admission to the acute care hospital, and 
IPF payment for the admission to the excluded psychiatric unit.
    Comment: One commenter asked if the interrupted stay policy applies 
if a patient is discharged to receive acute care and is readmitted to a 
different IPF than the IPF that originally discharged and transferred 
the patient. The commenter indicated that the shuffling of psychiatric 
patients from hospital to hospital is an abusive practice that the 
interrupted stay policy should address.
    Response: We share the commenter's concern about the ``shuffling'' 
of psychiatric patients from hospital to hospital. We believe adopting 
an interrupted stay policy will address this concern from the viewpoint 
of the IPF PPS.
    One example is when a patient is discharged from a psychiatric unit 
to receive acute care and discharged at the completion of the hospital 
IPPS stay, then transferred to a freestanding psychiatric hospital 
rather than returning to the psychiatric unit. Under the interrupted 
stay policy, if the readmission to the psychiatric hospital occurs 
within the 3-day interrupted stay timeframe, of the initial psychiatric 
unit stay, we would not pay the psychiatric hospital the variable per 
diem adjustments for the initial days of the original psychiatric unit 
stay otherwise applicable to the stay. The transferring hospital would 
send the psychiatric hospital the patient's medical record that will 
include information regarding the prior psychiatric stay in accordance 
with the hospital condition of participation for discharge planning 
(Sec.  482.43).
    As a result, we have revised Sec.  412.424(d) to clarify that if a 
patient is discharged from an IPF and is readmitted to the same or 
another IPF before midnight on the third consecutive day following the 
discharge from the original IPF stay, the case is considered to be 
continuous for

[[Page 66964]]

applying the variable per diem adjustments and determining whether the 
case qualifies for outlier payments.
    Comment: Several commenters asked if the interrupted stay policy 
would apply if a patient is transferred from a distinct part 
psychiatric unit to the hospital's medical unit and is readmitted to 
the IPF within the 5-day interrupted stay timeframe, but with a 
different principal diagnosis.
    Response: In the situation described by the commenter, the 
interrupted stay policy would apply. A psychiatric patient whose 
illness is severe enough to require inpatient psychiatric treatment, 
should be receiving care for all of their psychiatric conditions. 
Therefore, if this psychiatric patient was discharged for acute medical 
care, and upon discharge from the acute medical hospital the patient 
still required inpatient psychiatric treatment, that treatment should 
be considered a continuation of the original stay. Thus, the principal 
diagnosis upon readmission is not relevant to the interrupted stay 
policy.
    Comment: One commenter asked if the interrupted stay policy would 
apply when a patient is discharged to a partial hospitalization 
program, decompensates while in that program, necessitating a 
readmission to the IPF within 5 days of the discharge from the IPF.
    Response: Under this final rule, if a patient was in an IPF and was 
discharged to a partial hospitalization program but then required 
readmission to an IPF within the 3-day timeframe, the stay is 
considered an interrupted stay. The interrupted stay policy applies to 
all discharges and subsequent readmissions to an IPF within 3 
consecutive days.
3. Stop-Loss Provision
    Many commenters who believed that they would be disadvantaged by 
implementation of the IPF PPS, requested that we provide additional 
payments through a risk sharing arrangement. We considered alternatives 
that would reduce financial risk to facilities expected to experience 
substantial reductions in Medicare payments during the period of 
transition to the IPF PPS.
    Specifically, we considered stop-loss policies that would guarantee 
each facility, total IPF PPS payments no less than a minimum percent of 
its TEFRA payments, had the IPF PPS not been implemented. The two 
values for the minimum percent of TEFRA payments we examined were 70 
percent and 80 percent. The 80 percent option was considered because 80 
percent is a commonly used rate of risk-sharing in Medicare programs. 
We pay 80 percent of the estimated costs of outlier cases beyond the 
outlier threshold, and 80 percent is similarly used in other Medicare 
PPS's, as well as in many other insurance arrangements. The 70 percent 
option was assessed as an alternative, because it more narrowly targets 
stop-loss payments to facilities with greater financial risk.
    Each of these policies was applied to the IPF PPS portion of 
Medicare payments during the transition. Hence, during year 1, three-
quarters of the payment would be based on TEFRA and one-quarter on the 
IPF PPS. In year 2, one-half of the payment would be based on TEFRA and 
one-half on the IPF PPS. In year 3, one-quarter of the payment would be 
based on TEFRA and three-quarters on the IPF PPS. In year 4 of the IPF 
PPS, Medicare payments are based 100 percent on the IPF PPS.
    The combined effects of the transition and the stop-loss policies 
would be to ensure that the total estimated IPF PPS payments would be 
no less than 92.5 or 95 percent in year 1, 85 or 90 percent in year 2, 
and 77.5 or 85 percent in year 3, depending upon whether the 70 percent 
or the 80 percent stop-loss option were implemented. Under the 70 
percent policy, 75 percent of total payment would be TEFRA payments, 
and the 25 percent would be IPF PPS payments, which would be guaranteed 
to be at least 70 percent of the TEFRA payments. The resulting 92.5 
percent of TEFRA payments is the sum of 75 percent and 25 percent times 
70 percent (which equals 17.5 percent).
    The 70 percent of TEFRA payment stop-loss policy would require a 
reduction in the Federal per diem and ECT base rates of 0.39 percent in 
order to make the stop-loss payments budget neutral. We estimate that 
about 10 percent of IPFs would receive stop-loss payments under the 70 
percent policy.
    The 80 percent of TEFRA stop-loss policy would require a reduction 
in the Federal per diem rate of almost 2 percent in order to make the 
stop-loss policy budget neutral. We estimate that almost 27 percent of 
all facilities would receive additional payments under the 80 percent 
stop-loss policy.
    We also considered a risk-sharing policy modeled on the same 
principles as the case-level outlier policy, but applied at the 
facility level. Under this approach, we considered the case in which an 
IPF would have to incur a 12 percent loss in IPF PPS payments relative 
to TEFRA and then we would pay 80 percent of additional losses. This 
approach was estimated to require a reduction in the Federal per diem 
and ECT base rates of about 12 percent.
    In order to target the stop-loss policy to the IPFs that may 
experience the greatest impact relative to current payments and to 
limit the size of the reductions to the Federal per diem and ECT base 
rates required to maintain budget neutrality, we are adopting the 70 
percent stop-loss provision. We have added a new paragraph (d) to Sec.  
412.426 to include the 70 percent stop-loss provision as part of the 3-
year transition to the IPF PPS. We will monitor expenditures under this 
policy to evaluate its effectiveness in targeting stop-loss payments to 
IPFs facing the greatest financial risk.
4. Physician Recertification Requirements
    In the proposed rule, we proposed to modify the timing of the first 
physician recertification after admission to the IPF. We proposed to 
revise Sec.  424.14(d) to require that a physician recertify a 
patient's continued need for inpatient psychiatric care on the tenth 
day following admission to the IPF rather than the 18th day following 
admission to the IPF.
    Also, we proposed to amend Sec.  424.14 by adding a new paragraph 
(c)(3) to require that, in recertifying a patient's need for continued 
inpatient care, a physician must indicate that the patient continues to 
need, on a daily basis, inpatient psychiatric care (furnished directly 
by or requiring the supervision of IPF personnel) or other professional 
services that, as a practical matter, can be provided only on an 
inpatient basis. We received a few comments supporting the proposed 
change. However, most of the commenters did not support the proposed 
changes and indicated inconsistencies in the timeframes currently 
required for IPFs that warrant additional analysis. As a result, we are 
not including the proposed physician re-certification requirements in 
this final rule. We will continue to require that a physician recertify 
a patient's continued need for inpatient psychiatric care on the 18th 
day following admission to the IPF.

VII. Implementation of the IPF PPS

A. Transition Period

1. Existing Providers
    We proposed a 3-year transition period during which IPFs would 
receive a blended payment of the Federal per diem payment amount and 
the facility-specific payment amount the IPF would receive under the 
TEFRA payment methodology. We proposed that the first year of the 
transition would be 15 months. Thus the first year of transition is for 
cost reporting periods beginning

[[Page 66965]]

on or after April 1, 2004 and before July 1, 2005. The proposed total 
payment for this period would consist of 75 percent based on the TEFRA 
payment system and 25 percent based on the proposed IPF prospective 
payment amount.
    We also proposed that for cost reporting periods beginning on or 
after July 1, 2005 and before July 1, 2006, the total payment would 
consist of 50 percent based on the TEFRA payment system, and 50 percent 
based on the proposed IPF prospective payment amount. In addition, we 
also proposed that for cost reporting periods beginning on or after 
July 1, 2006 and before July 1, 2007, the total payment would consist 
of 25 percent based on the TEFRA payment system and 75 percent based on 
the proposed IPF prospective payment amount. Thus, we proposed that 
payments to IPFs would be at 100 percent of the proposed IPF 
prospective payment amount for cost reporting periods beginning on or 
after July 1, 2007.
    We proposed this transition period so existing IPFs would have time 
to adjust their cost structures and integrate the effects of changing 
to the IPF PPS payment system. We specified that we would not allow 
IPFs the option to be paid at 100 percent of the IPF PPS payment amount 
in the first year of the transition, but would require all IPFs to 
receive the blended IPF payments during the 3-year transition period.
    However, new IPFs would be paid the full Federal per diem payment 
amount rather than a blended payment amount. This is because the 
transition period is intended to provide currently existing IPFs time 
to adjust to payment under the new system. A new IPF would not have 
received payment under TEFRA for delivery of IPF services before the 
effective date of the IPF PPS. Therefore, we believe new IPFs do not 
need a transition to adjust their operating or capital financing that 
IPFs that have been paid under the TEFRA payment methodology would 
need.
    In the proposed rule (68 FR 66920), we defined new IPFs as those 
IPFs that, under current or previous ownership or both, have their 
first cost reporting period as an IPF beginning on or after April 1, 
2004. In this final rule, we define a new provider as those IPFs that, 
under current or previous ownership or both, have their first cost 
reporting period as an IPF beginning on or after January 1, 2005 to 
coincide with the effective date of the final IPF PPS.
    Comment: The majority of commenters requested that we provide an 
option for IPFs to forego the transition and be paid at 100 percent of 
the IPF PPS payment amount in the first year of the transition. The 
commenters stated that other PPSs, specifically IRF PPS and LTCH PPS, 
included that option.
    The commenters also stated that a mandatory transition period 
causes IPFs to continue to be paid under the outdated TEFRA payment 
system. The commenters requested that IPFs that are substantially 
underpaid under TEFRA or those that would be last to begin the 
transition to the IPF PPS because of the timing of their cost reporting 
year should be permitted to receive 100 percent of the Federal per diem 
payment amount.
    One commenter stated that failure to provide for a 100 percent IPF 
PPS payment option disadvantages efficient providers. The commenter 
indicated IPFs that choose this option would strive to become more cost 
efficient more quickly. In addition, the blended payment methodology 
during the transition period could lead to payments that are less than 
current cost-based payments and would penalize IPFs that have a low 
TEFRA rate. Several commenters indicated that a 100 percent IPF PPS 
payment option would avoid the complications and financial burden of a 
blended payment process due to accounting difficulties caused by being 
paid under two payment systems.
    One commenter indicated that the protection offered by the 
transition is short-lived and that psychiatric units suffering the 
greatest losses will experience significant financial hardship until 
the IPF PPS is refined to account for more of the variation in the per 
diem costs of psychiatric units and psychiatric hospitals.
    Another commenter indicated that hospitals would be unable to 
offset Medicare ``losses'' under the IPF PPS with gains in other 
services. The commenter indicated that it would be very difficult for 
many of these hospitals to support ``losses'' in their psychiatric 
units for the long term and that some hospitals may decide to close 
their psychiatric units, which would result in diminished access for 
beneficiaries.
    However, several commenters specifically requested that CMS retain 
the proposed 3-year transition period. The commenters stated that the 
IPF PPS could have unexpected financial consequences for IPFs and the 
full transition period is needed to enable IPFs to adapt to the new 
payment system. The commenters are concerned that allowing immediate 
implementation of the IPF PPS would dilute the Federal per diem base 
rate and exacerbate the redistributive effect of the new payment 
system. Several commenters indicated that the availability of new 
funding, a 100 percent of the Federal per diem payment amount option 
would result in further reductions to the Federal per diem base rate. 
As a result, these commenters would support a 100 percent option, but 
only if there is new funding available.
    Other commenters requested that CMS phase-in the new IPF PPS more 
slowly, to allow corrections to any serious errors in the IPF PPS 
before full implementaion. Commenters recommended that CMS lengthen the 
transition to 5 or 6 years and perhaps for as long as 10 years to 
enable CMS to refine the IPF PPS before the full implementation.
    Response: We have retained the transition period in the final IPF 
PPS. We believe this approach strikes an appropriate balance between 
IPFs that are prepared immediately to move to full implementation of 
the IPF PPS and those IPFs that need time to make the changes before 
the full implementation of the new PPS.
    Section 305(b)(10)(c) of BIPA allowed IRFs to elect to be paid 100 
percent of the adjusted facility Federal prospective payment for each 
cost reporting period to which the blended payment methodology would 
other wise have been applied. In implementing LTCHs 5-year transition 
period of the PPS, one of the goals was to transition hospitals to full 
prospective payments as soon as appropriate. Due to the longer length 
of the transition period, under the LTCH PPS, we allowed LTCHs to elect 
payment based on 100 percent of the Federal rate at the start of any of 
its cost reporting periods during the 5-year transition period. Once 
the election to be paid 100 percent of the Federal per diem base rate 
was made, the LTCH was not able to revert to the transition blend.
    The IPF statute does not mandate that IPFs be given the option to 
elect to be paid 100 percent of IPF PPS payment amount immediately 
Federal rate. The shorter timeframe of a 3-year transition period was 
to provide all IPFs adequate time to make the most prudent adjustments 
to their operations and capital financing to secure the maximum 
benefits of the new PPS.
    Absent the availability of additional funds, the reallocation of 
existing funds in budget neutral payment systems cause shifts in 
facility payments. The aim of having an IPF PPS payment amount that is 
a blend of an ever-decreasing TEFRA portion and ever increasing IPF PPS 
portion is to mitigate dramatic negative effects of converting too 
quickly to a new payment system. Every budget neutral payment system 
will impact different provider groups

[[Page 66966]]

differently. Some providers believe that they will ``gain'' under the 
new IPF PPS while others believe they will do less well compared to the 
payments they have received under TEFRA.
    To provide the impartial treatment to all IPFs, in the final IPF 
PPS, we have required all IPFs to participate in the 3-year transition 
period. Therefore, prolonging the transitional period to 5 or 10 years 
would not help providers who believe they have been disadvantaged under 
TEFRA as well as those who feel they are not being helped under IPF PPS 
for a an even longer period of time.
    However, we share the commenter's concern about the ability of IPFs 
to adjust to the IPF PPS so that access to inpatient mental health care 
is maintained. Thus, we have tried to ensure continued access to mental 
health care by accounting for the complexity of patients with 
concurrent psychiatric and medical health conditions. We have created a 
PPS with numerous patient and facility level adjustments, an outlier 
policy, as well as a stop-loss policy that when used in combination 
with the transition period should ensure that an IPF PPS payment 
adequately reflects the costs of furnishing inpatient psychiatric care 
to Medicare beneficiaries.
2. New Providers
    We proposed a definition of a new IPF because new IPFs will not 
participate in the 3-year transition from cost-based reimbursement 
under TEFRA to the IPF PPS. The transition period is intended to 
provide existing IPFs time to adjust to payment under the IPF PPS. A 
new IPF would not have received payment under TEFRA for the delivery of 
IPF services before the effective date of the IPF PPS. Therefore, we do 
not believe that new IPFs require a transition period in order to make 
adjustments to their operating and capital financing, as will IPFs that 
have been paid under TEFRA, or need to otherwise integrate the effects 
of changing from one payment system to another payment system.
    For purposes of applying the IPF PPS 3-year transition period, we 
proposed to define a new IPF as a provider of inpatient hospital 
psychiatric services that otherwise meets the qualifying criteria for 
IPFs, set forth in Sec.  412.22, Sec.  412.23, Sec.  412.25, and Sec.  
412.27 under present or previous ownership (or both), and its first 
cost reporting period as an IPF begins on or after April 1, 2004, the 
effective date of the proposed IPF PPS. In this final rule, we are 
finalizing the definition, except we are replacing April 1, 2004 with 
January 1, 2005 in order to account for the revised effective date of 
the final IPF PPS. In other words, we are finalizing the definition of 
a new IPF as a provider of inpatient hospital psychiatric services that 
otherwise meets the qualifying criteria for IPFs, set forth in Sec.  
412.22, Sec.  412.23, Sec.  412.25, and Sec.  412.27 under present or 
previous ownership (or both), and its first cost reporting period as an 
IPF begins on or after January 1, 2005.
B. Claims Processing
    We proposed to continue processing claims in a manner similar to 
the current claims processing system. Hospitals would continue to 
report diagnostic information on the claim form and the FIs would 
continue to enter clinical and demographic information in their claims 
processing systems for review by the Medicare Code Editor (MCE).
    Comment: We received a variety of comments from all-inclusive rate 
and nominal cost hospitals regarding specific billing issues.
    Response: We are issuing operational instructions to address the 
specific billing issues raised by the commenters.
C. Annual Update
    In the proposed rule, we indicated that section 124 of Public Law 
106-113 does not specify an update strategy for the IPF PPS and is 
broadly written to give the Secretary discretion in proposing an update 
methodology. Therefore, we reviewed the update approach used in other 
hospital prospective payment systems (specifically, the IRF and LTCH 
PPS update methodologies).
    As a result of this analysis, we proposed the following strategy 
for updating the IPF PPS: (1) use the FY 2000 bills and cost report 
data and the most current ICD-9-CM codes and DRGs when we issue the IPF 
prospective payment system final rule; (2) implement the system 
effective for cost reporting periods beginning on or after April 1, 
2004; and (3) update the Federal per diem base rate on July 1, 2005, 
since a July 1 update coincides with more hospital cost reporting 
cycles and would be administratively easier to manage. As a result, the 
implementation period for the proposed IPF PPS was the 15-month period 
April 1, 2004 to June 30, 2005.
    In this final rule, we calculated the final Federal per diem base 
rate to be budget neutral during the implementation period of the final 
IPF PPS. As in the proposed rule, for future updates, we will use a 
July 1 through June 30 annual update cycle. Similar to the proposed 
rule, we will not update the IPF PPS during the first year of 
implementation because we believe there would be an insufficient amount 
of time under the IPF PPS to generate data useful in updating the 
system. Thus, the implementation period for the final IPF PPS is the 
18-month period January 1, 2005 through June 30, 2006. As a result, the 
first update to the IPF PPS will occur on July 1, 2006, and updated for 
each subsequent 12-month period thereafter.
    As we noted in the proposed rule, we believe it is important to 
delay updating the adjustment factors derived from the regression 
analysis until we have IPF PPS data that includes as much information 
as possible regarding the patient-level characteristics of the 
population that each IPF serves. For this reason, we do not intend to 
update the regression and recalculate the Federal per diem base rate 
until we have analyzed one complete year of data under the IPF PPS. 
Until that analysis is complete, we proposed to publish a notice in the 
Federal Register each spring to update the IPF PPS and identified the 
various elements of the IPF PPS that we would update.
    In this final rule, we are adopting the proposed annual update with 
minor modifications to reflect the policies contained in this final 
rule. For example, we did not include an adjustment for ECT in the 
proposed rule and as a result, the proposed update strategy did not 
address how we would update that payment amount.
    We will publish a notice in the spring of CY 2006 to update the IPF 
PPS effective July 1, 2006 and will publish a update notice for each 
12-month period thereafter. In the notice, we will:
    <bullet> Update the Federal per diem base rate using the excluded 
hospital with capital market basket increase in order to reflect the 
price of goods and services used by IPFs.
    <bullet> Apply the best available hospital wage index with an 
adjustment factor to the Federal per diem base rate to ensure that 
aggregate payments to IPFs are not affected by an updated wage index.
    <bullet> Update the fixed dollar loss threshold to maintain an 
outlier policy that is 2 percent of total estimated IPF PPS payments.
    <bullet> Describe relevant ICD-9-CM coding and DRG classification 
changes discussed in the IPPS that would affect IPF PPS coding and 
payment.
    <bullet> Update the payment amount for ECT based on the best 
available OPPS data.
    Finally, as we indicated in the proposed rule, we may propose an 
update methodology for the IPF PPS in the future. We anticipate that 
the update methodology would be based on the

[[Page 66967]]

excluded hospital with capital market basket index along with other 
appropriate factors relevant to psychiatric service delivery such as 
productivity, intensity, new technology, and changes in practice 
patterns.
    Comment: Several commenters requested that we delay the proposed 
April 1, 2004 implementation date until October 1, 2004 in order to be 
consistent with the October 1 update cycle for the IPPS. The commenters 
believe that an October 1 update cycle for the IPF PPS would avoid 
confusion and coding errors that would occur because of the 
introduction of ICD-9-CM and DRG changes mid-cycle. In addition, the 
commenters believe adopting an update cycle consistent with the IPPS 
would facilitate cost efficiency by also allowing educational efforts 
for coding and DRG changes to occur once per year.
    Response: While we appreciate the commenter's concerns, it is 
important that CMS retain the flexibility to develop administratively 
feasible update schedules for the various prospective payment systems 
that must be updated annually. Therefore, we are retaining a July 1 
through June 30 cycle for annual updating of the IPF PPS.
    Comment: A few commenters requested clarification regarding the 
timing of implementation since hospitals have different cost reporting 
year start dates.
    Response: IPFs will begin the first transition year of the IPF PPS 
at the beginning of their next cost reporting period after January 1, 
2005. For example, if an IPF's cost reporting year begins on March 1, 
the IPF would begin to receive a blended payment amount consisting of 
75 percent based on TEFRA payments and 25 percent based on IPF PPS 
payments for all discharges that occur after March 1, 2005.

VIII. Future Refinements

    In the proposed rule, we described research efforts by RTI 
International<SUP>[reg]</SUP> and the University of Michigan that were 
underway at the time the proposed rule was published. Section VI. of 
this final rule describes the outcome of the RTI 
International<SUP>[reg]</SUP> project to study modes of practice and 
patient characteristics to analyze the components of the routine cost 
category of the Medicare cost report.
    The University of Michigan project would assist us in developing a 
patient classification system based on a standard assessment tool, the 
Case Mix Assessment Tool (CMAT). We attached a draft of the assessment 
tool and explained that it had not been submitted to the Office of 
Management and Budget (OMB) for review in order to obtain approval to 
pilot test the draft assessment tool. We indicated that a public 
comment period would be available as part of the OMB review process.
    We received multiple comments on the CMAT instrument.
    Most of the comments received focused on the overall content of the 
instrument. There were several commenters that opposed the potential 
implements of the instrument.
    Comment: One commenter indicated that CMAT appeared to address the 
primary diagnostic needs of the mentally ill, but fell short on the 
collection of information on functional status. The commenters 
recommended that variables be added to CMAT instrument to collect 
information on social integration and the recreational use of time. The 
commenter also indicated that it was not clear how the functionality 
section would affect payment. Other commenters recommended that the 
instrument be revised to capture better information on patient 
conditions and resources needed to provide care. One commenter 
indicated that while the CMAT, as proposed, was an excellent tool for 
describing psychiatric signs and symptoms, it fails to assess active 
comorbid medical conditions. Another commenter recommended that the 
CMAT instrument be expanded to collect information on the use of 
seclusion and restraints. Another commenter also indicated that the 
CMAT should contain sections that specifically address the assessment 
reference date, common observational periods, and multiaxial 
assessments.
    Response: We are aware that the current draft CMAT instrument would 
not collect extensive information on patient conditions and comorbid 
conditions. However, if the instrument is pilot tested, and ultimately 
fielded for refinement purposes, we are planning to match the CMAT with 
CMS administrative files. This comparison will augment the collection 
capacity of the CMAT and provide detailed information of medical 
conditions. The draft CMAT instrument, which has not been proposed, is 
currently undergoing OMB review. Following this review, the instrument 
is to be pilot tested. The variables suggested in these comments (for 
example, seclusion and restraints, assessment dates, observational 
periods, and multi-axial assessments) are being evaluated for potential 
inclusion in the pilot test.
    Comment: One commenter recommended that because the CMAT is 
controversial, any pilot test findings should be made available to the 
public.
    Response: The results of the pilot test will be made available to 
the public. We plan to test the feasibility of administration, 
reliability and validity of the instrument, and recommendations 
regarding potential modifications to the draft CMAT. A report from the 
pilot test will be available, and CMS will use this report and 
experience garnered from the pilot test to determine next steps for the 
instrument. We will then decide whether to propose the use of the CMAT 
instrument to assist us in developing a patient classification system.
    Comment: Several commenters expressed support for development of a 
standardized instrument to collect patient level information to augment 
CMS administrative data. One commenter stated that the costs for an 
instrument would be outweighed by the benefits of creating a tool that 
collects information on patient conditions and necessary resources, so 
long as the tool is easy to use and complete.
    Another commenter was pleased with the development of the CMAT and 
indicated that only when information from the refined variables in CMAT 
are available would it be appropriate to implement the IPF PPS.
    Response: We will implement the IPF PPS before the CMAT is pilot 
tested because once the instrument has been pilot tested and the 
instrument reflects changes resulting from the testing, the instrument 
will have to be cleared by the Office of Management and Budget (OMB). 
We do not want to further delay implementation of the IPF PPS while the 
CMAT is tested and approved. However, a detailed OMB information 
collection package will be prepared and made available to the public.
    In addition, there are a number of steps that are necessary to 
insure that assessment instruments collect the most useful information. 
Pending the pilot test results and a national fielding of the CMAT 
instrument following the pilot test, and OMB clearance of a final 
instrument, we would potentially use these variables to propose future 
refinements to the IPF PPS.
    Comment: Many of the comments focused on the burden associated with 
completion of the CMAT instrument. Commenters stated that completion of 
the CMAT instrument for each discharged patient would require 
additional staff. The commenters recommended that CMS consider 
providing an adjustment to the Federal per diem base rate payment 
amount for the additional staff resources that would be required to 
complete the CMAT instrument.

[[Page 66968]]

    One commenter indicated that IPFs are already faced with funding 
and management challenges and should not be asked to allocate resources 
away from direct patient care to fulfill a reporting requirement.
    Response: The CMAT instrument and supporting materials is currently 
undergoing OMB review for potential fielding of the pilot test. One of 
the considerations of OMB review is to assess the potential burden on 
providers to complete the pilot test. One of the areas that will be 
assessed in administering the pilot test is the direct burden on the 
facilities to complete the instrument. CMS will assess the results of 
the pilot test to determine the feasibility of administering this 
instrument on a national basis, and the overall resources required to 
complete the instrument.
    If the pilot test is implemented, we have proposed approaches that 
could lessen the burden for administration, such as, automation of the 
instrument. In addition, we would allow the treatment team members 
providing patient care to complete the form, rather than to request 
that only nurses complete the form. CMS will monitor the experience in 
administering the form throughout the pilot test. Finally, the report 
on the pilot test will address the burden on staff of completing the 
CMAT instrument.
    Comment: One commenter indicated that the CMAT instrument, as 
currently drafted, would collect excessive and duplicative (to the 
medical record) information. Other commenters stressed that the 
instrument was time-consuming to complete and the potential use of the 
information proposed for collection was not clear. These commenters 
indicated that the relationship of the proposed data collection to case 
mix and reimbursement was not described.
    Some commenters referred to their experiences in implementing the 
assessment instruments currently in use for SNFs and IRFs, and 
indicated that the instruments used in those payment systems do not 
adequately collect information on the resources needed to provide 
patient care.
    One commenter recommended that all research regarding the 
development of the CMAT instrument cease. Another commenter indicated 
that the tool, as currently drafted, requested superfluous data with 
too many gameable variables. Commenters also indicated that collection 
of the information contained on the CMAT instrument was not necessary 
for refinement purposes. Instead, they recommended expanding the 
variables that are collected as part of either the cost reports or the 
claims.
    Response: We are aware that some of the variables proposed to be 
pilot tested in the draft CMAT instrument (which we did not propose to 
use in the proposed IPF PPS) may appear to be duplicative of the 
medical record. The availability in the medical record of the potential 
variables to be collected by the CMAT instrument are expected to 
facilitate the completion of the instrument and reduce completion time.
    The number of steps to pilot test and implement an instrument on a 
national basis are many. When data is available on a national basis, we 
will be in a better position to test the predictability and usefulness 
of the variables and determine whether its use should be proposed as a 
refinement to the IPF PPS.
    We are aware of the option of adding variables to the cost reports 
or claims. We have explored this option in developing other payment 
systems. Pending decisions on the implementation of the pilot test, we 
will explore either supplementing material from the CMAT or collecting 
stand alone variables using the cost reports or claims. In addition, we 
disagree with the commenters that suggest research for the development 
of the CMAT cease. Not only might continued development of the CMAT 
provide possible new useful information on patient resource needs and 
staffing utilization, it might ascertain whether our case mix is 
correct or need refinements. Furthermore, we believe the best way to 
ensure that our IPF PPS continues to be an adequate payment system is 
to continue research on all fronts so that we have the best available 
information to us when we must make policy decisions.
    Comment: Commenters raised concerns regarding the limitation of the 
draft CMAT instrument for collecting staffing information.
    Response: We note that other CMS research studies are currently 
working towards providing information on staffing resources needed to 
provide patient care. We will review the findings from the studies and 
consider incorporating them in any proposed refinements to the IPF PPS.
    Comment: A few commenters recommended that CMS engage in additional 
research to acquire a greater understanding of the payment dynamics 
between comorbidities and resource utilization before implementing the 
IPF PPS.
    Many commenters suggested that further analysis is needed to 
explain the difference in average per diem costs between psychiatric 
units and freestanding psychiatric hospitals. One commenter suggested 
an approach that would mirror a swing-bed methodology for patients 
needing both psychiatric and non-psychiatric inpatient services.
    Response: Additional research is planned that will address many 
outstanding questions regarding differences among IPFs, unit 
characteristics, patient characteristics, discharge and transfer 
criteria, and economic incentives.
    The current research agenda includes a project to assess the 
relationship between facilities that have scatter bed and organized DRG 
units and the IPF PPS. In addition, this research project will examine 
the role played by smaller psychiatric inpatient units and facilities, 
the continued use of partial hospitalizations and outpatient programs 
and their role in complementing and substituting for inpatient care. 
This project will further monitor the relationship between the IPF PPS, 
the OPPS, and IPPS payment systems over time.
    Comment: One commenter indicated that if there was any future 
research in support of the IPF PPS it should focus only on costs and 
payment, and build off existing facility and payment variables. The 
commenter did not support the creation of a new set of variables 
requiring additional data collection unless there was evidence that it 
would dramatically increase the predictability of the models. The 
commenter recommended research that focused on mode of practice and 
staffing patterns across different types of inpatient psychiatric 
facilities.
    Another commenter specifically questioned the need for the CMAT 
instrument in collecting new variables. The commenter also recommended 
that CMS consolidate all research efforts regarding payment for 
inpatient psychiatric services.
    Response: In general, the majority of the prospective payment 
systems focus on data that predict the cost and/or payment for the 
provision of services. While this is the current focus, it is our 
position that costs and payments may be influenced by a number of 
variables that are beyond those currently used for payment. We 
anticipate that in the future, quality and outcome measures may be 
useful in determining payments. In addition, in most of the prospective 
payment systems that rely on patient assessment data, additional 
variables are collected that may not be directly or significantly 
related, at that time, to the payment system, but could nonetheless be 
useful at some future time.
    We believe that relying only on those variables that are currently 
perceived as directly or significantly influencing payment, may 
preclude potential

[[Page 66969]]

refinements to the IPF PPS, limit research in the area, and prohibit 
the future inclusion of variables that could significantly predict 
payment, outcome, and quality. Therefore, we are reluctant to restrict 
further research and scientific excellence by building only on existing 
and available facility and payment variables.
    Comment: For patient characteristics, a commenter recommended 
adding two statistical parameters to the RTI 
International<SUP>[reg]</SUP> study, length of the IPF stay and length 
of time since their last psychiatric hospitalization.
    Response: We agree that it would be useful to investigate the 
potential relationship between the frequency of an individual's 
hospitalizations, their length of stay, and the per diem cost of their 
care. In addition, we believe that the issue is relevant as a topic for 
our monitoring and evaluation activities.

IX. Comments Beyond the Scope of the Final Rule

    In response to the proposed rule, many commenters chose to raise 
issues that are beyond the scope of our proposals. In this final rule, 
we are not summarizing or responding to those comments in this 
document. However, we will review the comments and consider whether to 
take other actions, such as revising or clarifying CMS program 
operating instructions or procedures, based on the information or 
recommendations in the comments.

X. Provisions of the Final Rule

    We are making a number of revisions to the regulations in order to 
implement the IPF PPS. Specifically, we are making conforming changes 
in 42 CFR parts 412 and 413. We are establishing a new subpart N in 
part 412, ``Prospective Payment System for Hospital Inpatient Services 
of Inpatient Psychiatric Facilities.'' We have reorganized the 
regulations text to make it easier to follow.
    This subpart implements section 124 of the BBRA, which requires the 
implementation of a per diem prospective payment system for IPFs. 
Subpart N sets forth the framework for the IPF PPS, including the 
methodology used for the development of the Federal per diem base 
payment amount and related rules. These revisions and others are 
discussed in detail below.

Section 412.1 Scope of Part

    We are revising the authority citation to include ``Section 124 of 
Public Law 106-113'' and ``Section 405 of Public Law 108-173.''
    We are revising Sec.  412.1 by redesignating paragraphs (a)(2) and 
(a)(3) as paragraphs (a)(3) and (a)(4).
    We are adding a new paragraph (a)(2) that specifies that this part 
implements section 124 of Public Law 106-113 by establishing a per diem 
based prospective payment system for inpatient operating and capital 
costs of hospital inpatient services furnished to Medicare 
beneficiaries by an inpatient psychiatric facility that meets the 
conditions of subpart N.
    We are revising Sec.  412.1 by redesignating paragraphs (b)(12) and 
(b)(13) as paragraphs (b)(13) and (b)(14).
    We are revising newly redesignated paragraph (b)(13) by removing 
reference ``paragraph (a)(3)'' and adding the reference ``paragraph 
(a)(4)'' in its place.
    We are revising newly redesignated paragraph (b)(14) by removing 
reference ``paragraph (a)(2)'' and adding the reference ``paragraph 
(a)(3)'' in its place.
    We are adding a new paragraph (b)(12) that summarizes the content 
of the new subpart N and sets forth the general methodology for paying 
operating and capital costs for inpatient psychiatric facilities 
effective with cost reporting periods beginning on or after January 1, 
2005.

Section 412.20 Hospital Services Subject to the Prospective Payment 
Systems

    We are amending Sec.  412.20(a) by adding a reference to IPFs.
    We are revising Sec.  412.20 by redesignating paragraphs (b), (c), 
and (d), as paragraphs (c), (d), and (e).
    We are adding a new paragraph (b) that indicates that effective for 
cost reporting periods beginning on or after January 1, 2005, covered 
inpatient hospital inpatient services furnished by an IPF as specified 
in Sec.  412.404 of subpart N are paid under the IPF PPS.

Section 412.22 Excluded Hospitals and Hospital Units: General Rules

    We are amending Sec.  412.22(b) by revising paragraph (b) to state 
that except for those hospitals specified in paragraph (c) of this 
section, and Sec.  412.20(b), (c), and (d), all excluded hospitals (and 
excluded hospital units, as described in Sec.  412.23 through Sec.  
412.29) are reimbursed under the cost reimbursement rules set forth in 
part 413 of this chapter, and are subject to the ceiling on the rate of 
hospital cost increases as specified in Sec.  413.40.

Section 412.23 Excluded Hospitals: Classifications

    We are revising Sec.  412.23 by redesignating paragraphs (a)(1) and 
(a)(2) as paragraphs (a)(2) and (a)(3).
    We are adding a new paragraph (a)(1) that specifies the 
requirements a psychiatric hospital must meet in order to be excluded 
from reimbursement under the hospital IPPS as specified in Sec.  
412.1(a)(1) and to be paid under the IPF PPS as specified in Sec.  
412.1(a)(2).
    We are revising paragraph (b) by removing the reference ``Sec.  
412.1(a)(2)'' and adding the reference to ``412.1(a)(3).''
    We are revising paragraph (b)(9) by removing the reference to 
``Sec.  412.2(a)(2)'' and adding the reference to ``412.1(a)(3)'' in 
its place.
    We are revising paragraph (e) by removing the reference to ``Sec.  
412.1(a)(3)'' and adding ``Sec.  412.1(a)(4)'' in its place.

Section 412.25 Excluded Hospital Units: Common Requirements

    We are amending Sec.  412.25(a) by adding a reference to Sec.  
412.1(a)(2).

Section 412.27 Excluded Psychiatric Units: Additional Requirements

    We are amending the introductory text of Sec.  412.27 by adding 
reference to Sec.  412.1(a)(1) and (a)(2).
    We are amending Sec.  412.27(a) by removing the words the ``Third 
Edition,'' and adding in its place, ``Fourth Edition, Text Revision.''

Section 412.429 Excluded Rehabilitation Units: Additional Requirements

    We are revising the introductory text by removing the reference 
``Sec.  412.1(a)(2)'' and adding ``Sec.  412.1(a)(3)'' in its place.

Section 412.116 Method of Payment

    We are revising Sec.  412.116 by redesignating paragraphs (a)(3) 
and (a)(4) as paragraphs (a)(4) and (a)(5).
    We are adding a new paragraph (a)(3) that specifies the cost-
reporting period to which the IPF PPS applies and how payments for 
inpatient psychiatric services are made to a qualified IPF.

Section 412.130 Exclusion of New Rehabilitation Units and Expansion of 
Units Already Excluded

Subpart N--Prospective Payment System for Hospital Inpatient Services 
of Inpatient Psychiatric Facilities

    We are revising paragraph (a)(1) and paragraph (a)(2) by removing 
reference to ``Sec.  412.1(a)(2)'' and adding reference ``Sec.  
412.1(a)(3)'' in its place.
    We are adding a new subpart N as follows:

[[Page 66970]]

Section 412.400 Basis and Scope of Subpart

    We are adding a new Sec.  412.400. In Sec.  412.400(a), we provide 
the requirements for the implementation of a PPS for IPFs.
    In Sec.  412.400(b), we specify that this subpart sets forth the 
framework for the IPF PPS, including the methodology used for the 
development of payment rates and associated adjustments, the 
application of a transition period, and related rules for IPFs for cost 
reporting periods beginning on or after January 1, 2005.

Section 412.402 Definitions

    In Sec.  412.402, we are defining the following terms for purposes 
of this new subpart:

<bullet> Comorbidity
<bullet> Federal per diem base rate
<bullet> Federal per diem payment amount
<bullet> Federal per diem
<bullet> Fixed dollar loss threshold
<bullet> Inpatient psychiatric facilities
<bullet> Interrupted stay
<bullet> Outlier payment
<bullet> Principal diagnosis
<bullet> Rural area
<bullet> Urban area

Section 412.404 Conditions for Payment Under the Prospective Payment 
System for Hospital Inpatient Services of Psychiatric Facilities

    In Sec.  412.404(a), we specify that IPFs must meet the following 
general requirements to receive payment under the IPF PPS:
    <bullet> The IPF must meet the conditions as specified in this 
subpart.
    <bullet> If the IPF fails to comply fully with the provisions of 
this part, then CMS may, as appropriate--
    ++ Withhold (in full or in part) or reduce payment to the IPF until 
the facility provides adequate assurances of compliance; or
    ++ Classify the IPF as a hospital subject to the IPPS.
    In paragraph (b), we specify that, subject to the special payment 
provisions of Sec.  412.22(c), an IPF must meet the general criteria 
set forth in Sec.  412.22 for exclusion from the hospital IPPS as 
specified in Sec.  412.1(a)(1). Additionally, a psychiatric hospital 
must meet the criteria set forth in Sec.  412.23(a), Sec.  482.60, 
Sec.  482.61, and Sec.  482.62 and psychiatric units must meet the 
criteria set forth in Sec.  412.25 and Sec.  412.27.
    In paragraph (c), we specify the prohibited and permitted charges 
that may be imposed on Medicare beneficiaries.
    In paragraph (c)(1), we specify that except as permitted in 
paragraph (c)(2), an IPF may not charge the beneficiary for any 
services for which payment is made by Medicare, except as permitted in 
paragraph (c)(2), even if the IPFs costs are greater than the amount 
the facility is paid under the IPF PPS.
    In paragraph (c)(2), we specify that an IPF receiving payment for a 
covered stay may charge the Medicare beneficiary or other person for 
only the applicable deductible and coinsurance amounts under Sec.  
409.82, Sec.  409.83, and Sec.  409.87.
    In paragraph (d), we specify the following provisions for 
furnishing IPF services directly or under arrangement:
    Applicable payments made under the IPF PPS are considered payment 
in full for all inpatient hospital services (as defined in Sec.  
409.10(a)). In addition, we specify the following--
    <bullet> Inpatient hospital services do not include physician, 
physician assistant, nurse practitioner, clinical nurse specialist, 
certified nurse midwives, qualified psychologist, and certified 
registered nurse anesthetist services.
    <bullet> Payment is not made to a provider or supplier other than 
the IPF, except for services provided by a physician, physician 
assistant, nurse practitioner, clinical nurse specialist, certified 
nurse midwives, qualified psychologist, and certified registered nurse 
anesthetist.
    <bullet> The IPF must furnish all necessary covered services to the 
Medicare beneficiary directly or under arrangement (as defined in Sec.  
409.3).
    In paragraph (e), we specify that IPFs must meet the recordkeeping 
and cost reporting requirements of Sec.  412.27(c), Sec.  413.20, and 
Sec.  413.24.

Section 412.422 Basis of Payment

    In Sec.  412.422(a), we specify that under the IPF PPS, IPFs will 
receive a predetermined per diem amount, adjusted for patient 
characteristics and facility characteristics, for inpatient hospital 
services furnished to Medicare Part A fee-for-service beneficiaries. In 
addition, we specify that during the transition period, payment is 
based on a blend of the Federal per diem payment amount and the 
facility-specific payment rate as specified in Sec.  412.426.
    In Sec.  412.422(b), we specify that payments made under the IPF 
PPS represent payment in full for inpatient operating and capital-
related costs associated with furnishing Medicare covered service in an 
IPF, but not for the cost of an approved medical education program 
described in Sec.  413.85 and Sec.  413.86 and for bad debts of 
Medicare beneficiaries as specified in Sec.  413.80.

Section 412.424 Methodology for Calculating the Federal Per Diem 
Payment Amount

    In Sec.  412.424, we specify the methodology for calculating the 
Federal per diem base rate for IPFs.
    In paragraph (a), we specify the data sources used to calculate the 
Federal per diem base rate.
    In paragraph (b), we specify that we determine the average 
inpatient operating, ancillary, and capital related per diem cost for 
which payment is made to IPF as described in paragraph (a)(1).
    In paragraph (c), we specify that the methodology used for 
determining the Federal per diem base rate for cost reporting periods 
beginning on or after January 5, 2005 through June 30, 2006 includes 
the following:

<bullet> The updated average per diem amount
<bullet> The budget-neutrality adjustment factor
<bullet> Outlier payments
<bullet> Standardization
<bullet> Computation of the Federal per diem base rate

    In paragraph (d), we specify that the Federal per diem payment 
amount for IPFs is the product of the Federal per diem base rate, the 
facility-level adjustments applicable to the IPF and the patient-level 
adjustments applicable to the case as described below:

<bullet> Facility-level adjustments include:
++ Adjustment for wages
++ Rural location
++ Teaching adjustments
++ Cost of living adjustments for IPFs in Alaska and Hawaii
++ IPFs with qualifying emergency departments
<bullet> Patient-level adjustments include:
++ Age
++ Diagnosis-related group assignment
++ Principal diagnosis
++ Comorbodities
++ Variable per diem adjustments
<bullet> Other payment adjustments include:
++ Outlier payments
++ Stop-loss payments
++ Special payment provision for interrupted stay
++ Patients who receive ECT treatments
++ Adjustment for high-cost outlier cases
    In paragraph (d), we specify the special payment provisions for 
interrupted stays.

Section 412.426 Transition Period

    In Sec.  412.426(a), we specify the duration of the transition 
period to the IPF PPS. In addition, we specify that IPFs receive a 
payment that is a blend of the Federal per diem payment

[[Page 66971]]

amount and the facility-specific payment amount the IPF would receive 
under the TEFRA payment methodology.
    In paragraph (b), we specify how the facility-specific payment 
amount is calculated.
    In paragraph (c), we specify that a new IPF, that is, a facility 
that under present or previous ownership, or both, has its first cost 
reporting period as an IPF beginning on or after January 1, 2005, is 
paid based on 100 percent of the full Federal per diem payment.

Section 412.428 Publication of Updated to the IPF PPS

    In Sec.  412.428, we specify how we plan to publish information 
each year in the Federal Register to update the IPF PPS.

Section 412.432 Method of Payment Under the IPF PPS

    In Sec.  412.432, we specify the following method of payment used 
under the IPF PPS:

<bullet> General rules for receiving payment
<bullet> Periodic interim payments including--
++ Criteria for receiving periodic interim payments
++ Frequency of payments
++ Termination of periodic interim payments
<bullet> Interim payment for Medicare bad debts and for costs of an 
approved education program and other costs paid outside the PPS
<bullet> Outlier payments
<bullet> Accelerated payments including--
++ General rule for requesting accelerated payments
++ Approval of accelerated payments
++ Amount of the accelerated payment
++ Recovery of the accelerated payment

Section 413.1 Introduction

    We are revising the authority citation to include ``Section 124 of 
Public Law 106-113.''
    We are amending Sec.  413.1(d)(2)(ii) by removing the words 
``psychiatric hospitals (as well as separate psychiatric units 
(distinct parts) of short-term general hospitals).''
    We are revising Sec.  413.1 by redesignating paragraphs (d)(2)(iv), 
(d)(2)(v), (d)(2)(vi), and (d)(2)(vii) as paragraphs (d)(2)(vi), 
(d)(2)(vii), (d)(2)(viii), and (d)(2)(ix).
    We are adding a new paragraph (iv) to specify that for cost 
reporting periods beginning before January 1, 2005, payment to 
psychiatric hospitals (as well as separate psychiatric units of short-
term general hospitals) that are excluded under subpart B of part 412 
of this chapter from the PPS is on a reasonable cost basis, subject to 
the provisions of Sec.  413.40.
    We are adding a new paragraph (v) to specify that for cost 
reporting periods beginning on or after January 1, 2005, payment to 
psychiatric hospitals that meet the conditions of Sec.  412.404 of this 
chapter is made under the PPS as described in subpart N of part 412.

Section 413.40 Ceiling on the Rate of Increase in Hospital Costs

    Section 413.40(a)(2)(i) specifies the types of facilities to which 
the ceiling on the rate of increase in hospital inpatient costs is not 
applicable.
    We are revising Sec.  413.40(a)(2)(i) by redesignating paragraphs 
(a)(2)(i)(C) and (a)(2)(i)(D) as paragraphs (a)(2)(i)(D) and 
(a)(2)(i)(E).
    We are adding a new paragraph (a)(2)(i)(C) to Sec.  413.40 to 
clarify that Sec.  413.40 is not applicable to psychiatric hospitals 
and psychiatric units under subpart N of part 412 of this chapter for 
cost reporting periods beginning on or after January 1, 2005.
    We are republishing paragraph (a)(2)(ii).
    We are revising paragraph (a)(2)(ii)(B) to include reference to 
psychiatric hospitals and psychiatric units as specified in Sec.  
412.22, Sec.  412.23, Sec.  412.25, Sec.  412.27, Sec.  412.29, and 
Sec.  412.30 of this chapter.
    We are revising paragraph (a)(2)(iii) by redesignating paragraphs 
(a)(2)(iii) and (a)(2)(iv) as paragraphs (a)(2)(iv) and (a)(2)(v).
    We are revising paragraph (a)(2)(ii)(C) by removing reference to 
``paragraph (a)(2)(iv)'' and adding the reference to ``paragraph 
(a)(2)(v)'' in its place.
    We are adding a new paragraph (a)(2)(iii) to specify psychiatric 
facilities are excluded from the prospective payment system as 
specified in Sec.  412.1(a)(1) and paid under Sec.  412.1(a)(2) for 
cost reporting periods beginning on or after January 1, 2005.

Section 413.64 Payment to Providers: Special Rules

    We are amending Sec.  413.64(h)(2)(i) to add a reference to 
hospitals paid under the IPF PPS.

Section 413.70 Payment for Services of a CAH

    We are revising paragraph (e) to specify that for cost reporting 
periods beginning before January 1, 2005, payment is made on a 
reasonable cost basis, subject to the provisions of Sec.  413.40. For 
cost reporting periods beginning on or after January 1, 2005, payment 
is based on prospectively determined rates under subpart N Sec.  
412.400 through Sec.  412.432) of part 412 of this subchapter.

XI. Collection of Information Requirements

    These regulations do not impose any new information collection 
requirements. The burden of the requirements in Sec.  412.404(e), 
reporting and recordkeeping requirements, are captured in the burden 
for the cross-referenced Sec.  412.27(c), Sec.  413.20, and Sec.  
413.24 under OMB approval numbers 0938-0301, 0938-0050, 0938-0358, and 
0938-0600.

XII. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impact of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-
354), section 1102(b) of the Act, the Unfunded Mandates Reform Act of 
1995 (UMRA) (Pub. L. 104-4), and Executive Order 13132).
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
    Based on analysis of the aggregate dollar impacts for each of the 
different facility types, we have determined that the re-distributive 
impact of the IPF PPS among facility types is $96 million in the first 
year the system is fully implemented. In addition, our analysis showed 
that an estimated payment ``reduction'' of almost $48 million would 
occur for psychiatric units and an estimated payment ``increase'' of 
$18 million would occur for for-profit hospitals, $27 million for 
government-operated hospitals, and slightly more than $3 million for 
non-profit hospitals. Although this final rule does not meet the $100 
million threshold established by Executive Order 12866 in its first 
year of implementation, we have determined that this final rule is a 
major rule within the meaning of Executive Order 12866 in its first 
year of implementation, because the re-distributive effects are 
estimated to be close to constituting a shift of $100 million in the 
first year of implementation. In addition, although we have not 
estimated the distributional

[[Page 66972]]

impact of this rule in subsequent years, because of the trends in 
medical expenditure discussed below, we believe it is likely that the 
rule would have distributional impacts greater than $100 million in 
subsequent years, relative to TEFRA payments. In addition, because the 
IPF PPS must be budget neutral in accordance with section 124(a)(1) of 
Public Law 106-113, we estimate that there will be no budgetary impact 
for the Medicare program as discussed later in this analysis.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small government 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$29 million or less in any 1 year. Medicare fiscal intermediaries are 
not considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
    HHS considers that a substantial number of entities are affected if 
the rule impacts more than 5 percent of the total number of small 
entities as it does in this rule. We included all freestanding 
psychiatric hospitals (79 are non-profit hospitals) in the analysis 
since their total revenues do not exceed the $29 million threshold. We 
also included psychiatric units of small hospitals, that is, fewer than 
100 beds. We did not include psychiatric units within larger hospitals 
in the analysis because we believe this final rule would not 
significantly impact total revenues of the entire hospital that 
supports the unit. We have provided the following RFA analysis in 
section B, to emphasize that although the final rule would impact a 
substantial number of IPFs that were identified as small entities, we 
do not believe it would have a significant economic impact. Based on 
the analysis of the 1063 psychiatric facilities that were classified as 
small entities by the definitions described above, we estimate the 
combined impact of the IPF PPS will be a 5-percent increase in payments 
relative to their payments under TEFRA. We have prepared the following 
analysis to describe the impact of the final rule in order to provide a 
factual basis for our conclusions regarding small business impact.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of an MSA and has fewer 
than 100 beds. We have determined that this final rule would have a 
substantial impact on hospitals classified as located in rural areas. 
As discussed earlier in this preamble, we are providing a payment 
adjustment of 17 percent for IPFs located in rural areas. In addition, 
we are establishing a 3-year transition to the new system to allow IPFs 
an opportunity to adjust to the new system. Therefore, the impacts 
shown in Table 10 below reflect the adjustments that are designed to 
minimize or eliminate any potentially significant negative impact that 
the IPF PPS may otherwise have on small rural IPFs.
    Section 202 of the UMRA also requires that agencies assess 
anticipated costs and benefits before issuing any final rule that may 
result in expenditures in any 1 year by State, local, or tribal 
governments, in the aggregate, or by the private sector, of $110 
million or more. This final rule does not mandate any requirements for 
State, local, or tribal governments nor would it result in expenditures 
by the private sector of $110 million or more in any 1 year.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications.
    We have examined this final rule under the criteria set forth in 
Executive Order 13132 and have determined that the final rule will not 
have any negative impact on the rights, roles, and responsibilities of 
State, local, or tribal governments or preempt State law.

B. Anticipated Effects

    Below, we discuss the impact of this final rule on the Federal 
Medicare budget and on IPFs.
1. Budgetary Impact
    Section 124(a)(1) of Public Law 106-113 requires us to set the 
payment rates contained in this final rule to ensure that total 
payments under the IPF PPS are projected to equal the amount that would 
have been paid if the IPF PPS had not been implemented. As a result of 
this analysis, which is discussed in section V.B.2.b. of this final 
rule, we are establishing a budget-neutrality adjustment to the Federal 
per diem base rate. Thus, there will be no budgetary impact to the 
Medicare program by implementation of the IPF PPS.
2. Impacts on Providers
    To understand the impact of the IPF PPS on providers, it is 
necessary to compare estimated payments that would be made under the 
current TEFRA payment methodology (current payments) to estimated 
payments under the IPF PPS. The IPFs were grouped into the categories 
listed below based on characteristics provided in the Online Survey and 
Certification and Reporting (OSCAR) file and the 2002 cost report data 
from HCRIS:

<bullet> Facility Type
<bullet> Location
<bullet> Teaching Status Adjustment
<bullet> Census Region
<bullet> Size

    To estimate the impacts among the various categories of IPFs, we 
had to compare estimated future payments that would have been made 
under the TEFRA payment methodology to estimated payments under the IPF 
PPS. We estimated the impacts using the same set of providers (1,806 
IPFs) that was used for the regression analysis to calculate the 
budget-neutral Federal per diem base rate, and to determine the 
appropriateness of various adjustments to the Federal per diem base 
rate. A detailed explanation of the methods we used to simulate TEFRA 
payments and estimate payments under the IPF PPS is provided in section 
V. of this final rule.
    The impacts reflect the estimated ``losses'' or ``gains'' among the 
various classifications of IPF providers for the first year of the IPF 
PPS. Prospective payments were based on the budget-neutral Federal per 
diem base rate of $572 adjusted by the IPFs' estimated patient-level, 
facility-level adjustments, and simulated outlier amounts. This 
simulated PPS payment was compared to the IPF's payments based on its 
cost from the cost report inflated to the midpoint of the 
implementation period (January 1, 2005 through June 30, 2006) and 
subject to the updated per discharge target amount. Table 10 below 
illustrates the aggregate impact of the IPF PPS on various 
classifications of IPFs. The first column identifies the type of IPF, 
the second column indicates the number of IPFs for each type of IPF, 
and the third column indicates the ratio of IPF PPS payments to the 
current TEFRA payments in the first period of the transition.

BILLING CODE 4120-03-P

[[Page 66973]]

[GRAPHIC] [TIFF OMITTED] TR15NO04.450


[[Page 66974]]


[GRAPHIC] [TIFF OMITTED] TR15NO04.451

BILLING CODE 4120-03-C
3. Results
    We measured the impact of the IPF PPS by comparing estimated 
payments under the IPF PPS relative to current TEFRA payments. This was 
computed as a ratio of IPF PPS payment to current TEFRA payment for 
each classification of IPF. We have prepared the following summary of 
the impact of the IPF PPS set forth in this final rule.
a. Facility type
    We grouped the IPFs into the following four categories: (1) 
Psychiatric units; (2) government-operated hospitals; (3) for-profit 
hospitals; and (4) non-profit hospitals. Roughly 77 percent of all IPFs 
are psychiatric units. The impact analysis in Table 10 indicates that 
under the IPF PPS, freestanding psychiatric hospitals receive an 
estimated ``increase'' relative to the current payment. Psychiatric 
units have an estimated IPF PPS payment to current TEFRA payment ratio 
of 0.98, the government-operated hospitals have an estimated IPF PPS 
payment to current TEFRA payment ratio of 1.13, and the non-profit and 
for-profit hospitals have an estimated IPF PPS payment to current TEFRA 
payment ratio of 1.02 and 1.05, respectively.
b. Location
    Approximately 24 percent of all IPFs are located in rural areas. 
The impact analysis in Table 10 indicates that under the IPF PPS, the 
estimated IPF PPS payment to current TEFRA payment ratio is 
approximately 1.00 for rural and urban IPFs. When we group all of the 
IPFs by facility type within urban and rural locations, the impact 
analysis indicates that the estimated IPF PPS payment to current TEFRA 
payment ratios would be between approximately 0.98 and 1.05 for all 
IPFs except government-operated hospitals. Under the IPF PPS, the 
payment ratios for rural and urban government-operated hospitals are 
estimated to be 1.14 and 1.12, respectively.
c. Teaching Status Adjustment
    Using the ratio of interns and residents to the average daily 
census for each facility as a measure of the magnitude of the teaching 
status, we grouped facilities into the following four major categories: 
(1) Non teaching; (2) less than 0.10 (it is not a percent) ratio of 
interns and residents to average daily census; (3) 0.10 to 0.30 ratio 
of interns and residents to average daily census; and (4) more than 
0.30 ratio of interns and residents to average daily census. Facilities 
with a teaching ratio greater than 0.10, have payment ratios less than 
1.00.
d. Census Region
    Under the IPF PPS, IPFs in the Mid-Atlantic region receive a 
payment ratio of approximately 1.03 when compared to IPFs in other 
regions that receive payment ratios between approximately 0.98 and 
1.01. Specifically, the New England States, the West North Central 
States, and the Mountain States receive payment ratios of 1.00. The 
South Atlantic States, East North Central States, and the Pacific 
States, receive payments ratios of approximately 0.99. The East South 
Central States have a payment ratio of 1.01, and the West South Central 
States have a ratio of 0.98.
e. Size
    We grouped the IPFs into 5 categories for each group of psychiatric 
facilities based on bed size: (1) Under 12 beds; (2) 12 to 25 beds; (3) 
25 to 50 beds; (4) 50 to 75 beds; and (5) over 75 beds. Under the IPF 
PPS, the majority of IPFs' bed sizes were categories in which the 
payment ratio would be greater than 0.98. Under the IPF PPS, large IPFs 
with over 75 beds receive the highest payment ratio (1.10 for 
psychiatric hospitals and 1.01 for psychiatric units), while 
psychiatric units with less than 10 beds receive the lowest payment 
ratio of 0.96.
4. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other prospective payment systems, we estimate that Medicare spending 
(total Medicare program payments) for IPF services over the next 5 
years would be as follows:
[GRAPHIC] [TIFF OMITTED] TR15NO04.452


[[Page 66975]]


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

    <bullet> 3.4 percent for FY 2005;
    <bullet> 3.0 percent for FY 2006;
    <bullet> 2.8 percent for FY 2007;
<bullet> 2.7 percent for FY 2008;
<bullet> 3.0 percent for FY 2009; and
<bullet> 3.0 percent for FY 2010.

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

<bullet> 0.5 percent in FY 2005;
<bullet> -7.3 percent in FY 2006;
<bullet> -4.7 percent in FY 2007;
<bullet> -0.2 percent in FY 2008;
<bullet> -0.1 percent in FY 2009; and
<bullet> 1.4 percent in FY 2010.

    Consistent with the statutory requirement for budget neutrality in 
the initial implementation period, we intend for estimated aggregate 
payments under the IPF PPS to equal the estimated aggregate payments 
that would be made if the IPF PPS were not implemented. Our methodology 
for estimating payments for purposes of the budget-neutrality 
calculations uses the best available data.
    After the IPF PPS is implemented, we will evaluate the accuracy of 
the assumptions used to compute the budget-neutrality calculation. We 
intend to analyze claims and cost report data from the first year of 
the IPF PPS to determine whether the factors used to develop the 
Federal per diem base rate are not significantly different from the 
actual results experienced in that year. We are planning to compare 
payments under the final IPF PPS (which relies on an estimate of cost-
based TEFRA payments using historical data from a base year and 
assumptions that trend the data to the initial implementation period) 
to estimated cost-based TEFRA payments based on actual data from the 
first year of the IPF PPS. The percent difference (either positive or 
negative) would be applied prospectively to the established prospective 
payment rates to ensure the rates accurately reflect the payment levels 
intended by the statute. We intend to perform this analysis within the 
first 5 years of the implementation of the IPF PPS.
    Section 124 of Public Law 106-113 provides the Secretary broad 
authority in developing the IPF PPS, including the authority for 
appropriate adjustments. In accordance with this authority, as stated 
above, we may make a one-time prospective adjustment to the Federal per 
diem base rate in an effort to ensure that the best historical data 
available forms the foundation of the prospective payment rates in 
future years.
5. Effect on Beneficiaries
    Under the IPF PPS, IPFs will receive payment based on the average 
resources consumed by patients for each day. We do not expect changes 
in the quality of care or access to services for Medicare beneficiaries 
under the IPF PPS. In fact, we believe that access to IPF services 
would be enhanced due to the patient and facility level adjustment 
factors, all of which are intended to adequately reimburse IPFs for 
expensive cases. Finally, the stop-loss policy is intended to assist 
IPFs during the transition. In addition, we expect that paying 
prospectively for IPF services will enhance the efficiency of the 
Medicare program.
6. Computer Hardware and Software
    We do not anticipate that IPFs will incur additional systems 
operating costs in order to effectively participate in the IPF PPS. We 
believe that IPFs possess the computer hardware capability to handle 
the billing requirements under the IPF PPS. Our belief is based on 
indications that approximately 99 percent of hospital inpatient claims 
are submitted electronically. In addition, we are not adopting 
significant changes in claims processing (see section IV. C. of this 
final rule).

C. Alternatives Considered

    We considered the following alternatives in developing the IPF PPS: 
One option we considered incorporated not only the patient-level and 
facility-level variables described previously, but also a site-of-
service distinction. Under this approach, psychiatric units would have 
received a higher per diem payment, all other factors being equal, 
based on the assumption that psychiatric units on average treat a more 
complex and costly case-mix. A psychiatric unit adjustment to the 
otherwise applicable per diem payment rate would reflect the absence of 
a more sophisticated patient classification system specifically linked 
to resource use. Our analysis of the FY 2002 cost report and billing 
data used to develop the final IPF PPS reveals that an adjustment would 
have increased the otherwise applicable per diem payment to psychiatric 
units by approximately 33 percent. The average 2002 IPF per diem costs 
was $615 for psychiatric units, $534 for non-profit hospitals, $448 for 
proprietary providers, and $378 for governmental-operated facilities. 
While some of the higher than average per diem cost in psychiatric 
units may be due to a greater medical and surgical acuity among 
patients treated in psychiatric units, part of the difference is likely 
attributable to economy of scale inefficiencies associated with 
operating small units, including higher overhead expenses, and 
generally lower occupancy rates. A psychiatric unit site-of-service 
distinction in payment rates would represent a proxy adjuster in lieu 
of a more sophisticated patient classification system.
    We considered alternative policies in order to reduce financial 
risk to facilities in the event that they experience substantial 
reductions in Medicare payments during the period of transition to the 
IPF PPS. As discussed previously in this final rule, we have adopted a 
provision that would guarantee each facility an average payment per 
case under the IPF PPS that is estimated to be no less than a minimum 
proportion of its average payment per case under TEFRA. We analyzed the 
impact on losses if we were to make a payment adjustment to ensure that 
the minimum IPF PPS per case payment to an IPF is at least 70 percent 
of its TEFRA payment.
    The stop-loss adjustment will be applied to the IPF PPS portion of 
Medicare payments during the transition. For example, during year 1 of 
the 3-year transition period, three-quarters of the payment is based on 
TEFRA, and one-quarter of the payment is based on the Federal rate. We 
would apply the stop-loss adjustment to the portion of the IPF's 
payments during the transition based on the Federal rate. We estimate 
that the combined effects of the transition and the stop-loss policies 
will ensure that per case payments relative to pre-IPF PPS TEFRA per 
case payments are no less than 92.5 percent in year 1, 85 percent in 
year 2, and 77.5 percent in year 3. We estimate that about 10 percent 
of IPFs will receive additional payments under the stop-loss policy.
    The 70 percent of TEFRA stop-loss policy would require a reduction 
in the per diem rate to make the stop-loss policy budget neutral. As a 
result, we made a reduction to the Federal per diem base rate of 0.4 
percent in order to maintain budget neutrality.
    In accordance with the provisions of Executive Order 12866, this 
rule was reviewed by OMB.

List of Subjects

42 CFR Part 412

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

[[Page 66976]]

42 CFR Part 413

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


0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT PSYCHIATRIC 
SERVICES

0
1. The authority citation for part 412 is revised to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh), Sec. 124 of Pub. L. 106-113, 113 Stat. 
1515, and Sec. 405 of Pub. L. of 108-173, 117 Stat. 2266, 42 U.S.C. 
1305, 1395.

Subpart A--General Provisions

0
2. Section 412.1 is amended as follows:
0
a. Redesignating paragraphs (a)(2) and (a)(3) as paragraphs (a)(3) and 
(a)(4).
0
b. Adding a new paragraph (a)(2).
0
c. Redesignating paragraphs (b)(12) and (b)(13) as paragraphs (b)(13) 
and (b)(14).
0
d. Adding a new paragraph (b)(12).
0
e. Amending newly redesignated paragraph (b)(13) by removing the 
reference ``paragraph (a)(3)'' and adding the reference ``paragraph 
(a)(4)'' in its place.
0
f. Amending newly redesignted paragraph (b)(14) by removing the 
reference ``paragraph (a)(2)'' and adding the reference ``paragraph 
(a)(3)'' in its place.
    The additions read as follows:


Sec.  412.1  Scope of part.

    (a) * * *
    (2) This part implements section 124 of Public Law 106-113 by 
establishing a per diem prospective payment system for the inpatient 
operating and capital costs of hospital inpatient services furnished to 
Medicare beneficiaries by a psychiatric facility that meets the 
conditions of subpart N of this part.
* * * * *
    (b) * * *
    (12) Subpart N describes the prospective payment system specified 
in paragraph (a)(2) of this section for inpatient psychiatric 
facilities and sets forth the general methodology for paying the 
operating and capital-related costs of inpatient hospital services 
furnished by inpatient psychiatric facilities effective with cost 
reporting periods beginning on or after January 1, 2005.
* * * * *

Subpart B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and 
Inpatient Capital Related Costs

0
3. Section 412.20 is amended as follows:
0
a. Revising paragraph (a).
0
b. Redesignating paragraphs (b), (c), and (d) as paragraphs (c), (d), 
and (e).
0
c. Adding a new paragraph (b).
    The revision and addition read as follows:


Sec.  412.20  Hospital services subject to the prospective payment 
systems.

    (a) Except for services described in paragraphs (b), (c), (d), and 
(e) of this section, all covered hospital inpatient services furnished 
to beneficiaries during the subject cost reporting periods are paid 
under the prospective payment system as specified in Sec.  412.1(a)(1).
    (b) Effective for cost reporting periods beginning on or after 
January 1, 2005, covered inpatient hospital services furnished to 
Medicare beneficiaries by a inpatient psychiatric facility that meets 
the conditions of Sec.  412.404 are paid under the prospective payment 
system described in subpart N of this part.
* * * * *

0
4. Section 412.22 is amended by revising paragraph (b).


Sec.  412.22  Excluded hospitals and hospital units: General rules.

* * * * *
    (b) Cost reimbursement. Except for those hospitals specified in 
paragraph (c) of this section, and Sec.  412.20(b), (c), and (d), all 
excluded hospitals (and excluded hospital units, as described in Sec.  
412.23 through Sec.  412.29) are reimbursed under the cost 
reimbursement rules set forth in part 413 of this chapter, and are 
subject to the ceiling on the rate of hospital cost increases as 
specified in Sec.  413.40 of this chapter.
* * * * *

0
5. Section 412.23 is amended as follows:
0
a. Republishing paragraph (a) introductory text.
0
b. Redesignating paragraphs (a)(1) and (a)(2) as paragraphs (a)(2) and 
(a)(3).
0
c. Adding a new paragraph (a)(1).
0
d. Amending the introductory text to paragraph (b) by removing the 
reference ``Sec.  412.1(a)(2)'' and adding the reference to ``Sec.  
412.1(a)(3)'' in its place.
0
e. Amending paragraph (b)(9) by removing the reference to ``Sec.  
412.2(a)(2)'' and adding the reference to ``Sec.  412.1(a)(3)'' in its 
place.
0
f. Revising the introductory text to paragraph (e).
    The republication and addition read a follows:


Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (a) Psychiatric hospitals. A psychiatric hospital must--
    (1) Meet the following requirements to be excluded from the 
prospective payment system as specified in Sec.  412.1(a)(1) and to be 
paid under the prospective payment system as specified in Sec.  
412.1(a)(2) and in subpart N of this part;
* * * * *
    (e) Long-term care hospitals. A long-term care hospital must meet 
the requirements of paragraph (e)(1) and (e)(2) of this section and, 
when applicable, the additional requirement of Sec.  412.22(e), to be 
excluded from the prospective payment system specified in Sec.  
412.1(a)(1) and to be paid under the prospective payment system 
specified in Sec.  412.1(a)(4) and in Subpart O of this part.
* * * * *

0
6. Section 412.25 is amended by revising the paragraph (a) introductory 
text to read as follows:


Sec.  412.25  Excluded hospital units: Common requirements.

    (a) Basis for exclusion. In order to be excluded from the 
prospective payment systems as specified in Sec.  412.1(a)(1) and to be 
paid under the prospective payment system as specified in 412.1(a)(2), 
a psychiatric unit must meet the following requirements.
* * * * *

0
7. Section 412.27 is amended as follows:
0
a. Revising the introductory text.
0
b. Amending paragraph (a) by removing the words ``Third Edition'', and 
adding in its place, ``Fourth Edition, Text Revision''.
    The revision reads as follows:


Sec.  412.27  Excluded psychiatric units: Additional requirements.

    In order to be excluded from the prospective payment system as 
specified in Sec.  412.1(a)(1), and paid under the prospective payment 
system as specified in Sec.  412.1(a)(2), a psychiatric unit must meet 
the following requirements:
* * * * *


Sec.  412.29  [Amended]

0
8. In Sec.  412.29, the introductory text is amended by removing the 
reference ``Sec.  412.1(a)(2)'' and adding the reference ``Sec.  
412.1(a)(3)'' in its place.
0
9. Section 412.116 is amended as follows:

[[Page 66977]]

0
a. Redesignating paragraphs (a)(3) and (a)(4) as paragraphs (a)(4) and 
(a)(5).
0
b. Adding a new paragraph (a)(3).
    The addition reads as follows:


Sec.  412.116  Method of payment.

    (a) * * *
    (3) For cost reporting periods beginning on or after January 1, 
2005, payments for inpatient hospital services furnished by an 
inpatient psychiatric facility that meets the conditions of Sec.  
412.404 are made as described in Sec.  412.432.
* * * * *


Sec.  412.130  [Amended]

0
10. In Sec.  412.130, paragraphs (a)(1) and (a)(2) are amended by 
removing the reference ``Sec.  412.1(a)(2)'' and adding the reference 
``Sec.  412.1(a)(3)'' in its place.
0
11. A new subpart N is added to read as follows:

Subpart N--Prospective Payment System for Hospital Inpatient 
Services of Inpatient Psychiatric Facilities

Sec.
412.400 Basis and scope of subpart.
412.402 Definitions.
412.404 Conditions for payment under the prospective payment system 
for inpatient hospital services of psychiatric facilities.
412.422 Basis of payment.
412.424 Methodology for calculating the Federal per diem payment 
amount.
412.426 Transition period.
412.428 Publication of Updates to the inpatient psychiatric facility 
prospective payment system.
412.432 Method of payment under the inpatient psychiatric facility 
prospective payment system.

Subpart N--Prospective Payment System for Inpatient Hospital 
Services of Inpatient Psychiatric Facilities


Sec.  412.400  Basis and scope of subpart.

    (a) Basis. This subpart implements section 124 of Public Law 106-
113, which provides for the implementation of a per diem-based 
prospective payment system for inpatient hospital services of inpatient 
psychiatric facilities.
    (b) Scope. This subpart sets forth the framework for the 
prospective payment system for the inpatient hospital services of 
inpatient psychiatric facilities, including the methodology used for 
the development of the Federal per diem rate, payment adjustments, 
implementation issues, and related rules. Under this system, for cost 
reporting periods beginning on or after January 1, 2005, payment for 
the operating and capital-related costs of inpatient hospital services 
furnished by inpatient psychiatric facilities to Medicare Part A fee-
for-service beneficiaries is made on the basis of prospectively 
determined payment amount applied on a per diem basis.


Sec.  412.402  Definitions.

    As used in this subpart--
    Comorbidity means all specific patient conditions that are 
secondary to the patient's primary diagnosis and that coexist at the 
time of admission, develop subsequently, or that affect the treatment 
received or the length of stay or both. Diagnoses that relate to an 
earlier episode of care that have no bearing on the current hospital 
stay are excluded.
    Federal per diem base rate means the payment based on the average 
routine operating, ancillary, and capital-related cost of 1 day of 
hospital inpatient services in an inpatient psychiatric facility.
    Federal per diem payment amount means the Federal per diem base 
rate with all applicable adjustments.
    Fixed dollar loss threshold means a dollar amount by which the 
costs of a case exceed payment in order to qualify for an outlier 
payment.
    Inpatient psychiatric facilities means hospitals that meet the 
requirements as specified in Sec.  412.22, Sec.  412.23(a), Sec.  
482.60, Sec.  482.61, and Sec.  482.62, and units that meet the 
requirements as specified in Sec.  412.22, Sec.  412.25, and Sec.  
412.27.
    Interrupted stay means a Medicare inpatient is discharged from an 
inpatient psychiatric facility and is admitted to any inpatient 
psychiatric facility within 3 consecutive calendar days following 
discharge. The 3 consecutive calendar days begins with the day of 
discharge from the inpatient psychiatric facility and ends on midnight 
of the third day.
    Outlier payment means an additional payment beyond the Federal per 
diem payment amount for cases with unusually high costs.
    Principal diagnosis means the condition established after study to 
be chiefly responsible for occasioning the admission of the patient to 
the inpatient psychiatric facility also referred to as primary 
diagnosis. Principal diagnosis is also referred to as primary 
diagnosis.
    Qualifying emergency department means an emergency department that 
is staffed and equipped to furnish a comprehensive array of emergency 
services and meting the definitions of a dedicated emergency department 
as specified in Sec.  489.24(b).
    Rural area means any area outside an urban area.
    Urban area means an area as defined in Sec.  412.62(f)(1)(ii).


Sec.  412.404  Conditions for payment under the prospective payment 
system for inpatient hospital services of psychiatric facilities.

    (a) General requirements. (1) Effective for cost reporting periods 
beginning on or after January 1, 2005, an inpatient psychiatric 
facility must meet the conditions of this section to receive payment 
under the prospective payment system described in this subpart for 
inpatient hospital services furnished in to Medicare Part A fee-for-
service beneficiaries.
    (2) If an inpatient psychiatric facility fails to comply fully with 
these conditions, CMS may, as appropriate--
    (i) Withhold (in full or in part) or reduce Medicare payment to the 
inpatient psychiatric facility until the facility provides adequate 
assurances of compliance; or
    (ii) Classify the inpatient psychiatric facility as an inpatient 
hospital that is subject to the conditions of subpart C of this part 
and is paid under the prospective payment system as specified in Sec.  
412.1(a)(1).
    (b) Inpatient psychiatric facilities subject to the prospective 
payment system. Subject to the special payment provisions of Sec.  
412.22(c), an inpatient psychiatric facility must meet the general 
criteria set forth in Sec.  412.22. In order to be excluded from the 
hospital inpatient prospective payment system as specified in Sec.  
412.1(a)(1), a psychiatric hospital must meet the criteria set forth in 
Sec.  412.23(a), Sec.  482.60, Sec.  482.61, and Sec.  482.62 and 
psychiatric units must meet the criteria set forth in Sec.  412.25 and 
Sec.  412.27.
    (c) Limitations on charges to beneficiaries--(1) Prohibited 
charges. Except as permitted in paragraph (c)(2) of this section, an 
inpatient psychiatric facility may not charge a beneficiary for any 
services for which payment is made by Medicare, even if the facility's 
cost of furnishing services to that beneficiary are greater than the 
amount the facility is paid under the prospective payment system.
    (2) Permitted charges. An inpatient psychiatric facility receiving 
payment under this subpart for a covered hospital stay (that is, a stay 
that included at least one covered day) may charge the Medicare 
beneficiary or other person only the applicable deductible and 
coinsurance amounts under Sec.  409.82, Sec.  409.83, and Sec.  409.87 
of this chapter and for items or services as specified under Sec.  
489.20(a) of this chapter.
    (d) Furnishing of inpatient hospital services directly or under 
arrangement.

[[Page 66978]]

(1) Subject to the provisions of Sec.  412.422, the applicable payments 
made under this subpart are payment in full for all inpatient hospital 
services, as specified in Sec.  409.10 of this chapter. Hospital 
inpatient services do not include the following:
    (i) Physicians' services that meet the requirements of Sec.  
415.102(a) of this chapter for payment on a fee schedule basis.
    (ii) Physician assistant services, as specified in section 
1861(s)(2)(K)(i) of the Act.
    (iii) Nurse practitioners and clinical nurse specialist services, 
as specified in section 1861(s)(2)(K)(ii) of the Act.
    (iv) Certified nurse midwife services, as specified in section 
1861(gg) of the Act.
    (v) Qualified psychologist services, as specified in section 
1861(ii) of the Act.
    (vi) Services of a certified registered nurse anesthetist, as 
specified in section 1861(bb) of the Act and defined in Sec.  410.69 of 
this subchapter.
    (2) CMS does not pay providers or suppliers other than inpatient 
psychiatric facilities for services furnished to a Medicare beneficiary 
who is an inpatient of the inpatient psychiatric facility, except for 
services described in paragraphs (d)(1)(i) through (d)(1)(vi) of this 
section
    (3) The inpatient psychiatric facility must furnish all necessary 
covered services to a Medicare beneficiary who is an inpatient of the 
inpatient psychiatric facility, either directly or under arrangements 
(as specified in Sec.  409.3 of this chapter).
    (e) Reporting and recordkeeping requirements. All inpatient 
psychiatric facilities participating in the prospective payment system 
under this subpart must meet the recordkeeping and cost reporting 
requirements as specified in Sec.  412.27(c), Sec.  413.20, Sec.  
413.24, and Sec.  482.61 of this chapter.


Sec.  412.422  Basis of payment.

    (a) Method of Payment. (1) Under the inpatient psychiatric facility 
prospective payment system, inpatient psychiatric facilities receive a 
predetermined Federal per diem base rate for inpatient hospital 
services furnished to Medicare Part A fee-for-service beneficiaries.
    (2) The Federal per diem payment amount is based on the Federal per 
diem base rate plus applicable adjustments as specified in Sec.  
412.424.
    (3) During the transition period, payment is based on a blend of 
the Federal per diem payment amount as specified in Sec.  412.424, and 
the facility-specific payment rate as specified in Sec.  412.426.
    (b) Payment in full. (1) The payment made under this subpart 
represents payment in full (subject to applicable deductibles and 
coinsurance as specified in subpart G of part 409 of this chapter) for 
inpatient operating and capital-related costs associated with 
furnishing Medicare covered services in an inpatient psychiatric 
facility, but not the cost of an approved medical education program as 
specified in Sec.  413.79 through Sec.  413.75 of this chapter.
    (2) In addition to the Federal per diem payment amounts, inpatient 
psychiatric facilities receive payment for bad debts of Medicare 
beneficiaries, as specified in Sec.  413.80 of this chapter.


Sec.  412.424  Methodology for calculating the Federal per diem payment 
amount.

    (a) Data sources. (1) To calculate the Federal per diem base rate 
(as specified in paragraph (b) of this section for inpatient 
psychiatric facilities, as specified in paragraph (b) of this section, 
CMS uses the following data sources:
    (2) The best Medicare data available to estimate the average 
inpatient operating and capital-related costs per day made as specified 
in part 413 of this chapter.
    (i) Patient and facility cost report data capturing routine and 
ancillary costs.
    (ii) An appropriate wage index to adjust for wage differences.
    (iii) An increase factor to adjust for the most recent estimate of 
increases in the prices of an appropriate market basket of goods and 
services provided by inpatient psychiatric facilities.
    (b) Determining the average per diem cost of inpatient psychiatric 
facilities for FY 2002. CMS determines the average inpatient operating, 
ancillary, and capital-related per diem cost for which payment is made 
to each inpatient psychiatric facility, using the available data 
described in paragraph (a) of this section.
    (c) Determining the Federal per diem base rate for cost reporting 
periods beginning on or after January 1, 2005 through June 30, 2006. 
(1) General. Payment under the inpatient psychiatric facility 
prospective payment system is based on a standardized per diem payment 
referred to as the Federal per diem base rate. The Federal per diem 
base rate is the unadjusted cost for 1 day of inpatient hospital 
services in an inpatient psychiatric facility in a base year as 
described in paragraph (b) of this section. The unadjusted cost per day 
is adjusted in accordance with paragraphs (c)(2) through (c)(5) of this 
section.
    (2) Update of the average per diem cost. CMS applies the increase 
factor described in paragraph (a)(2)(iii) of this section to the 
updated average per diem cost to the midpoint of the January 1, 2005 
through June 30, 2006, under the update methodology described in 
section 1886(b)(3)(B)(ii) of the Act.
    (3) Budget neutrality. (i) CMS adjusts the updated average per diem 
cost so that the aggregate payments in the first 18 months (for January 
1, 2005 through June 30, 2006) under the inpatient psychiatric facility 
prospective payment system are estimated to equal the amount that would 
have been made to the inpatient psychiatric facilities under part 413 
of this chapter if the inpatient psychiatric facility prospective 
payment system described in this subpart were not implemented.
    (ii) CMS evaluates the accuracy of the budget-neutrality adjustment 
within the first 5 years after implementation of the inpatient 
psychiatric facility prospective payment system. CMS may make a one-
time prospective adjustment to the Federal per diem base rate to 
account for significant differences between the historical data on 
cost-based TEFRA payments (the basis of the budget-neutrality 
adjustment at the time of implementation) and estimates of TEFRA 
payments based on actual data from the first year of the prospective 
payment system.
    (4) Outlier payments. CMS determines a reduction factor equal to 
the estimated proportion of outlier payments described in paragraph 
(d)(3)(i) of this section.
    (5) Standardization. CMS determines a reduction factor to reflect 
estimated increases in the Federal per diem base rate as defined in 
Sec.  412.402 resulting from the facility-level and patient-level 
adjustments described in paragraph (d) of this section.
    (6) Computation of the Federal per diem base rate. The Federal per 
diem base rate is computed as follows:
    (i) For cost reporting periods beginning on or after January 1, 
2005 and on or before June 30, 2006, the Federal per diem base rate is 
computed in accordance with paragraph (c) of this section.
    (ii) For inpatient psychiatric facilities beginning on or after 
July 1, 2006, the Federal per diem base rate will be the Federal per 
diem base rate for the previous year, updated by an increase factor 
described in paragraph (a)(2)(iii) of this section.
    (d) Determining the Federal per diem payment amount. The Federal 
per diem payment amount is the product of the Federal per diem base 
rate established under paragraph (c) of this section, the facility-
level adjustments applicable to the inpatient psychiatric facility, and 
the patient-level adjustments applicable to the case.

[[Page 66979]]

    (1) Facility-level adjustments. (i) Adjustment for wages. CMS 
adjusts the labor portion of the Federal per diem base rate to account 
for geographic differences in the area wage levels using an appropriate 
wage index. The application of the wage index is made on the basis of 
the location of the inpatient psychiatric facility in an urban or rural 
area as defined in Sec.  412.402.
    (ii) Rural location. CMS adjusts the Federal per diem base rate for 
inpatient psychiatric facilities located in a rural area as defined in 
Sec.  412.402.
    (iii) Teaching adjustment. CMS adjusts the Federal per diem base 
rate by a factor to account for indirect medical education costs.
    (A) An inpatient psychiatric facility's teaching adjustment is 
based on the ratio of the number of residents training in the inpatient 
psychiatric facility divided by the facility's average daily census.
    (B) The number of full-time equivalent residents used in 
calculating the teaching adjustment cannot exceed the number of full-
time equivalent residents in a base year.
    (1) The base year is the inpatient psychiatric facility's most 
recently filed cost report filed with its fiscal intermediary before 
November 15, 2004. Residents with less than full-time status and 
residents rotating through the inpatient psychiatric facility for less 
than a full year will be counted in proportion to the time they spend 
in the inpatient psychiatric facility.
    (2) The teaching status adjustment for new inpatient psychiatric 
facilities as defined in Sec.  412.426 is made in accordance with Sec.  
413.79(e)(1)(i) and (ii).
    (C) If an inpatient psychiatric facility has fewer full-time 
equivalent residents than in its base year payment of the teaching 
adjustment will be based on the actual number of full-time equivalent 
residents. The inpatient psychiatric facility may add residents in 
subsequent years up to its resident cap established under section 
(1)(iii)(B) of this paragraph.
    (iv) Inpatient psychiatric facilities located in Alaska and Hawaii. 
CMS adjusts the non-labor portion of the Federal per diem base rate to 
reflect the higher cost of living of inpatient psychiatric facilities 
located in Alaska and Hawaii.
    (v) Adjustment for IPF with qualifying emergency departments. (A) 
CMS adjusts the Federal per diem base rate to account for the costs 
associated with maintaining a qualifying emergency department. A 
qualifying emergency department is staffed and equipped to furnish a 
comprehensive array of emergency services and meets the requirements of 
Sec.  489.24(b) and Sec.  413.65.
    (B) Where the inpatient psychiatric facility is part of an acute 
care hospital that has a qualifying emergency department as described 
in paragraph (d)(1)(v)(A) of this section and an individual patient is 
discharged to the inpatient psychiatric facility from that acute care 
hospital, CMS would not apply the emergency adjustment.
    (2) Patient-level adjustments. (i) Age. CMS adjusts the Federal per 
diem base rate to account for patient age based on age groupings 
specified by CMS.
    (ii) Diagnosis-related group assignment. The inpatient psychiatric 
facility must identify a principal diagnosis as specified in Sec.  
412.27(a) for each patient. CMS adjusts the Federal per diem base rate 
by a factor to account for the CMS inpatient psychiatric facility 
prospective payment system recognized diagnosis-related group 
assignment associated with each patient's principal diagnosis.
    (iii) Principal diagnosis. The inpatient psychiatric facility must 
identify a principal psychiatric diagnosis as specified in Sec.  
412.27(a) for each patient. CMS adjusts the Federal per diem base rate 
by a factor to account for the diagnosis-related group assignment 
associated with the principal diagnosis, as specified by CMS.
    (iv) Comorbidities. CMS adjusts the Federal per diem base rate by a 
factor to account for certain comorbidities as specified by CMS.
    (v) Variable per diem adjustments. CMS adjusts the Federal per diem 
base rate by factors as specified by CMS to account for the cost of 
each day of inpatient psychiatric care relative to the cost of the 
median length of stay.
    (3) Other adjustments. (i) Outlier payments. CMS provides an 
additional payment if an inpatient psychiatric facility's estimated 
total cost for a case exceeds a fixed dollar loss threshold as defined 
in Sec.  412.402 plus the Federal per diem payment amount for the case.
    (A) The fixed dollar loss threshold is adjusted for the inpatient 
psychiatric facility's adjustments for wage area, teaching, rural 
location, and cost of living adjustment for facilities located in 
Alaska and Hawaii.
    (B) The outlier payment equals 80 percent of the difference between 
the IPF's estimated cost for the case and the adjusted threshold amount 
for days 1 through 9, and 60 percent for day 10 and thereafter.
    (C) For discharges occurring in cost reporting periods beginning on 
or after January 1, 2005, outlier payments are subject to the 
adjustments specified at Sec.  412.84(i) and Sec.  412.84(m) of this 
part, except that national urban and rural median cost-to-charge ratios 
would be used instead of statewide average cost-to-charge ratios.
    (ii) Stop-loss payments. CMS will provide additional payments 
during the transition period, specified in Sec.  412.426(a)(1) through 
(3), to an inpatient psychiatric facility to ensure that aggregate 
payments under the prospective payment system are at least 70 percent 
of the amount the inpatient psychiatric facility would have received 
under reasonable cost reimbursement had the prospective payment system 
not been implemented.
    (iii) Special payment provision for interrupted stays. If a patient 
is discharged from an inpatient psychiatric facility and is admitted to 
the same or another inpatient psychiatric facility within 3 consecutive 
calendar days following the discharge, the case is considered to be 
continuous for the purposes listed below. The 3 consecutive calendar 
days begins with the day of discharge from the inpatient psychiatric 
facility and ends on midnight of day 3.
    (A) Determining the appropriate variable per diem adjustment, as 
specified in paragraph (d)(2)(v) of this section, applicable to the 
case.
    (B) Determining whether the total cost for a case meets the 
criteria for outlier payments, as specified in paragraph (d)(3)(i)(C) 
of this section.
    (iv) Payment for electroconvulsive therapy treatments. CMS provides 
an additional payment to reflect the cost of electroconvulsive therapy 
treatments received by a patient during an inpatient psychiatric 
facility stay in a manner specified by CMS.
    (v) Adjustment for high-cost cases. CMS provides for an additional 
payment if the estimated total cost for a case exceeds a fixed dollar 
loss threshold plus the total per diem payment amount for the case.
    (A) The fixed dollar loss threshold is adjusted for area wage 
levels, teaching status, and rural location.
    (B) The additional payment equals 80 percent of the difference 
between the estimated cost of the case and the Federal per diem payment 
amount for days 1 through 9, and 60 percent for days 10 and beyond.
    (C) Effective for discharges occurring in cost reporting periods 
beginning on or after January 1, 2005, additional payments made under 
this section would be subject to the adjustments at Sec.  412.84(i) and 
Sec.  412.84(m) of this part, except that the national urban and rural 
median cost-to-charge ratios would be

[[Page 66980]]

used instead of statewide averages, and at Sec.  412.84(m) of this 
part.


Sec.  412.426  Transition period.

    (a) Duration of transition period and composition of the blended 
transition payment. Except as provided in paragraph (c) of this 
section, for cost reporting periods beginning on or after January 1, 
2005 through June 30, 2008, an inpatient psychiatric facility receives 
a payment comprised of a blend of the estimated Federal per diem 
payment amount, as specified in Sec.  412.424(c) and a facility-
specific payment as specified under paragraph (b).
    (1) For cost reporting periods beginning on or after January 1, 
2005 and on or before June 30, 2006, payment is based on 75 percent of 
the facility-specific payment and 25 percent is based on the Federal 
per diem payment amount.
    (2) For cost reporting periods beginning on or after July 1, 2006 
and on or before June 30, 2007, payment is based on 50 percent of the 
facility-specific payment and 50 percent is based on the Federal per 
diem payment amount.
    (3) For cost reporting periods beginning on or after July 1, 2007 
and on or before June 30, 2008, payment is based on 25 percent of the 
facility-specific payment and 75 percent is based on the Federal per 
diem payment amount.
    (4) For cost reporting periods beginning on or after July 1, 2008, 
payment is based entirely on the Federal per diem payment amount.
    (b) Calculation of the facility-specific payment. The facility-
specific payment is equal to the estimated payment for each cost 
reporting period in the transition period that would have been made 
without regard to this subpart. The facility's Medicare fiscal 
intermediary calculates the facility-specific payment for inpatient 
operating costs and capital costs in accordance with part 413 of this 
chapter.
    (c) Treatment of new inpatient psychiatric facilities. New 
inpatient psychiatric facilities, are facilities that under present or 
previous ownership or both have their first cost reporting period as an 
IPF beginning on or after January 1, 2005. New IPFs are paid based on 
100 percent of the Federal per diem payment amount.


Sec.  412.428  Publication of Updates to the inpatient psychiatric 
facility prospective payment system.

    CMS will publish annually in the Federal Register information 
pertaining to updates to the inpatient psychiatric facility prospective 
payment system. This information includes:
    (a) A description of the methodology and data used to calculate the 
updated Federal per diem base payment amount.
    (b) The rate of increase factor as described in 412.424(a)(2)(iii), 
which is based on the excluded hospital with capital market basket 
under the update methodology of 1886(b)(3)(B)(ii) of the Act for each 
year.
    (c) The best available hospital wage index and information 
regarding whether an adjustment to the Federal per diem base rate is 
needed to maintain budget neutrality.
    (d) Updates to the fixed dollar loss threshold in order to maintain 
the appropriate outlier percentage.
    (e) Describe the ICD-9-CM coding changes and DRG classification 
changes discussed in the annual update to the hospital inpatient 
prospective payment system regulations.
    (f) Update the electroconvulsive therapy adjustment by a factor 
specified by CMS.


Sec.  412.432  Method of payment under the inpatient psychiatric 
facility prospective payment system.

    (a) General rule. Subject to the exceptions in paragraphs (b) and 
(c) of this section, an inpatient psychiatric facility receives payment 
under this subpart for inpatient operating cost and capital-related 
costs for each inpatient stay following submission of a bill.
    (b) Periodic interim payments (PIP). (1) Criteria for receiving 
PIP.
    (i) An inpatient psychiatric facility receiving payment under this 
subpart may receive PIP for Part A services under the PIP method 
subject to the provisions of Sec.  413.64(h) of this chapter.
    (ii) To be approved for PIP, the inpatient psychiatric facility 
must meet the qualifying requirements in Sec.  413.64(h)(3) of this 
chapter.
    (iii) A hospital that is receiving periodic interim payments also 
receives payment under this subpart for applicable services furnished 
by its excluded psychiatric unit.
    (iv) As provided in Sec.  413.64(h)(5) of this chapter, 
intermediary approval is conditioned upon the intermediary's best 
judgment as to whether payment can be made under the PIP method without 
undue risk of resulting in an overpayment to the provider.
    (2) Frequency of payment. For facilities approved for PIP, the 
intermediary estimates the annual inpatient psychiatric facility's 
Federal per diem prospective payments, net of estimated beneficiary 
deductibles and coinsurance, and makes biweekly payments equal to \1/
26\ of the total estimated amount of payment for the year. If the 
inpatient psychiatric facility has payment experience under the 
prospective payment system, the intermediary estimates PIP based on 
that payment experience, adjusted for projected changes supported by 
substantiated information for the current year. Each payment is made 2 
weeks after the end of a biweekly period of service as specified in 
Sec.  413.64(h)(6) of this chapter. The interim payments are reviewed 
at least twice during the reporting period and adjusted if necessary. 
Fewer reviews may be necessary if an inpatient psychiatric facility 
receives interim payments for less than a full reporting period. These 
payments are subject to final settlement.
    (3) Termination of PIP. (i) Request by the inpatient psychiatric 
facility. Subject to the provisions of paragraph (b)(1)(iii) of this 
section, an inpatient psychiatric facility receiving PIP may convert to 
receiving prospective payments on a non-PIP basis at any time.
    (ii) Removal by the intermediary. An intermediary terminates PIP if 
the inpatient psychiatric facility no longer meets the requirements of 
Sec.  413.64(h) of this chapter.
    (c) Interim payments for Medicare bad debts and for costs of an 
approved education program and other costs paid outside the prospective 
payment system. For Medicare bad debts and for costs of an approved 
education program and other costs paid outside the prospective payment 
system, the intermediary determines the interim payments by estimating 
the reimbursable amount for the year based on the previous year's 
experience, adjusted for projected changes supported by substantiated 
information for the current year, and makes biweekly payments equal to 
1/26 of the total estimated amount. Each payment is made 2 weeks after 
the end of the biweekly period of service as specified in Sec.  
413.64(h)(6) of this chapter. The interim payments are reviewed at 
least twice during the reporting period and adjusted if necessary. 
Fewer reviews may be necessary if an inpatient psychiatric facility 
receives interim payments for less than a full reporting period. These 
payments are subject to final cost settlement.
    (d) Outlier payments. Additional payments for outliers are not made 
on an interim basis. Outlier payments are made based on the submission 
of a discharge bill and represents final payment subject to the cost 
report settlement specified in Sec.  412.84(i) and Sec.  412.84(m).
    (e) Accelerated payments. (1) General rule. Upon request, an 
accelerated payment may be made to an inpatient psychiatric facility 
that is receiving

[[Page 66981]]

payment under this subpart and is not receiving PIP under paragraph (b) 
of this section if the inpatient psychiatric facility is experiencing 
financial difficulties because of the following:
    (i) There is a delay by the intermediary in making payment to the 
inpatient psychiatric facility.
    (ii) Due to an exceptional situation, there is a temporary delay in 
the inpatient psychiatric facility's preparation and submittal of bills 
to the intermediary beyond the normal billing cycle.
    (2) Approval of accelerated payment. An inpatient psychiatric 
facility's request for an accelerated payment must be approved by the 
intermediary and CMS.
    (3) Amount of accelerated payment. The amount of the accelerated 
payment is computed as a percent of the net payment for unbilled or 
unpaid covered services.
    (4) Recovery of accelerated payment. Recovery of the accelerated 
payment is made by recoupment as inpatient psychiatric facility bills 
are processed or by direct payment by the inpatient psychiatric 
facility.

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

0
1. The authority citation for part 413 is revised to read as follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1861 (v), 1871, 1881, 1883, and 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) Sec 124 of Pub. L. 
106-113, 113 Stat. 1515.

0
2. Section 413.1 is amended as follows:
0
a. Revising paragraph (d)(2)(ii).
0
b. Redesignating paragraphs (d)(2)(iv), (d)(2)(v), (d)(2)(vi), and 
(d)(2)(vii) as paragraphs (d)(2)(vi), (d)(2)(vii), (d)(2)(viii), and 
(d)(2)(ix).
0
(c) Adding new paragraphs (d)(2)(iv) and (d)(2)(v).
    The revision and additions read as follows:


Sec.  413.1  Introduction.

* * * * *
    (d) * * *
    (2) * * *
    (ii) Payment to children's hospitals that are excluded from the 
prospective payment systems under subpart B of part 412 of this 
chapter, and hospitals outside the 50 States and the District of 
Columbia is on a reasonable cost basis, subject to the provisions of 
Sec.  413.40.
* * * * *
    (iv) For cost reporting periods beginning before January 1, 2005, 
payment to psychiatric hospitals (as well as separate psychiatric units 
(distinct parts) of short-term general hospitals) that are excluded 
under subpart B of part 412 of this chapter from the prospective 
payment system is on a reasonable cost basis, subject to the provisions 
of Sec.  413.40.
    (v) For cost reporting periods beginning on or after January 1, 
2005, payment to inpatient psychiatric facilities that meet the 
conditions of Sec.  412.404 of this chapter, is made under the 
prospective payment system described in subpart N of part 412 of this 
chapter.
* * * * *

0
3. Section 413.40 is amended as follows:
0
a. Redesignating paragraphs (a)(2)(i)(C) and (a)(2)(i)(D) as paragraphs 
(a)(2)(i)(D) and (a)(2)(i)(E).
0
b. Adding a new paragraph (a)(2)(i)(C).
0
c. Republishing paragraph (a)(2)(ii) introductory text.
0
d. Revising paragraph (a)(2)(ii)(B).
0
e. Amending paragraph (a)(2)(ii)(C) by removing reference to 
``paragraph (a)(2)(iv)'' and adding the reference ``paragraph 
(a)(2)(v)'' in its place.
0
f. Redesignating paragraphs (a)(2)(iii) and (a)(2)(iv) as paragraphs 
(a)(2)(iv) and (a)(2)(v).
0
g. Adding a new paragraph (a)(2)(iii).
    The revision and additions read as follows:


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

    (a) * * *
    (2) * * *
    (i) * * *
    (C) Psychiatric hospitals and psychiatric units that are paid under 
the prospective payment system for inpatient psychiatric facilities 
described in subpart N of part 412 of this chapter for cost reporting 
periods beginning on or after January 1, 2005.
* * * * *
    (ii) For cost reporting periods beginning on or after October 1, 
1983, this section applies to--
* * * * *
    (B) Psychiatric and rehabilitation units excluded from the 
prospective payment systems, as specified in Sec.  412.1(a)(1) of this 
chapter and in accordance with Sec.  412.25 through Sec.  412.30 of 
this chapter, except as limited by paragraphs (a)(2)(iii) and 
(a)(2)(iv) of this section with respect to psychiatric and 
rehabilitation hospitals and psychiatric and rehabilitation units as 
specified in Sec.  412.22, Sec.  412.23, Sec.  412.25, Sec.  412.27, 
Sec.  412.29 and Sec.  412.30 of this chapter.
* * * * *
    (iii) For cost reporting periods beginning on or after October 1, 
1983 and before January 1, 2005 this section applies to psychiatric 
hospitals and psychiatric units that are excluded from the prospective 
payment systems as specified in Sec.  412.1(a)(1) of this chapter and 
paid under the prospective payment system as specified in Sec.  
412.1(a)(2) of this chapter.
* * * * *

0
4. Section 413.64 is amended by revising paragraph (h)(2)(i) to read as 
follows:


Sec.  413.64  Payment to providers: Specific rules.

* * * * *
    (h) * * *
    (2) * * *
    (i) Part A inpatient services furnished in hospitals that are 
excluded from the prospective payment systems, as specified in Sec.  
412.1(a)(1) of this chapter under subpart B of part 412 of this 
subchapter, or are paid under the prospective payment systems described 
in subpart N, O, and P of part 412 of this chapter.
* * * * *

0
5. Section 413.70 is amended by revising paragraph (e) to read as 
follows:


Sec.  413.70  Payment for services of a CAH.

* * * * *
    (e) Payment for service of distinct part psychiatric and 
rehabilitation units of CAHS. Payment for inpatient services of 
distinct part psychiatric units of CAHs--
    (1) For cost reporting periods beginning before January 1, 2005, 
payment is made on a reasonable cost basis, subject to the provisions 
of Sec.  413.40.
    (2) For cost reporting periods beginning on or after January 1, 
2005, payment is made in accordance with regulations governing 
inpatient psychiatric facilities at subpart N (Sec.  412.400 through 
Sec.  412.432) of Part 412 of this subchapter.
    (3) Payment for inpatient services of distinct part rehabilitation 
units of CAHs is made in accordance with regulations governing the 
inpatient rehabilitation facilities prospective payment system at 
Subpart P (Sec.  412.600 through Sec.  412.632) of Part 412 of this 
subchapter.
(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)


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

    Dated: October 26, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: November 2, 2004.
Tommy G. Thompson,
Secretary.

    Note: The following Addenda will not appear in the Code of 
Federal Regulations

Addendum A--Psychiatric Prospective Payment Adjustment Rate and 
Adjustment Factors

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[FR Doc. 04-24787 Filed 11-2-04; 4:47 pm]
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