66922 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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.

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).

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Libraries and at many other public and 

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country that receive the 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

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

• Rehabilitation hospitals and 

rehabilitation units in acute care 

hospitals. 

• Psychiatric hospitals and 

psychiatric units in acute care hospitals. 

• 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). RTI 

International 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, 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

66924 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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-andcomment 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 § 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 (§ 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 § 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: 

• 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. 

• 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

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 66925

October 1, 1997, through September 30, 

2002. 

• 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. 

• 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. 

• 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: 

• 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. 

• 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. 

• 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. 

• Provide patient-level adjustments 

for age, specified diagnosis-related 

groups (DRGs), and selected 

comorbidity categories. 

• Provide facility adjustments that 

include a wage index adjustment, rural 

location adjustment, and a teaching 

status adjustment. 

• Recognize variable per diem 

adjustments to account for the higher 

costs incurred in the early days of a 

psychiatric stay. 

• Adopt an outlier policy to target 

greater payment to the high cost cases. 

• Provide an interrupted stay policy 

for the purpose of applying the variable 

per diem adjustment and the outlier 

policy. 

• 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. 

• 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. 

• 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).

• 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. 

• Provide the annual update strategy 

for the IPF PPS. 

• 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.

66926 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 § 412.22, § 412.23, § 412.25, 

and § 412.27. As specified in § 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 § 412.22(c) and, therefore, 

would not be paid under the IPF PPS: 

• Veterans Administration hospitals. 

• Hospitals that are reimbursed under 

State cost control systems approved 

under 42 CFR part 403. 

• Hospitals that are reimbursed in 

accordance with demonstration projects 

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)). 

• 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 § 412.22, 

§ 412.25, and § 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 § 412.22, § 412.25, and 

§ 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 § 412.22, 

§ 412.25, and § 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 § 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.

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

66928 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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

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ER15NO04.439</GPH>
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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 

§ 413.40(c)(3)(vii) and the full excluded 

hospital market-basket percentage 

increase for FY 2003 and later in 

accordance with § 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 § 413.40(c)(3)(viii). 

Comment: A few commenters 

recommended that CMS project IPF


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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 § 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 § 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.

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 

§ 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—

• The hospital-specific target amount 

multiplied by the number of Medicare 

discharges (the ceiling); or 

• 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: 

• 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. 

• IPFs whose net inpatient operating 

costs are greater than the ceiling, but 

less than 110 percent of the ceiling, 

would receive the ceiling payment. 

• 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 CapitalRelated 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 CapitalRelated 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 laborrelated 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 facilitylevel 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


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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 budgetneutrality 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

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

66934 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 hospitalbased 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 hospitalbased 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 forprofit 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

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

name of Research Triangle Institute) 

study of inpatient psychiatric care that 

was designed to complement the 

development of the IPF PPS. RTI 

International 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 study is 

noteworthy for its success in dealing 

with these two issues. First, RTI 

International 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 was able to go beyond the 

potential constraints of administrative 

data to study differences among patients 

across days of the stay. 

Second, RTI International 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 faced choices about 

how to obtain the most useful 

information possible with the limited 

funds available. RTI International

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 did not 

collect ancillary service use, but instead 

relied on claims data for this 

information. 

The findings of the RTI International

study have played an important role in 

the development of the IPF PPS in 

several ways. First, RTI International

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 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 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’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 study provides us 

with a starting point for future 

refinements of the IPF PPS. As noted 

above, RTI International’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 would 

find that elderly psychiatric patients use 

fewer resources than younger patients. 

Response: The commenter’s 

prediction that RTI International

would find that elderly psychiatric 

patients use fewer resources than 

younger patients was not supported. RTI 

International 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

data was able to capture cost variations 

among patients within the same facility 

and RTI International 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 casemix, 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

66936 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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-tocharge 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 diagnosisrelated 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 

§ 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

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

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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.

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,


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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

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BILLING CODE 4120–03–C


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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.

66942 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 facilityand 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


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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) × 683.06 

= $894.81 

Day 2 (adjustment factor 1.12) × 683.06 

= $765.03 

Day 3 (adjustment factor 1.08) × 683.06 

= $737.70 

Day 4 (adjustment factor 1.05) × 683.06 

= $717.21 

Day 5 (adjustment factor 1.04) × 683.06 

= $710.38 

Day 6 (adjustment factor 1.02) × 683.06 

= $696.72 

Day 7 (adjustment factor 1.01) × 683.06 

= $689.89 

Day 8 (adjustment factor 1.01) × 683.06 

= $689.89 

Day 9 (adjustment factor 1.00) × 683.06 

= $683.06 

Day 10 (adjustment factor 1.00) × 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 § 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

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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


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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.

66946 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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: 

• In Table 3 (68 FR 66931), in the 

Infectious Disease category, the correct 

range of codes is 07950 through 07959. 

• 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

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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).

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


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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 reevaluated 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, 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

examined the variation in routine 

resource use across days within stays in 

its study of a sample of patients from 40 

facilities. RTI International 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 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 data 

enabled them to estimate a relationship 

between per diem cost and the day-ofstay that is consistent with the way we 

used the variable per diem adjustment 

factors for payment. In addition, since 

RTI International 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 did not 

collect information on ancillary usage 

by day-of-stay. In constructing its 

measure of daily total cost, RTI 

International allocated 1 day of average 

ancillary costs from the matching 

MedPAR stay record. RTI International

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 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 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-ofstay. We note that the variable per diem 

adjustment are made in a budget-neutral 

manner.

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 66949

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 reexamine 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

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 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


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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. 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

study addressed the issue raised by this 

comment because it examined the 

variation in routine cost by day of the 

stay. RTI International 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 governmentoperated 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 governmentoperated 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 genderrelated costs, since gender was not 

included as a variable in the regression. 

Therefore, we are not adopting a 

patient-level adjustment for gender.

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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 patientlevel 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 addon 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 prescaled 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 overutilization 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

66952 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 § 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, § 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, § 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 followup 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 laborrelated 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, prereclassified) 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

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 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 prereclassified 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 laborrelated 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 laborrelated 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 laborrelated share based primarily on IPF 

data (see 68 FR 66928).

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.


ER15NO04.448</GPH>
66954 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 addon 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

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 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 § 413.75 

through § 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 residentto-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. 

• Similar to the regulations for 

counting FTE residents under the IPPS 

as described in § 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. 

• 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 § 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

66956 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

for IPPS teaching hospitals that start 

new teaching programs as specified in 

§ 413.79 (1) for new teaching IPFS and 

for teaching IPFs that start new 

programs. We note that under 

§ 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 § 412.105(f)(1)(i) 

that are approved by one of the 

organizations listed in § 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 stepby-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 × exp (.5150) = 1.050 

Hospital B: 1.2 × 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 × 1.050 = $656.25 

Hospital B: $625 × 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.

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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 stoploss provision during the 3-year 

transition period during which a stoploss 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

66958 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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

ii. IPFs located in California 

Although we did not propose a costof-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 reexamine 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 lowincome 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


ER15NO04.449</GPH>
Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 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 facilitylevel 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.

66960 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 

§ 489.24 and the definition of ‘‘providerbased entity’’ in § 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 × 0.72528 (labor share) × 0.7743 

(area wage index) = $3201.03

Step 2: Add this number to the nonlabor share threshold amount.

$5700 × 0.27472 (non-labor share) = 

$1565.90 

$1565.90 + $3201.03 = $4766.93

Step 3: Apply the other facility-level 

adjustments.

$4766.96 × 1.17 (rural adjustment) × 1.0 

(teaching adjustment) = $5577.31

Step 4: Calculate the adjusted 

threshold amount by adding the 

estimated payment amount to the 

amount above.

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 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-tocharge 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 × 0.80 = $316.40 

$316.40 × 9 days = $2847.60

Step 4: For days 10 and beyond, the 

IPF receives 60% of the difference.

395 × 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-tocharge 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: 

• 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 costto-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-tocharge 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 costto-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. 

• 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-tocharge 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-tocharge 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: 

• Include in § 412.424(c)(2)(v) a crossreference to § 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 

§ 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 § 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 § 412.424(c)(2)(v) 

a cross reference to § 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

66962 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 § 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 costto-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 costto-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

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

(§ 482.43). 

As a result, we have revised 

§ 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

66964 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 threequarters 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 § 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 § 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 § 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 facilityspecific 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

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

66966 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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 § 412.22, 

§ 412.23, § 412.25, and § 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 § 412.22, § 412.23, § 412.25, and 

§ 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: 

• 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. 

• 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. 

• Update the fixed dollar loss 

threshold to maintain an outlier policy 

that is 2 percent of total estimated IPF 

PPS payments. 

• Describe relevant ICD–9–CM coding 

and DRG classification changes 

discussed in the IPPS that would affect 

IPF PPS coding and payment. 

• 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

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

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 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.

66968 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

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

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 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 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 § 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 § 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 § 412.20(a) by 

adding a reference to IPFs. 

We are revising § 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 § 412.404 of 

subpart N are paid under the IPF PPS. 

Section 412.22 Excluded Hospitals 

and Hospital Units: General Rules 

We are amending § 412.22(b) by 

revising paragraph (b) to state that 

except for those hospitals specified in 

paragraph (c) of this section, and 

§ 412.20(b), (c), and (d), all excluded 

hospitals (and excluded hospital units, 

as described in § 412.23 through 

§ 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 § 413.40. 

Section 412.23 Excluded Hospitals: 

Classifications 

We are revising § 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 

§ 412.1(a)(1) and to be paid under the 

IPF PPS as specified in § 412.1(a)(2). 

We are revising paragraph (b) by 

removing the reference ‘‘§ 412.1(a)(2)’’

and adding the reference to 

‘‘412.1(a)(3).’’

We are revising paragraph (b)(9) by 

removing the reference to 

‘‘§ 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 

‘‘§ 412.1(a)(3)’’ and adding 

‘‘§ 412.1(a)(4)’’ in its place. 

Section 412.25 Excluded Hospital 

Units: Common Requirements 

We are amending § 412.25(a) by 

adding a reference to § 412.1(a)(2). 

Section 412.27 Excluded Psychiatric 

Units: Additional Requirements 

We are amending the introductory 

text of § 412.27 by adding reference to 

§ 412.1(a)(1) and (a)(2). 

We are amending § 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 

‘‘§ 412.1(a)(2)’’ and adding 

‘‘§ 412.1(a)(3)’’ in its place. 

Section 412.116 Method of Payment 

We are revising § 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 ‘‘§ 412.1(a)(2)’’ and adding reference 

‘‘§ 412.1(a)(3)’’ in its place. 

We are adding a new subpart N as 

follows:

66970 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

Section 412.400 Basis and Scope of 

Subpart 

We are adding a new § 412.400. In 

§ 412.400(a), we provide the 

requirements for the implementation of 

a PPS for IPFs. 

In § 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 § 412.402, we are defining the 

following terms for purposes of this new 

subpart:

• Comorbidity

• Federal per diem base rate

• Federal per diem payment amount

• Federal per diem

• Fixed dollar loss threshold

• Inpatient psychiatric facilities

• Interrupted stay

• Outlier payment

• Principal diagnosis

• Rural area

• Urban area

Section 412.404 Conditions for 

Payment Under the Prospective 

Payment System for Hospital Inpatient 

Services of Psychiatric Facilities

In § 412.404(a), we specify that IPFs 

must meet the following general 

requirements to receive payment under 

the IPF PPS: 

• The IPF must meet the conditions 

as specified in this subpart. 

• 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 § 412.22(c), an IPF must 

meet the general criteria set forth in 

§ 412.22 for exclusion from the hospital 

IPPS as specified in § 412.1(a)(1). 

Additionally, a psychiatric hospital 

must meet the criteria set forth in 

§ 412.23(a), § 482.60, § 482.61, and 

§ 482.62 and psychiatric units must 

meet the criteria set forth in § 412.25 

and § 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 § 409.82, § 409.83, and § 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 § 409.10(a)). In addition, we 

specify the following—

• 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. 

• 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. 

• The IPF must furnish all necessary 

covered services to the Medicare 

beneficiary directly or under 

arrangement (as defined in § 409.3). 

In paragraph (e), we specify that IPFs 

must meet the recordkeeping and cost 

reporting requirements of § 412.27(c), 

§ 413.20, and § 413.24. 

Section 412.422 Basis of Payment 

In § 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 § 412.426. 

In § 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 § 413.85 and 

§ 413.86 and for bad debts of Medicare 

beneficiaries as specified in § 413.80. 

Section 412.424 Methodology for 

Calculating the Federal Per Diem 

Payment Amount 

In § 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:

• The updated average per diem 

amount 

• The budget-neutrality adjustment 

factor 

• Outlier payments 

• Standardization 

• 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:

• 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 

• Patient-level adjustments include: 

++ Age 

++ Diagnosis-related group assignment 

++ Principal diagnosis 

++ Comorbodities 

++ Variable per diem adjustments 

• 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 § 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

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 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 § 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 § 412.432, we specify the following 

method of payment used under the IPF 

PPS:

• General rules for receiving payment 

• Periodic interim payments 

including—

++ Criteria for receiving periodic 

interim payments 

++ Frequency of payments 

++ Termination of periodic interim 

payments 

• Interim payment for Medicare bad 

debts and for costs of an approved 

education program and other costs 

paid outside the PPS 

• Outlier payments 

• 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 § 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 § 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 § 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 § 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 § 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 § 413.40 to clarify that 

§ 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 § 412.22, § 412.23, § 412.25, 

§ 412.27, § 412.29, and § 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 

§ 412.1(a)(1) and paid under 

§ 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 § 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 

§ 413.40. For cost reporting periods 

beginning on or after January 1, 2005, 

payment is based on prospectively 

determined rates under subpart N 

§ 412.400 through § 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 § 412.404(e), reporting 

and recordkeeping requirements, are 

captured in the burden for the crossreferenced § 412.27(c), § 413.20, and 

§ 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 governmentoperated 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 redistributive 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

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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:

• Facility Type 

• Location 

• Teaching Status Adjustment 

• Census Region 

• 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 budgetneutral 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.

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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 MidAtlantic 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:


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These estimates are based on the current 

estimate of increases in the number of 

proposed excluded hospitals with 

capital market basket as follows:

• 3.4 percent for FY 2005; 

• 3.0 percent for FY 2006; 

• 2.8 percent for FY 2007;

• 2.7 percent for FY 2008; 

• 3.0 percent for FY 2009; and 

• 3.0 percent for FY 2010.

We estimate that there would be a 

change in fee-for-service Medicare 

beneficiary enrollment as follows:

• 0.5 percent in FY 2005; 

• -7.3 percent in FY 2006; 

• -4.7 percent in FY 2007; 

• -0.2 percent in FY 2008; 

• -0.1 percent in FY 2009; and 

• 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 facilitylevel 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 siteof-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, threequarters 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.

66976 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

42 CFR Part 413 

Health facilities, Kidney diseases, 

Medicare, Puerto Rico, Reporting and 

recordkeeping requirements.

■ 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

■ 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

■ 2. Section 412.1 is amended as follows:

■ a. Redesignating paragraphs (a)(2) and 

(a)(3) as paragraphs (a)(3) and (a)(4).

■ b. Adding a new paragraph (a)(2).

■ c. Redesignating paragraphs (b)(12) 

and (b)(13) as paragraphs (b)(13) and 

(b)(14).

■ d. Adding a new paragraph (b)(12).

■ e. Amending newly redesignated 

paragraph (b)(13) by removing the 

reference ‘‘paragraph (a)(3)’’ and adding 

the reference ‘‘paragraph (a)(4)’’ in its 

place.

■ 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:

§ 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

■ 3. Section 412.20 is amended as 

follows:

■ a. Revising paragraph (a).

■ b. Redesignating paragraphs (b), (c), 

and (d) as paragraphs (c), (d), and (e).

■ c. Adding a new paragraph (b).

The revision and addition read as 

follows:

§ 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 § 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 § 412.404 are paid 

under the prospective payment system 

described in subpart N of this part.

* * * * *

■ 4. Section 412.22 is amended by 

revising paragraph (b).

§ 412.22 Excluded hospitals and hospital 

units: General rules.

* * * * *

(b) Cost reimbursement. Except for 

those hospitals specified in paragraph 

(c) of this section, and § 412.20(b), (c), 

and (d), all excluded hospitals (and 

excluded hospital units, as described in 

§ 412.23 through § 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 § 413.40 of this 

chapter.

* * * * *

■ 5. Section 412.23 is amended as 

follows:

■ a. Republishing paragraph (a) 

introductory text.

■ b. Redesignating paragraphs (a)(1) and 

(a)(2) as paragraphs (a)(2) and (a)(3).

■ c. Adding a new paragraph (a)(1).

■ d. Amending the introductory text to 

paragraph (b) by removing the reference 

‘‘§ 412.1(a)(2)’’ and adding the reference 

to ‘‘§ 412.1(a)(3)’’ in its place.

■ e. Amending paragraph (b)(9) by 

removing the reference to ‘‘§ 412.2(a)(2)’’

and adding the reference to 

‘‘§ 412.1(a)(3)’’ in its place.

■ f. Revising the introductory text to 

paragraph (e). 

The republication and addition read a 

follows:

§ 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 

§ 412.1(a)(1) and to be paid under the 

prospective payment system as 

specified in § 412.1(a)(2) and in subpart 

N of this part;

* * * * *

(e) Long-term care hospitals. A longterm care hospital must meet the 

requirements of paragraph (e)(1) and 

(e)(2) of this section and, when 

applicable, the additional requirement 

of § 412.22(e), to be excluded from the 

prospective payment system specified 

in § 412.1(a)(1) and to be paid under the 

prospective payment system specified 

in § 412.1(a)(4) and in Subpart O of this 

part.

* * * * *

■ 6. Section 412.25 is amended by 

revising the paragraph (a) introductory 

text to read as follows:

§ 412.25 Excluded hospital units: Common 

requirements. 

(a) Basis for exclusion. In order to be 

excluded from the prospective payment 

systems as specified in § 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.

* * * * *

■ 7. Section 412.27 is amended as 

follows:

■ a. Revising the introductory text.

■ b. Amending paragraph (a) by 

removing the words ‘‘Third Edition’’, 

and adding in its place, ‘‘Fourth Edition, 

Text Revision’’. 

The revision reads as follows:

§ 412.27 Excluded psychiatric units: 

Additional requirements. 

In order to be excluded from the 

prospective payment system as 

specified in § 412.1(a)(1), and paid 

under the prospective payment system 

as specified in § 412.1(a)(2), a 

psychiatric unit must meet the 

following requirements:

* * * * *

§ 412.29 [Amended]

■ 8. In § 412.29, the introductory text is 

amended by removing the reference 

‘‘§ 412.1(a)(2)’’ and adding the reference 

‘‘§ 412.1(a)(3)’’ in its place.

■ 9. Section 412.116 is amended as 

follows:

Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 66977

■ a. Redesignating paragraphs (a)(3) and 

(a)(4) as paragraphs (a)(4) and (a)(5).

■ b. Adding a new paragraph (a)(3).

The addition reads as follows:

§ 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 

§ 412.404 are made as described in 

§ 412.432.

* * * * *

§ 412.130 [Amended]

■ 10. In § 412.130, paragraphs (a)(1) and 

(a)(2) are amended by removing the 

reference ‘‘§ 412.1(a)(2)’’ and adding the 

reference ‘‘§ 412.1(a)(3)’’ in its place.

■ 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

§ 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.

§ 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 § 412.22, § 412.23(a), 

§ 482.60, § 482.61, and § 482.62, and 

units that meet the requirements as 

specified in § 412.22, § 412.25, and 

§ 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 § 489.24(b). 

Rural area means any area outside an 

urban area. 

Urban area means an area as defined 

in § 412.62(f)(1)(ii).

§ 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 § 412.1(a)(1). 

(b) Inpatient psychiatric facilities 

subject to the prospective payment 

system. Subject to the special payment 

provisions of § 412.22(c), an inpatient 

psychiatric facility must meet the 

general criteria set forth in § 412.22. In 

order to be excluded from the hospital 

inpatient prospective payment system 

as specified in § 412.1(a)(1), a 

psychiatric hospital must meet the 

criteria set forth in § 412.23(a), § 482.60, 

§ 482.61, and § 482.62 and psychiatric 

units must meet the criteria set forth in 

§ 412.25 and § 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 § 409.82, 

§ 409.83, and § 409.87 of this chapter 

and for items or services as specified 

under § 489.20(a) of this chapter. 

(d) Furnishing of inpatient hospital 

services directly or under arrangement.

66978 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

(1) Subject to the provisions of 

§ 412.422, the applicable payments 

made under this subpart are payment in 

full for all inpatient hospital services, as 

specified in § 409.10 of this chapter. 

Hospital inpatient services do not 

include the following: 

(i) Physicians’ services that meet the 

requirements of § 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 

§ 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 

§ 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 

§ 412.27(c), § 413.20, § 413.24, and 

§ 482.61 of this chapter.

§ 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 § 412.424. 

(3) During the transition period, 

payment is based on a blend of the 

Federal per diem payment amount as 

specified in § 412.424, and the facilityspecific payment rate as specified in 

§ 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 

§ 413.79 through § 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 § 413.80 of this chapter.

§ 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 onetime 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 budgetneutrality 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 § 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.

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(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 § 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 § 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 § 412.426 is made in 

accordance with § 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 § 489.24(b) and 

§ 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 § 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 § 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 § 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 

§ 412.84(i) and § 412.84(m) of this part, 

except that national urban and rural 

median cost-to-charge ratios would be 

used instead of statewide average costto-charge ratios. 

(ii) Stop-loss payments. CMS will 

provide additional payments during the 

transition period, specified in 

§ 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 

§ 412.84(i) and § 412.84(m) of this part, 

except that the national urban and rural 

median cost-to-charge ratios would be

66980 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

used instead of statewide averages, and 

at § 412.84(m) of this part.

§ 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 § 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 facilityspecific 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 facilityspecific 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 facilityspecific 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 facilityspecific 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.

§ 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.

§ 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 § 413.64(h) of this chapter. 

(ii) To be approved for PIP, the 

inpatient psychiatric facility must meet 

the qualifying requirements in 

§ 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 § 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 § 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 § 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 § 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 § 412.84(i) and 

§ 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

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

■ 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.

■ 2. Section 413.1 is amended as follows:

■ a. Revising paragraph (d)(2)(ii).

■ 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).

■ (c) Adding new paragraphs (d)(2)(iv) 

and (d)(2)(v). 

The revision and additions read as 

follows:

§ 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 § 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 § 413.40. 

(v) For cost reporting periods 

beginning on or after January 1, 2005, 

payment to inpatient psychiatric 

facilities that meet the conditions of 

§ 412.404 of this chapter, is made under 

the prospective payment system 

described in subpart N of part 412 of 

this chapter.

* * * * *

■ 3. Section 413.40 is amended as 

follows:

■ a. Redesignating paragraphs (a)(2)(i)(C) 

and (a)(2)(i)(D) as paragraphs (a)(2)(i)(D) 

and (a)(2)(i)(E).

■ b. Adding a new paragraph (a)(2)(i)(C).

■ c. Republishing paragraph (a)(2)(ii) 

introductory text.

■ d. Revising paragraph (a)(2)(ii)(B).

■ 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.

■ f. Redesignating paragraphs (a)(2)(iii) 

and (a)(2)(iv) as paragraphs (a)(2)(iv) and 

(a)(2)(v).

■ g. Adding a new paragraph (a)(2)(iii).

The revision and additions read as 

follows:

§ 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 

§ 412.1(a)(1) of this chapter and in 

accordance with § 412.25 through 

§ 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 § 412.22, § 412.23, 

§ 412.25, § 412.27, § 412.29 and § 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 § 412.1(a)(1) of this chapter 

and paid under the prospective payment 

system as specified in § 412.1(a)(2) of 

this chapter.

* * * * *

■ 4. Section 413.64 is amended by 

revising paragraph (h)(2)(i) to read as 

follows:

§ 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 § 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.

* * * * *

■ 5. Section 413.70 is amended by 

revising paragraph (e) to read as follows:

§ 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 

§ 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 

(§ 412.400 through § 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 (§ 412.600 

through § 412.632) of Part 412 of this 

subchapter.

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program)

66982 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations 

(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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