Wednesday, 

June 2, 2010 

Part II 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 412 and 413 

Medicare Program; Prospective Payment 

Systems; 2010 and 2011 Rates; Wage 

Indices; Proposed Rule and Notice 


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DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 412 and 413 

[CMS–1498–P2] 

RIN 0938–AP80 

Medicare Program; Supplemental 

Proposed Changes to the Hospital 

Inpatient Prospective Payment 

Systems for Acute Care Hospitals and 

the Long-Term Care Hospital 

Prospective Payment System and 

Supplemental Proposed Fiscal Year 

2011 Rates 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule is a 

supplement to the fiscal year (FY) 2011 

hospital inpatient prospective payment 

systems (IPPS) and long-term care 

prospective payment system (LTCH 

PPS) proposed rule published in the 

May 4, 2010 Federal Register. This 

supplemental proposed rule would 

implement certain statutory provisions 

relating to Medicare payments to 

hospitals for inpatient services that are 

contained in the Patient Protection and 

Affordable Care Act and the Health Care 

and Education Reconciliation Act of 

2010 (collectively known as the 

Affordable Care Act). It would also 

specify statutorily required changes to 

the amounts and factors used to 

determine the rates for Medicare acute 

care hospital inpatient services for 

operating costs and capital-related costs, 

and for long-term care hospital costs. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on July 2, 2010. 

ADDRESSES: In commenting, please refer 

to file code CMS–1498–P2. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit 

electronic comments on this regulation 

to http://www.regulations.gov. Follow 

the instructions for submitting a 

comment. 

2. By regular mail. You may mail 

written comments to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–1498–P2, P.O. Box 8011, 

Baltimore, MD 21244–1850. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments to the 

following address ONLY: Centers for 

Medicare & Medicaid Services, 

Department of Health and Human 

Services, Attention: CMS–1498–P2, 

Mail Stop C4–26–05, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments before the close 

of the comment period to either of the 

following addresses: 

a. For delivery in Washington, DC— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Room 445–G, Hubert 

H. Humphrey Building, 200 

Independence Avenue, SW., 

Washington, DC 20201. 

(Because access to the interior of the 

Hubert H. Humphrey Building is not 

readily available to persons without 

Federal government identification, 

commenters are encouraged to leave 

their comments in the CMS drop slots 

located in the main lobby of the 

building. A stamp-in clock is available 

for persons wishing to retain a proof of 

filing by stamping in and retaining an 

extra copy of the comments being filed.) 

b. For delivery in Baltimore, MD— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by following 

the instructions at the end of the 

‘‘Collection of Information 

Requirements’’ section in this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: Tzvi 

Hefter, (410) 786–4487, and Ing-Jye 

Cheng, (410) 786–4548, Operating 

Prospective Payment, Wage Index, 

Hospital Geographic Reclassifications, 

Capital Prospective Payment, Critical 

Access Hospital (CAH). 

Michele Hudson, (410) 786–4487, and 

Judith Richter, (410) 786–2590, LongTerm Care Hospital Prospective 

Payment. 

Siddhartha Mazumdar, (410) 786– 

6673, Rural Community Hospital 

Demonstration Program Issues. 

SUPPLEMENTARY INFORMATION: 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http:// 

www.regulations.gov. Follow the search 

instructions on that Web site to view 

public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

Electronic Access 

This Federal Register document is 

also available from the Federal Register 

online database through GPO Access, a 

service of the U.S. Government Printing 

Office. Free public access is available on 

a Wide Area Information Server (WAIS) 

through the Internet and via 

asynchronous dial-in. Internet users can 

access the database by using the World 

Wide Web, (the Superintendent of 

Documents’ home Web page address is 

http://www.gpoaccess.gov/), by using 

local WAIS client software, or by telnet 

to swais.access.gpo.gov, then login as 

guest (no password required). Dial-in 

users should use communications 

software and modem to call (202) 512– 

1661; type swais, then login as guest (no 

password required). 

I. Background 

On March 23, 2010, the Patient 

Protection and Affordable Care Act 

(Pub. L. 111–148) was enacted. 

Following the enactment of Public Law 

111–148, the Health Care and Education 

Reconciliation Act of 2010 Public Law 

111–152 (enacted on March 30, 2010), 

amended certain provisions of Public 

Law 111–148. These public laws are 

collectively known as the Affordable 

Care Act. A number of the provisions of 

Public Law 111–148, affect the IPPS and 

the LTCH PPS and the providers and 

suppliers addressed in this proposed 


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rule. However, due to the timing of the 

passage of the legislation, were unable 

to address those provisions in the FY 

2011 IPPS and LTCH PPS proposed rule 

that appeared in the May 4, 2010 

Federal Register (75 FR 23852). 

Therefore, the proposed policies and 

payment rates in that proposed rule did 

not reflect the new legislation. We noted 

in that proposed rule that we would 

issue separate Federal Register 

documents addressing the provisions of 

Public Law 111–148 that affect our 

proposed policies and payment rates for 

FY 2010 and FY 2011 under the IPPS 

and the LTCH PPS. This supplementary 

proposed rule addresses the following 

provisions of the new legislation that 

affect the following FY 2011 proposed 

policies: 

• Hospital wage index improvement 

related to geographic reclassification 

criteria for FY 2011 (section 3137 of 

Pub. L. 111–148). 

• National budget neutrality in the 

calculation of the rural floor for hospital 

wage index (section 3141 of Pub. L. 

111–148). 

• Protections for frontier States 

(section 10324 of Pub. L. 111–148). 

• Revisions of certain market basket 

updates (sections 3401 and 10319 of 

Pub. L. 111–148 and section 1105 of 

Pub. L. 111–152). 

• Temporary improvements to the 

low-volume hospital adjustment 

(sections 3125 and 10314 of Pub. L. 

111–148). 

• Extension of Medicare-dependent 

hospitals (MDHs) (section 3124 of Pub. 

L. 111–148). 

• Additional payments in FYs 2011 

and 2012 for qualifying hospitals in the 

lowest quartile of per capital Medicare 

spending (section 1109 of Pub. L. 111– 

152). 

• Extension of the rural community 

hospital demonstration (section 3123 of 

Pub. L. 111–148). 

• Technical correction related to 

critical access hospital (CAH) services 

(section 3128 of Pub. L. 111–148). 

• Extension of certain payment rules 

for long-term care hospital services and 

of moratorium on the establishment of 

certain hospitals and facilities (sections 

3106 and 10312 of Pub. L. 111–148). 

We also noted that we plan to issue 

further instructions implementing the 

provisions of Public Law 111–148 that 

affect the policies and payment rates for 

FY 2010 under the IPPS and for RY 

2010 under the LTCH PPS in a separate 

document published elsewhere in this 

Federal Register. 

II. Provisions of the Proposed 

Regulations 

In this section of this supplementary 

proposed rule, we address the 

provisions of Public Law 111–148, that 

affect our proposed policies and 

payment rates for FY 2011 under the 

IPPS and the LTCH PPS. 

A. Changes to the Acute Care Hospital 

Wage Index 

1. Plan for Reforming the Wage Index 

Section 3137(b) of Public Law 111– 

148 requires the Secretary of Health and 

Human Services to submit to Congress, 

not later than December 31, 2011, a 

report that includes a plan to reform the 

Medicare wage index applied under the 

Medicare IPPS. In developing the plan, 

the Secretary of Health and Human 

Services must take into consideration 

the goals for reforming the wage index 

that were set forth by the MedPAC in its 

June 2007 report entitled, ‘‘Report to 

Congress: Promoting Greater Efficiency 

in Medicare’’, including establishing a 

new system that — 

• Uses Bureau of Labor of Statistics 

(BLS) data, or other data or 

methodologies, to calculate relative 

wages for each geographic area; 

• Minimizes wage index adjustments 

between and within MSAs and 

statewide rural areas; 

• Includes methods to minimize the 

volatility of wage index adjustments 

while maintaining budget neutrality in 

applying such adjustments; 

• Takes into account the effect that 

implementation of the system would 

have on health care providers and on 

each region of the country; 

• Addresses issues related to 

occupational mix, such as staffing 

practices and ratios, and any evidence 

on the effect on quality of care or patient 

safety as a result of the implementation 

of the system; and 

• Provides for a transition. 

In addition, section 3137(b)(3) of Public 

Law 111–148 requires the Secretary of 

Health and Human Services to consult 

with relevant affected parties in 

developing the plan. Although the 

provisions of section 3137(b) of Public 

Law 111–148 will not have an actual 

impact on the FY 2011 wage, we are 

notifying the public of the provisions so 

that they may provide comments and 

suggestions on how they may 

participate in developing the plan. 

2. Provisions on Wage Comparability 

and Rural/Imputed Floor Budget 

Neutrality 

Sections 3137(c) and 3141 of Public 

Law 111–148 affect reclassification 

average hourly wage comparison criteria 

and rural and imputed floor budget 

neutrality provisions for FY 2011. 

a. Reclassification Average Hourly Wage 

Comparison Criteria 

In the FY 2009 IPPS final rule, we 

adopted the policy to adjust the 

reclassification average hourly wage 

standard, comparing a reclassifying 

hospital’s (or county hospital group’s) 

average hourly wage relative to the 

average hourly wage of the area to 

which it seeks reclassification. (We refer 

readers to the FY 2009 IPPS final rule 

for a full discussion of the basis for the 

proposals the public comments received 

and the FY 2009 final policies.) We 

provided for a phase-in of the 

adjustment over 2 years. For 

applications for reclassification for the 

first transitional year, FY 2010, the 

average hourly wage standards were set 

at 86 percent for urban hospitals and 

group reclassifications, and 84 percent 

for rural hospitals. For applications for 

reclassification for FY 2011 (for which 

the application deadline was September 

1, 2009) and for subsequent fiscal years, 

the average hourly wage standards were 

88 percent for urban and group 

reclassifications and 86 percent for rural 

hospitals. Sections 412.230, 412.232, 

and 412.234 of the regulations were 

revised accordingly. These policies were 

adopted in the FY 2009 IPPS final rule 

and were reflected in the wage index in 

the Addendum to the FY 2011 IPPS 

proposed rule, which appeared in the 

Federal Register on May 4, 2010. 

However, provisions of section 

3137(c) of Public Law 111–148 recently 

revised the average hourly wage 

standards. Specifically, section 3137(c) 

restores the average hourly wage 

standards that were in place for FY 2008 

(that is, 84 percent for urban hospitals, 

85 percent for group reclassifications, 

and 82 percent for rural hospitals) for 

applications for reclassification for FY 

2011 and for each subsequent fiscal year 

until the first fiscal year beginning on or 

after the date that is one year after the 

Secretary of Health and Human Services 

submits a report to Congress on a plan 

for reforming the wage index under 

3137(b) of Public Law 111–148. Section 

3137(c) of Public Law 111–148 also 

requires the revised average hourly 

wage standards to be applied in a 

budget neutral manner. We note that 

section 3137(c) of Public Law 111–148 

does not provide for the revised average 

hourly wage standards to be applied 

retroactively, nor does it change the 

statutory deadline for applications for 

reclassification for FY 2011. Under 

section 1886(d)(10) of the Act, the 

Medicare Geographic Classification 

Review Board (MGCRB) considers 


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applications by hospitals for geographic 

reclassification for purposes of payment 

under the IPPS. Hospitals must apply to 

the MGCRB to reclassify 13 months 

prior to the start of the fiscal year for 

which reclassification is sought 

(generally by September 1). For 

reclassifications for the FY 2011 wage 

index, the deadline for applications was 

September 1, 2009 (74 FR 43838). 

In implementing section 3137(c) of 

Public Law 111–148, we requested the 

assistance of the MGCRB in 

determining, for applications received 

by September 1, 2009, whether 

additional hospitals would qualify for 

reclassification for FY 2011 based on the 

revised average hourly wage standards 

of 84 percent for urban hospitals, 85 

percent for group reclassifications, and 

82 percent for rural hospitals. We 

determined that 18 additional hospitals 

would qualify for reclassification for FY 

2011. Also, 5 hospitals, for which the 

MGCRB granted reclassifications to their 

secondary requested areas for FY 2011, 

would qualify for reclassifications 

instead to their primary requested areas 

because they now meet the average 

hourly wage criteria to reclassify to 

those areas. Therefore, in accordance 

with § 412.278 of the regulations, in 

which paragraph (c) provides the 

Administrator discretionary authority to 

review any final decision of the 

MGCRB, we submitted a letter to the 

Administrator requesting that she 

review and amend the MGCRB’s 

decision and grant the 23 hospitals their 

requested reclassifications (or primary 

reclassifications) for FY 2011. 

The wage index in the Addendum to 

this supplemental FY 2011 IPPS 

proposed rule reflects these changes in 

hospital reclassifications, although the 

Administrator had not issued all of her 

decisions by the date of this proposed 

rule. In calculating the wage index in 

this proposed rule, we made 

assumptions that the Administrator 

would grant the 23 hospitals their 

requested reclassifications (or primary 

reclassifications) and that the hospitals 

would not request the Administrator to 

amend her decisions. Generally, these 

reclassifications would result in the 

highest possible wage index for the 

hospitals. Any changes to the wage 

index, as a result of the Administrator’s 

actual decision issued under 

§ 412.278(c), or an amendment of the 

Administrator’s decision issued under 

paragraph (g), will be reflected in the FY 

2011 IPPS final rule. 

In accordance with the requirements 

in section 3137(c) of Affordable Care 

Act, we are modifying § 412.230, 

§ 412.232, and § 412.234 of the 

regulations to codify the revised average 

hourly wage standards. 

b. Budget Neutrality Adjustment for the 

Rural and Imputed Floors 

In the FY 2009 IPPS final rule (73 FR 

48574 through 48575), we adopted State 

level budget neutrality (rather than the 

national budget neutrality adjustment) 

for the rural and imputed floors, 

effective beginning with the FY 2009 

wage index and incorporated this policy 

in our regulation at § 412.64(e)(4). 

Specifically, the regulations specified 

that CMS makes an adjustment to the 

wage index to ensure that aggregate 

payments after implementation of the 

rural floor under section 4410 of the 

Balanced Budget Act of 1997 (Pub. L. 

105–33) and the imputed floor under 

§ 412.64(h)(4) are made in a manner that 

ensures that aggregate payments to 

hospitals are not affected and that, 

beginning October 1, 2008, we would 

transition from a nationwide adjustment 

to a statewide adjustment, with a 

statewide adjustment fully in place by 

October 1, 2010. 

These policies for the rural and 

imputed floors were adopted in the FY 

2009 IPPS final rule and were reflected 

in the wage index in the Addendum to 

the FY 2011 IPPS/LTCH PPS proposed 

rule, published in the Federal Register 

on May 4, 2010. However, these policies 

were recently changed by the provisions 

of section 3141 of Public Law 111–148. 

Specifically, section 3141 of Affordable 

Care Act rescinds our policy 

establishing a statewide budget 

neutrality adjustment for the rural and 

imputed floors and, instead, restores it 

to a uniform, national adjustment, 

beginning with the FY 2011 wage index. 

Additionally, the imputed floor, is set to 

expire on September 30, 2011. We do 

not read section 3141 of Public Law 

111–148 as altering this expiration date. 

Section 3141 of Public Law 111–148 

requires that we ‘‘administer subsection 

(b) of such section 4410 and paragraph 

(e) of * * * section 412.64 in the same 

manner as the Secretary administered 

such subsection (b) and paragraph (e) 

for discharges occurring during fiscal 

year 2008 (through a uniform, national 

adjustment to the area wage index).’’ 

Thus, section 3141 of Public Law 111– 

148 is governing how we apply budget 

neutrality, under the authorities of 

§ 412.64(e) and section 4410(b) of the 

Balanced Budget Act, but it does not 

alter § 412.64(h) of our regulations 

(which includes the imputed floor and 

its expiration date). To the extent there 

is an imputed floor, section 3141 of 

Public Law 111–148 governs budget 

neutrality for that floor, but it does not 

continue the imputed floor beyond the 

expiration date already included in our 

regulations. 

Therefore, the wage index in the 

Addendum to this supplemental FY 

2011 IPPS proposed rule reflects a 

uniform, national budget neutrality 

adjustment for the rural and imputed 

floors, which is a factor of 0.995425. 

3. Frontier States Floor (§ 412.64) 

In accordance with section 10324(a) 

of Affordable Care Act, beginning in FY 

2011, the statute provides for 

establishing an adjustment to create a 

wage index floor of 1.00 for all hospitals 

located in States determined to be 

Frontier States. The statute defines any 

State as a Frontier State if at least 50 

percent of the State’s counties are 

determined to be Frontier Counties. The 

statute defines as counties that have a 

population density less than 6 persons 

per square mile. The law requires that 

this provision shall not apply to 

hospitals in Alaska or Hawaii receiving 

a non-labor related share adjustment 

under section 1886(d)(5)(H) of the Act. 

To implement this provision, we 

propose to identify Frontier Counties by 

analyzing population data and county 

definitions based upon the most recent 

annual Population Estimates published 

by the U.S. Census Bureau. We will 

divide each county’s population total by 

each county’s reported land area 

(according to the decennial census) in 

square miles to establish population 

density. We also propose to update this 

analysis from time to time, such as upon 

publication of a subsequent decennial 

census, and if necessary, add or remove 

qualifying States from the list of 

Frontier States based on the updated 

analysis. 

For a State that qualifies as a Frontier 

State, in accordance with section 

10324(a) of Public Law 111–148, all PPS 

hospitals located within that State will 

receive either the higher of its postreclassification wage index rate, or a 

minimum value of 1.00. We propose 

that, for a hospital that is geographically 

located in a Frontier State and is 

reclassified under section 1886(d)(10) of 

the Act to a CBSA in a non-Frontier 

State, the hospital will receive a wage 

index that is the higher of the 

reclassified area wage index or the 

minimum wage index of 1.00. In 

accordance with section 10324(a) of 

Public Law 111–148, the Frontier State 

adjustment will not be subject to budget 

neutrality under section 1886(d)(3)(E) of 

the Act, and will only be extended to 

hospitals geographically located within 

a Frontier State. We propose to calculate 

and apply the Frontier State floor 

adjustments after rural and imputed 

floor budget neutrality adjustments are 


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calculated for all labor market areas, so 

as to ensure that no hospital in a 

Frontier State will receive a wage index 

lesser than 1.00 due to the rural and 

imputed floor adjustment. We invite 

public comment on these proposals 

regarding our methods for determining 

Frontier States, and for calculation and 

application of the adjustment. 

For the proposed FY 2011 IPPS wage 

index, the Frontier States are the 

following: Reflected in the following 

table: 

TABLE 1—FRONTIER STATES UNDER SECTION 10324(a) 

State Total 

counties 

Frontier 

counties 

Percent 

frontier 

counties 

Montana ................................................................................................................................................... 56 45 80 

Wyoming .................................................................................................................................................. 23 17 74 

North Dakota ............................................................................................................................................ 53 36 68 

Nevada ..................................................................................................................................................... 17 11 65 

South Dakota ........................................................................................................................................... 66 34 52 

Frontier States are identified by a footnote in Table 4D–2 of the Addendum to this supplemental proposed rule. Population Data set: http:// 

www.census.gov/popest/estimates.html (2009 County Total Population Estimates). 

Land Area Dataset http://factfinder.census.gov/ (Decennial: Census Geographic Comparison Tables: ‘‘United States—County by State and for 

Puerto Rico’’). 

4. Revised FY 2011 IPPS Proposed Rule 

Wage Index Tables 

The revised IPPS proposed wage 

index values for FY 2011, reflecting the 

provisions of sections 3137(c), 3141, 

and 10324 of Public Law 111–148, are 

included in Tables 2, 4A, 4B, 4C, and 

4D–2 of the Addendum to this 

supplemental FY 2011 IPPS/LTCH PPS 

proposed rule. 

Table 4D–1, which listed the 

statewide rural and imputed floor 

budget neutrality factors, is eliminated 

from the Addendum to this 

supplemental FY 2011 IPPS/LTCH PPS 

proposed rule and is no longer 

applicable for the wage index because 

section 3141 of Public Law 111–148 

instead requires the application of a 

national adjustment. 

Table 4J, which lists the out-migration 

adjustment for a qualifying county, is 

revised due to the above provisions of 

Affordable Care Act. Additionally, Table 

9A, the list of hospitals that are 

reclassified or redesignated for FY 2011, 

is revised according to section 3137(c) 

of Public Law 111–148. Both revised 

tables are included in the Addendum to 

this supplemental FY 2011 IPPS/LTCH 

PPS proposed rule. 

Tables 3A and 3B, which list the 3- 

year average hourly wage for each labor 

market area before the redesignation or 

reclassification of hospitals, Table 4E, 

the list of urban CBSAs and constituent 

counties, Table 4F, the Puerto Rico wage 

index, and Table 9C, the list of hospitals 

redesignated under section 1886(d)(8)(E) 

of the Act, are unaffected by the above 

provisions of Affordable Care Act. 

Therefore, these tables are unchanged 

from the initial FY 2011 IPPS/LTCH 

PPS proposed rule and are not included 

in the Addendum to this supplemental 

FY 2011 IPPS/LTCH PPS proposed rule. 

5. Procedures for Withdrawing 

Reclassifications in FY 2011 

Section 1886(d)(10)(D)(v) of the Act 

states that the Secretary should establish 

procedures under which a subsection 

(d) hospital may elect to terminate a 

reclassification before the end of a 3- 

year period, but does not contain any 

other specifics regarding how such 

termination should occur. Our rules at 

42 CFR 412.273 state that hospitals that 

have been reclassified by the MGCRB 

are permitted to withdraw their 

applications within 45 days of the 

publication of CMS’s annual notice of 

proposed rulemaking. For purposes of 

this supplementary proposed rule, we 

interpret our regulation as referring to 

the initial FY 2011 IPPS/LTCH PPS 

proposed rule (which appeared in the 

May 4, 2010 Federal Register), and our 

procedure for this supplementary 

proposed rule is to start the time period 

for requesting a withdrawal or 

termination from publication of that 

initial proposed rule. Were we not to 

use such a time period, requests for 

termination and withdrawal would be 

received too late to include in our final 

rule. Thus, all requests for withdrawal 

of an application for reclassification or 

termination of an existing 3-year 

reclassification that would be effective 

in FY 2011 must be received by the 

MGCRB by June 18, 2010. 

We note that wage index values in the 

tables in the Addendum to this 

supplemental FY 2011 IPPS/LTCH PPS 

proposed rule may have changed 

somewhat from the initial, more 

comprehensive FY 2011 IPPS/LTCH 

PPS proposed rule (which appeared in 

the May 4, 2010 Federal Register) due 

to the application of sections 3137(c), 

3141, and 10324 of Affordable Care Act. 

In addition, as a result of section 3137(c) 

of Affordable Care Act, there may be 

additional hospitals listed as 

reclassified in Table 9A in the 

Addendum to this supplemental 

proposed rule. Hospitals have sufficient 

time between the display or publication 

date of this supplemental FY 2011 IPPS/ 

LTCH PPS proposed rule in the Federal 

Register and the June 18, 2010 deadline 

for withdrawals and terminations to 

evaluate and make determinations 

regarding their reclassification for the 

FY 2011 wage index. As noted in the 

initial FY 2011 IPPS proposed rule, the 

mailing address of the MGCRB is: 2520 

Lord Baltimore Drive, Suite L, 

Baltimore, MD 21244–2670. 

B. Inpatient Hospital Market Basket 

Update 

Below we discuss the adjustments to 

the FY 2010 and FY 2011 market basket 

as required by the Affordable Care Act. 

In this supplemental proposed rule we 

are not proposing to address the 

provisions of section 3401 of Public Law 

111–148 providing for a productivity 

adjustment for FY 2012 and subsequent 

fiscal years; rather, this change will be 

addressed in future rulemaking. 

1. FY 2010 Inpatient Hospital Update 

In accordance with section 

1886(b)(3)(B)(i) of the Act, each year we 

update the national standardized 

amount for inpatient operating costs by 

a factor called the ‘‘applicable 

percentage increase.’’ Prior to enactment 

of Public Law 111–148 and Public Law 

111–152, section 1886(b)(3)(B)(i)(XX) of 

the Act set the applicable percentage 

increase equal to the rate-of-increase in 

the hospital market basket for IPPS 

hospitals in all areas, subject to the 

hospital submitting quality information 

under rules established by the Secretary 

in accordance with section 

1886(b)(3)(B)(viii) of the Act. For 


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hospitals that do not provide these data, 

the update is equal to the market basket 

percentage increase less an additional 

2.0 percentage points. In accordance 

with these statutory provisions, in the 

FY 2010 IPPS/LTCH PPS final rule (74 

FR 43850), we finalized an applicable 

percentage increase equal to the full 

market basket update of 2.1 percent 

based on IHS Global Insight, Inc.’s 

second quarter 2009 forecast of the FY 

2010 market basket increase, provided 

the hospital submits quality data in 

accordance with our rules. For hospitals 

that do not submit quality data, in the 

FY 2010 IPPS/LTCH PPS final rule we 

finalized an applicable percentage 

increase equal to 0.1 percent (that is, the 

FY 2010 estimate of the market basket 

rate-of-increase minus 2.0 percentage 

points). 

Sections 3401(a) and 10319 of Public 

Law 111–148 amend section 

1886(b)(3)(B)(i) of the Act. Specifically, 

sections 3401(a) and 10319(a) of Public 

Law 111–148 amend section 

1886(b)(3)(B)(i) of the Act to set the FY 

2010 applicable percentage increase for 

IPPS hospitals equal to the rate-ofincrease in the hospital market basket 

for IPPS hospitals in all areas minus a 

0.25 percentage point, subject to the 

hospital submitting quality information 

under rules established by the Secretary 

in accordance with section 

1886(b)(3)(B)(viii) of the Act. For 

hospitals that do not provide these data, 

the update is equal to the market basket 

percentage increase minus 0.25 

percentage point less an additional 2.0 

percentage points. Section 3401(a)(4) of 

Public Law 111–148 further states that 

these amendments may result in the 

applicable percentage increase being 

less than zero. Although these 

amendments modify the applicable 

percentage increase applicable to the FY 

2010 rates under the IPPS, section 

3401(p) of Public Law 111–148 states 

that the amendments do not apply to 

discharges occurring prior to April 1, 

2010. In other words, for discharges 

occurring on or after October 1, 2009 

and prior to April 1, 2010, the rate for 

a hospital’s inpatient operating costs 

under the IPPS will be based on the 

applicable percentage increase set forth 

in the FY 2010 IPPS/LTCH PPS final 

rule. 

We are proposing to revise 42 CFR 

412.64(d) to reflect current law. 

Specifically, in accordance with section 

1886(b)(3)(B)(i) of the Act as amended 

by sections 3401(a) and 10319(a) of 

Public Law 111–148, we are proposing 

to revise § 412.64(d) to state that for the 

first half of FY 2010 (that is, discharges 

on or after October 1, 2009 through 

March 30, 2010), the applicable 

percentage change equals the market 

basket index for IPPS hospitals (which 

is defined under § 413.40(a)) in all areas 

for hospitals that submit quality data in 

accordance with our rules, and the 

market basket index for IPPS hospitals 

in all areas less 2.0 percentage for 

hospitals that fail to submit quality data 

in accordance with our rules. As noted 

above, in the FY 2010 IPPS/LTCH PPS 

final rule, we calculated that the full 

market basket update equals 2.1 percent 

based on IHS Global Insight, Inc.’s 

second quarter 2009 forecast of the FY 

2010 market basket increase. In 

addition, we are proposing to revise 

§ 412.64(d) to state that for the second 

half of FY 2010 (discharges on or after 

April 1, 2010 through September 30, 

2010), in accordance with section 

3401(a), we are proposing to set the 

applicable percentage change equal to 

the market basket index for IPPS 

hospitals in all areas reduced by 0.25 

percentage points for hospitals that 

submit quality data in accordance with 

our rules. For those hospitals that fail to 

submit quality data, in accordance with 

our rules, we are proposing to reduce 

the market basket index for IPPS 

hospitals by an additional 2.0 

percentage points (which is in addition 

to the 0.25 percentage point reduction 

required by section 1886(b)(3)(B)(i) of 

the Act as amended by section 3401(a) 

of Public Law 111–148 as amended by 

section 10319(a) of Public Law 111–148. 

Based on IHS Global Insight, Inc.’s 

second quarter 2009 forecast of the FY 

2010 market basket increase, the FY 

2010 applicable percentage change that 

applies to rates for inpatient hospital 

operating costs under the IPPS for 

discharges occurring in the second half 

of FY 2010 is 1.85 percent (that is, the 

FY 2010 estimate of the market basket 

rate-of-increase of 2.1 percent minus 

0.25 percentage points) for hospitals in 

all areas, provided the hospital submits 

quality data in accordance with our 

rules. For hospitals that do not submit 

quality data, the payment update to the 

operating standardized amount is ¥0.15 

percent (that is, the adjusted FY 2010 

estimate of the market basket rate-ofincrease of 1.85 percent minus 2.0 

percentage points). 

Section 1886(b)(3)(B)(iv) of the Act 

provides that the applicable percentage 

increase applicable to the hospitalspecific rates for SCHs and MDHs 

equals the applicable percentage 

increase set forth in section 

1886(b)(3)(B)(i) of the Act (that is, the 

same update factor as for all other 

hospitals subject to the IPPS). Because 

the Act sets the update factor for SCHs 

and MDHs equal to the update factor for 

all other IPPS hospitals, the update to 

the hospital specific rates for SCHs and 

MDHs is also subject to the amendments 

to section 1886(b)(3)(B)(i) made by 

section 3401(a) of Public Law 111–148. 

Accordingly, for hospitals paid for their 

inpatient operating costs on the basis of 

a hospital-specific rate, the rates paid to 

such hospitals for discharges occurring 

during the first half of FY 2010 will be 

based on an annual update estimated to 

be 2.1 percent for hospitals submitting 

quality data or 0.1 percent for hospitals 

that fail to submit quality data; and the 

rates paid to such hospitals for the 

second half of FY 2010 will be based on 

an update that is estimated to be 1.85 

percent for hospitals submitting quality 

data or ¥0.15 percent for hospitals that 

fail to submit quality data. Similar to 

that stated above, we are proposing to 

update §§ 412.73(c)(15), 412.75(d), 

412.77(e), 412.78(e), 412.79(d) to reflect 

current law. 

2. FY 2011 Inpatient Hospital Update 

As with the FY 2010 applicable 

percentage increase, section 3401(a) of 

Public Law 111–148 as amended by 

section 10319(a) of Public Law 111–148, 

amends section 1886(b)(3)(B)(i) of the 

Act to provide that the FY 2011 

applicable percentage increase for IPPS 

hospitals equals the rate-of-increase in 

the hospital market basket for IPPS 

hospitals in all areas reduced by 0.25 

percentage point, subject to the hospital 

submitting quality information under 

rules established by the Secretary in 

accordance with section 

1886(b)(3)(B)(viii) of the Act. For 

hospitals that do not provide these data, 

the update is equal to the market basket 

percentage increase minus a 0.25 

percentage point less an additional 2.0 

percentage points. Section 3401(a)(4) of 

Public Law 111–148 further states that 

this amendment may result in the 

applicable percentage increase being 

less than zero. 

In Appendix B of the FY 2011 IPPS/ 

LTCH PPS proposed rule, we 

announced that due to the timing of the 

passage of Public Law 111–148, we were 

unable to address those provisions in 

the proposed rule. In that proposed rule, 

consistent with current law, based on 

IHS Global Insight, Inc.’s first quarter 

2010 forecast, with historical data 

through the 2009 fourth quarter, of the 

FY 2011 IPPS market basket increase, 

we estimated that the FY 2011 update 

to the operating standardized amount 

would be 2.4 percent (that is, the 

current estimate of the market basket 

rate-of-increase) for hospitals in all 

areas, provided the hospital submits 

quality data in accordance with our 

rules. For hospitals that do not submit 


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quality data, we estimated that the 

update to the operating standardized 

amount would be 0.4 percent (that is, 

the current estimate of the market basket 

rate-of-increase minus 2.0 percentage 

points). Since publication of the FY 

2011 IPPS/LTCH PPS proposed rule our 

estimate of the market basket for FY 

2011 has not changed. However, 

consistent with the amendments to 

section 1886(b)(3)(B)(i) of the Act made 

by section 3401 of Public Law 111–148, 

for FY 2011 we are required to reduce 

the hospital market basket update by 

0.25 percentage points. Therefore, based 

on IHS Global Insight, Inc.’s first quarter 

2010 forecast of the FY 2011 market 

basket increase, the estimated update to 

the FY 2011 operating standardized 

amount is 2.15 percent (that is, the FY 

2011 estimate of the market basket rateof-increase of 2.4 percent minus 0.25 

percentage points) for hospitals in all 

areas, provided the hospital submits 

quality data in accordance with our 

rules. For hospitals that do not submit 

quality data, the estimated update to the 

operating standardized amount is 0.15 

percent (that is, the adjusted FY 2011 

estimate of the market basket rate-ofincrease of 2.15 percent minus 2.0 

percentage points). We are proposing to 

revise § 412.64(d) to reflect the 

provisions of section 3401(a) of Public 

Law 111–148. 

Section 1886(b)(3)(B)(iv) of the Act 

provides that the FY 2011 applicable 

percentage increase in the hospitalspecific rates for SCHs and MDHs 

equals the applicable percentage 

increase set forth in section 

1886(b)(3)(B)(i) of the Act (that is, the 

same update factor as for all other 

hospitals subject to the IPPS). Similar to 

the FY 2010 applicable percentage 

increase in the hospital-specific rates, 

because the Act requires us to apply to 

the hospital-specific rates the update 

factor for all other IPPS hospitals, the 

update to the hospital specific rates for 

SCHs and MDHs is also subject to 

section 1886(b)(3)(B)(i) as amended by 

the Affordable Care Act. Accordingly, 

the update to the hospital-specific rates 

applicable to SCHs and MDHs is 

estimated to be 2.15 for hospitals that 

submit quality data or 0.15 percent for 

hospitals that fail to submit quality data. 

Similar to above, we are proposing to 

update §§ 412.73(c)(15), 412.75(d), 

412.77(e), 412.78(e), 412.79(d) to 

implement this provision. 

3. FY 2010 and FY 2011 Puerto Rico 

Hospital Update 

Puerto Rico hospitals are paid a 

blended rate for their inpatient 

operating costs based on 75 percent of 

the national standardized amount and 

25 percent of the Puerto Rico-specific 

standardized amount. Section 

1886(d)(9)(C)(i) of the Act is the basis 

for determining the applicable 

percentage increase applied to the 

Puerto Rico-specific standardized 

amount. Section 1886(d)(9)(C)(i) of the 

Act provides that the Puerto Rico 

standardized amount shall be adjusted 

in accordance with the final 

determination of the Secretary under 

section 1886(d)(4) of the Act. Section 

1886(e)(4)(1) of the Act in turn directs 

the Secretary to recommend an 

appropriate change factor for Puerto 

Rico hospitals taking into account 

amounts necessary for the efficient and 

effective delivery of medically 

appropriate and necessary care of high 

quality, as well as the recommendations 

of MedPAC. In order to maintain 

consistency between the portion of the 

rates paid to Puerto Rico hospitals 

under the IPPS based on the national 

standardized amount and the portion 

based on the Puerto Rico-specific 

standardized rate, beginning in FY 2004 

we have set the update to the Puerto 

Rico-specific operating standardized 

amount equal to the update to the 

national operating standardized amount 

for all IPPS hospitals. This policy is 

reflected in our regulations at 42 CFR 

412.211. 

The amendments to section 

1886(b)(3)(B)(i) of the Act by sections 

3401(a) and section 10319(a) of Public 

Law 111–148, affect only the update 

factor applicable to the national 

standardized rate for IPPS hospitals and 

the hospital-specific rates; they do not 

mandate any revisions to the update 

factor applicable to the Puerto Ricospecific standardized amount. Rather, as 

noted above, sections 1886(d)(9)(C)(i) 

and (e)(4) of the Act direct us to adopt 

an appropriate change factor for the FY 

2010 Puerto Rico-specific standardized 

amount, which we did in the FY 2010 

IPPS/LTCH PPS final rule after notice 

and consideration of public comments. 

Therefore, we do not believe we have 

the authority to now propose setting the 

FY 2010 update factor for the Puerto 

Rico-specific operating standardized 

amount for the second half of FY 2010 

equal to the update factor applicable to 

the national standardized amount or the 

hospital-specific rates (that is the market 

basket minus 0.25 percentage points). 

Accordingly, the FY 2010 update to the 

Puerto Rico-specific operating 

standardized amount is 2.1 percent (that 

is, the FY 2010 estimate of the market 

basket rate-of-increase) for the entire FY 

2010. 

For FY 2011, consistent with our past 

practice of applying the same update 

factor to the Puerto Rico-specific 

standardized amount as applied to the 

national standardized amount, we are 

proposing to revise § 412.211(c) to set 

the update factor for the Puerto Ricospecific operating standardized amount 

equal to the update factor applied to the 

national standardized amount for all 

IPPS hospitals. Therefore, we are 

proposing an update factor for the 

Puerto Rico-specific standardized 

amount equal to the FY 2011 estimate 

of the IPPS operating market basket rateof-increase of 2.4 percent minus 0.25 

percentage points, or 2.15 percent, for 

FY 2011. 

C. Payment Adjustment for Low-Volume 

Hospitals (§ 412.101) 

Section 1886(d)(12) of the Act, as 

added by section 406 of Public Law 

108–173, provides for a payment 

adjustment to account for the higher 

costs per discharge for low-volume 

hospitals under the IPPS, effective 

beginning FY 2005. Sections 3215 and 

10314 of Public Law 111–148 amend the 

definition of a low-volume hospital 

under section 1886(d)(12)(C) of the Act. 

It also revises the methodology for 

calculating the payment adjustment for 

low-volume hospitals. 

1. Background 

Prior to being amended by the 

Affordable Care Act, section 

1886(d)(12)(C)(i) of the Act defined a 

low-volume hospital as ‘‘a subsection (d) 

hospital (as defined in paragraph (1)(B)) 

that the Secretary determines is located 

more than 25 road miles from another 

subsection (d) hospital and that has less 

than 800 discharges during the fiscal 

year.’’ Section 1886(d)(12)(C)(ii) of the 

Act further stipulates that ‘‘the term 

‘‘discharge’’ means an inpatient acute 

care discharge of an individual 

regardless of whether the individual is 

entitled to benefits under Part A.’’ 

Therefore, the term refers to total 

discharges, not merely Medicare 

discharges. Finally, under section 406, 

the provision requires the Secretary to 

determine an applicable percentage 

increase for these low-volume hospitals 

based on the ‘‘empirical relationship’’ 

between ‘‘the standardized cost-per-case 

for such hospitals and the total number 

of discharges of such hospitals and the 

amount of the additional incremental 

costs (if any) that are associated with 

such number of discharges.’’ The statute 

thus mandates that the Secretary 

develop an empirically justifiable 

adjustment based on the relationship 

between costs and discharges for these 

low-volume hospitals. The statute also 

limits the adjustment to no more than 

25 percent. 


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Based on an analysis we conducted 

for the FY 2005 IPPS final rule (69 FR 

49099 through 49102), a 25 percent lowvolume adjustment to all qualifying 

hospitals with less than 200 discharges 

was found to be most consistent with 

the statutory requirement to provide 

relief to low-volume hospitals where 

there is empirical evidence that higher 

incremental costs are associated with 

low numbers of total discharges. 

In the FY 2006 IPPS final rule (70 FR 

47432 through 47434), we stated that a 

multivariate analyses supported the 

existing low-volume adjustment 

implemented in FY 2005. Therefore, the 

low-volume adjustment of an additional 

25 percent would continue to be 

provided for qualifying hospitals with 

less than 200 discharges. 

2. Temporary Changes for FYs 2011 and 

2012 

Section 1886(d)(12) of the Act was 

amended by sections 3125 and 10314 of 

Public Law 111–148. These changes are 

effective only for FYs 2011 and 2012. 

Beginning with FY 2013, the preexisting low-volume hospital payment 

adjustment and qualifying criteria, as 

implemented in FY 2005, will resume. 

Section 3125(3) and 10314(1) of 

Public Law 111–148 amend the 

qualifying criteria for low-volume 

hospitals under section 1886(d)(12)(C) 

of the Act to make it easier for hospitals 

to qualify for the low-volume 

adjustment. Specifically, the revised 

provision specifies that for FYs 2011 

and 2012, a hospital qualifies as a lowvolume hospital if it is ‘‘more than 15 

road miles from another subsection (d) 

hospital and has less than 1,600 

discharges of individuals entitled to, or 

enrolled for, benefits under Part A 

during the fiscal year.’’ In addition, 

section 1886(d)(12)(C) of the Act, as 

amended, provides that the payment 

adjustment (the applicable percentage 

increase) is to be determined ‘‘using a 

continuous linear sliding scale ranging 

from 25 percent for low-volume 

hospitals with 200 or fewer discharges 

of individuals entitled to, or enrolled 

for, benefits under Part A in the fiscal 

year to 0 percent for low-volume 

hospitals with greater than 1,600 

discharges of such individuals in the 

fiscal year.’’ 

Section 3125(3)(A) of Public Law 

111–148 revises the distance 

requirement for FYs 2011 and 2012 from 

‘‘25 road miles’’ to ‘‘15 road miles’’ such 

that a low volume hospital is required 

to be only more than 15 road miles, 

rather than more than 25 road miles, 

from another subsection (d) hospital for 

purposes of qualifying for the lowvolume payment adjustment in FYs 

2011 and 2012. We therefore are 

proposing to revise our regulations at 42 

CFR 412.101(a)(2) to provide that to 

qualify for the low volume adjustment 

in FYs 2011 and 2012, a hospital must 

be more than 15 road miles from the 

nearest subsection (d) hospital. The 

statute specifies the 15 mile distance in 

‘‘road miles’’. The current regulations at 

42 CFR 412.101 also specify the current 

25 mile distance requirement in ‘‘road 

miles,’’ but do not provide a definition 

of the term ‘‘road miles.’’ We are 

proposing to define the term ‘‘road 

miles’’ consistent with the term ‘‘miles’’ 

as defined at § 412.92 for purposes of 

determining whether a hospital qualifies 

as a sole community hospital. 

Specifically, the regulations at 42 CFR 

412.92(c)(i) define ‘‘miles’’ as ‘‘the 

shortest distance in miles measured 

over improved roads. An improved road 

for this purpose is any road that is 

maintained by a local, State, or Federal 

government entity and is available for 

use by the general public. An improved 

road includes the paved surface up to 

the front entrance of the hospital.’’ We 

note that while the proposed change in 

the qualifying criteria from 25 to 15 road 

miles is applicable only for FYs 2011 

and 2012, the proposed definition of 

‘‘road miles’’ would continue to apply 

even after the distance requirement 

reverts to 25 road miles beginning in FY 

2013. 

Sections 3125(3)(B) and (4)(D) and 

10314(1) and (2) of Public Law 111–148, 

revise the discharge requirement for FYs 

2011 and 2012 to less than 1,600 

discharges of individuals entitled to, or 

enrolled for, benefits under Part A. 

Based on section 406 of Public Law 

108–173, the discharge requirement to 

qualify as a low-volume hospital prior 

to FY 2011 and subsequent to FY 2012 

is less than 800 discharges annually. For 

these fiscal years, the number of 

discharges is determined based on total 

discharges, which includes discharges 

of both Medicare and non-Medicare 

patients. However, under sections 3125 

and 10314 of Public Law 111–148, for 

FYs 2011 and 2012, the discharge 

requirement has been increased to less 

than 1,600 discharges of individuals 

‘‘entitled to, or enrolled for, benefits 

under Part A during the fiscal year.’’ 

Section 226(a) of the Act (42 U.S.C. 

426(a)) provides that an individual is 

automatically ‘‘entitled’’ to Medicare 

Part A when the person reaches age 65 

or becomes disabled, provided that the 

individual is entitled to Social Security 

benefits under section 202 of the Act (42 

U.S.C. 402). Once a person becomes 

entitled to Medicare Part A, the 

individual does not lose such 

entitlement simply because there is no 

Part A coverage of a specific inpatient 

stay. For example, a patient does not 

lose entitlement to Medicare Part A 

simply because the individual’s Part A 

hospital benefits have been exhausted; 

other items and services (for example, 

skilled nursing services) still might be 

covered under Part A, and the patient 

would qualify for an additional 90 days 

of Part A hospital benefits if at least 60 

days elapsed between the individual’s 

first and second hospital stay. (See 

§ 409.60(a) and (b)(1) and § 409.61(a)(1) 

and (c).) 

In addition, beneficiaries who are 

enrolled in Medicare Advantage (MA) 

plans provided under Medicare Part C 

continue to meet all of the statutory 

criteria for entitlement to Part A benefits 

under section 226. First, in order to 

enroll in Medicare Part C, a beneficiary 

must be ‘‘entitled to benefits under Part 

A and enrolled under Part B,’’ see 

section 1852(a)(1)(B)(i) of the Act. There 

is nothing in the Act that suggests 

beneficiaries who enroll in Part C plan 

forfeit their entitlement to Part A 

benefits. Second, once a beneficiary 

enrolls in Part C, the MA plan must 

provide the beneficiary with the benefits 

to which the enrollee is entitled under 

Medicare Part A, even though it may 

also provide for additional 

supplemental benefits. See section 

1852(a)(1)(A) of the Act. Third, under 

certain circumstances, Medicare Part A 

pays for care furnished to patients 

enrolled in Part C plans. For example, 

if, during the course of the year, the 

scope of benefits provided under 

Medicare Part A expands beyond a 

certain cost threshold due to 

Congressional action or a national 

coverage determination, Medicare Part 

A will pay the provider for the cost of 

the services directly. (See section 

1852(a)(5) of the Act.) Similarly, 

Medicare Part A also pays for Federally 

qualified health center services and 

hospice care furnished to MA patients. 

See 42 U.S.C. section 1853(a)(4), (h)(2) 

of the Act. Thus, a patient enrolled in 

a Part C plan remains entitled to 

benefits under Medicare Part A. 

Accordingly, for purposes of 

determining the number of discharges 

for ‘‘individuals entitled to, or enrolled 

for, benefits under Part A,’’ we propose 

to include all discharges associated with 

individuals entitled to Part A, including 

discharges associated with individuals 

whose inpatient benefits are exhausted 

or whose stay was not covered by 

Medicare and discharges of individuals 

enrolled in an MA plan under Medicare 

Part C. Since a hospital may only 

qualify for this adjustment if the 

hospital has fewer than 1,600 discharges 

for patients entitled to Part A, the 


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hospital must submit a claim to 

Medicare on behalf of all Part A entitled 

individuals, including a no-pay claim 

for patients who are enrolled in Part C, 

in order for Medicare to assure that 

these discharges are included in the 

determination of whether the hospital 

has fewer than 1,600 discharges for 

patients entitled to Part A. 

Currently, a prior cost reporting 

period is used to determine if the 

hospital meets the discharge criteria to 

receive the low-volume payment 

adjustment in the current year. 

Finally, sections 3125(4) of Public 

Law 111–148 and 10314(2), add a new 

section 1886(d)(12)(D) of the Act that 

modifies the methodology for 

calculation of the payment adjustment 

under section 1886(d)(12)(A) of the Act 

for low-volume hospitals for discharges 

occurring in FYs 2011 and 2012. 

Currently, sections 1886(d)(12)(A) and 

(B) of the Act require the Secretary to 

determine an applicable percentage 

increase for low-volume hospitals based 

on the ‘‘empirical relationship’’ between 

‘‘the standardized cost-per-case for such 

hospitals and the total number of 

discharges of such hospitals and the 

amount of the additional incremental 

costs (if any) that are associated with 

such number of discharges.’’ The statute 

thus mandates the Secretary to develop 

an empirically justifiable adjustment 

based on the relationship between costs 

and discharges for these low-volume 

hospitals. The statute also limits the 

adjustment to no more than 25 percent. 

Based on analyses, we conducted for the 

FY 2005 IPPS final rule (69 FR 49099 

through 49102) and the FY 2006 IPPS 

final rule (70 FR 47432 through 47434), 

a 25 percent low-volume adjustment to 

all qualifying hospitals with less than 

200 discharges was found to be most 

consistent with the statutory 

requirement to provide relief to lowvolume hospitals where there is 

empirical evidence that higher 

incremental costs are associated with 

low numbers of total discharges. 

However, section 1886(d)(12)(D) of the 

Act, provides that for discharges 

occurring in FYs 2011 and 2012, the 

Secretary shall determine the applicable 

percentage increase using a continuous, 

linear sliding scale ranging from an 

additional 25 percent payment 

adjustment for hospitals with 200 or 

fewer Medicare discharges to 0 percent 

additional payment for hospitals with 

more than 1,600 Medicare discharges. 

We propose to apply this payment 

adjustment based on increments of 100 

discharges (beginning with 200 or fewer 

discharges), with the applicable 

percentage increase decreasing linearly 

in equal amounts by 1.6667 percent for 

every additional 100 Medicare 

discharges, with no payment adjustment 

for hospitals with more than 1,599 

Medicare discharges. We have not 

proposed an adjustment for a hospital 

with exactly 1,600 discharges since, as 

specified in statute at section 

1886(d)(12)(C)(i) of the Act, as amended, 

a hospital must have ‘‘less’’ than 1,600 

discharges in order to qualify as a low 

volume hospital. The proposed payment 

adjustment would be as determined 

below: 

Medicare discharge range 

Payment adjustment 

(percent 

add-on) 

1–200 ...................................... 25.0000 

201–300 .................................. 23.3333 

301–400 .................................. 21.6667 

401–500 .................................. 20.0000 

501–600 .................................. 18.3333 

601–700 .................................. 16.6667 

701–800 .................................. 15.0000 

801–900 .................................. 13.3333 

901–1000 ................................ 11.6667 

1001–1100 .............................. 10.0000 

1101–1200 .............................. 8.3333 

1201–1300 .............................. 6.6667 

1301–1400 .............................. 5.0000 

1401–1500 .............................. 3.3333 

1501–1599 .............................. 1.6667 

1600 or more .......................... 0.0000 

While we are proposing to revise the 

qualifying criteria and the payment 

adjustment for low-volume hospitals for 

FYs 2011 and 2012, consistent with the 

amendments made by the Affordable 

Care Act, we note that we are not 

proposing to modify the process for 

requesting and obtaining the lowvolume hospital payment adjustment. In 

order to qualify, a hospital must provide 

to its FI or MAC sufficient evidence to 

document that it meets the number of 

Medicare discharges and distance 

requirements. The FI or MAC will 

determine, based on the most recent 

data available, if the hospital qualifies 

as a low-volume hospital, so that the 

hospital will know in advance whether 

or not it will receive a payment 

adjustment and, if so, the add-on 

percentage. The FI or MAC and CMS 

may review available data, in addition 

to the data the hospital submits with its 

request for low-volume status, in order 

to determine whether or not the hospital 

meets the qualifying criteria. 

We also note that as compared to the 

existing methodology for determining 

the payment adjustment for low-volume 

hospitals, no hospital would receive a 

lower payment adjustment under our 

proposed methodology for FYs 2011 and 

2012. Although the statute specifies 

that, for years other than FYs 2011 and 

2012, a hospital is a low-volume 

hospital if it has less than 800 

discharges, currently only hospitals 

with fewer than 200 discharges receive 

a payment adjustment, an additional 25 

percent, because the statute requires 

that the adjustment be empirically based 

to provide relief to low-volume 

hospitals where there is empirical 

evidence that higher incremental costs 

are associated with low numbers of total 

discharges. Consistent with section 

1886(d)(12)(D) of the Act, for FYs 2011 

and 2012, we will continue to pay 

hospitals with fewer than 200 

discharges a payment adjustment 

amount equal to an additional 25 

percent. 

We are proposing to revise our 

regulations at 42 CFR 412.101 to reflect 

our proposal outlined above. 

Currently, 42 CFR 412.101(a)(3) states 

that ‘‘The fiscal intermediary makes the 

determination of the discharge count for 

purposes of determining a hospital’s 

qualification for the adjustment based 

on the hospital’s most recent submitted 

cost report.’’ This may mistakenly be 

interpreted to mean that once a hospital 

qualifies as a low-volume hospital, no 

further qualification is needed. We, 

therefore, are proposing to clarify that a 

hospital must continue to qualify as a 

low-volume hospital in order to receive 

the payment adjustment in that year; 

that is, it is not based on a one-time 

qualification. 

D. Medicare-Dependent, Small Rural 

Hospitals (MDHs) (§ 412.108) 

1. Background 

Medicare-dependent, small rural 

hospitals (MDHs) are eligible for the 

higher of the Federal rate for their 

inpatient hospital services or a blended 

rate based in part on the Federal rate 

and in part on the MDH’s hospitalspecific rate. Section 1886(d)(5)(G)(iv) of 

the Act defines an MDH as a hospital 

that is located in a rural area, has not 

more than 100 beds, is not an SCH, and 

has a high percentage of Medicare 

discharges (that is, not less than 60 

percent of its inpatient days or 

discharges either in its 1987 cost 

reporting year or in two of its most 

recent three settled Medicare cost 

reporting years). The regulations that set 

forth the criteria that a hospital must 

meet to be classified as an MDH are at 

42 CFR 412.108. 

Although MDHs are paid under an 

adjusted payment methodology, they are 

still IPPS hospitals paid under section 

1886(d) of the Act. Like all IPPS 

hospitals paid under section 1886(d) of 

the Act, MDHs are paid for their 

discharges based on the DRG weights 


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calculated under section 1886(d)(4) of 

the Act. 

Through and including FY 2006, 

under section 1886(d)(5)(G) of the Act, 

MDHs are paid based on the Federal rate 

or, if higher, the Federal rate plus 50 

percent of the amount by which the 

Federal rate is exceeded by the updated 

hospital-specific rate based on the 

hospital’s FY 1982 or FY 1987 costs per 

discharge, whichever of these hospitalspecific rates is higher. Section 5003(b) 

of Public Law 109–171 (DRA 2005) 

amended section 1886(d)(5)(G) of the 

Act to provide that, for discharges 

occurring on or after October 1, 2006, 

MDHs are paid based on the Federal rate 

or, if higher, the Federal rate plus 75 

percent of the amount by which the 

Federal rate is exceeded by the updated 

hospital-specific rate based on the 

hospital’s FY 1982, FY 1987, or FY 2002 

costs per discharge, whichever of these 

hospital-specific rates is highest. 

For each cost reporting period, the 

fiscal intermediary or MAC determines 

which of the payment options will yield 

the highest aggregate payment. Interim 

payments are automatically made at the 

highest rate using the best data available 

at the time the fiscal intermediary or 

MAC makes the determination. 

However, it may not be possible for the 

fiscal intermediary or MAC to determine 

in advance precisely which of the rates 

will yield the highest aggregate payment 

by year’s end. In many instances, it is 

not possible to forecast the outlier 

payments, the amount of the DSH 

adjustment or the IME adjustment, all of 

which are applicable only to payments 

based on the Federal rate and not to 

payments based on the hospital-specific 

rate. The fiscal intermediary or MAC 

makes a final adjustment at the 

settlement of the cost report after it 

determines precisely which of the 

payment rates would yield the highest 

aggregate payment to the hospital. 

If a hospital disagrees with the fiscal 

intermediary’s or the MAC’s 

determination regarding the final 

amount of program payment to which it 

is entitled, it has the right to appeal the 

determination in accordance with the 

procedures set forth in 42 CFR Part 405, 

Subpart R, which govern provider 

payment determinations and appeals. 

2. Extension of the MDH Program 

Section 3124 of Public Law 111–148 

extends the MDH program, from the end 

of FY 2011 (that is, for discharges before 

October 1, 2011) to the end of FY 2012 

(that is, for discharges before October 1, 

2012). Under prior law, as specified in 

section 5003(a) of Public Law 109–171 

(DRA of 2005), the MDH program was 

to be in effect through the end of FY 

2011 only. Section 3124 (a) of Public 

Law 111–148 amends sections 

1886(d)(5)(G)(i) and (ii)(II) of the Act to 

extend the MDH program and payment 

methodology from the end of FY 2011 

to the end of FY 2012, by ‘‘striking 

‘‘October 1, 2011’’ and inserting ‘‘October 

1, 2012’’.’’ Section 3125(b) of Public Law 

111–148 also makes conforming 

amendments to sections 1886(b)(3)(D)(i) 

and (iv) of the Act. Section 3124(b)(2) of 

Public Law 111–148 also amends 

section 13501(e)(2) of OBRA 1993 (42 

U.S.C. 1395ww note) to extend the 

provision permitting hospitals to 

decline reclassification as an MDH 

through FY 2012. 

E. Additional Payments for Qualifying 

Hospitals With Lowest Per Capita 

Medicare Spending 

1. Background 

Section 1109 of Public Law 111–152, 

provides for additional payments for FY 

2011 and 2012 for ‘‘qualifying 

hospitals.’’ Section 1109(d) defines a 

‘‘qualifying hospital’’ as a ‘‘subsection (d) 

hospital * * * that is located in a 

county that ranks, based upon its 

ranking in age, sex and race adjusted 

spending for benefits under parts A and 

B * * * per enrollee within the lowest 

quartile of such counties in the United 

States.’’ Therefore, a ‘‘qualifying 

hospital’’ is one that meets the following 

conditions: (1) A ‘‘subsection (d) 

hospital’’ as defined in section 

1886(d)(1)(B) of the Act; and (2) located 

in a county that ranks within the lowest 

quartile of counties based upon its 

spending for benefits under Medicare 

Part A and Part B per enrollee adjusted 

for age, sex, and race. Section 1109(b) of 

Public Law 111–152 makes available 

$400 million to qualifying hospitals for 

FY 2011 and FY 2012. Section 1109(c) 

of Public Law 111–152 requires the 

$400 million to be divided among each 

qualifying hospital in proportion to the 

ratio of the individual qualifying 

hospital’s FY 2009 IPPS operating 

hospital payments to the sum of total FY 

2009 IPPS operating hospital payments 

made to all qualifying hospitals. 

2. Eligible Counties 

Section 1109 of Public Law 111–152 

provides $400 million for FYs 2011 and 

2012 for supplemental payments to 

qualifying hospitals located in counties 

that rank within the lowest quartile of 

counties in the United States for 

spending for benefits under Medicare 

Part A and Part B. The provision 

requires that the Medicare Part A and 

Part B county-level spending per 

enrollee to be adjusted by age, sex and 

race. We are proposing our methodology 

for determining the bottom quartile of 

counties with the lowest Medicare Part 

A and Part B spending adjusted by age, 

sex, and race and invite public comment 

on the methodology we propose to use 

to adjust for age, sex, and race described 

below. We further propose that we will 

determine this bottom quartile of 

counties one time in the FY 2011 IPPS/ 

RY 2011 LTCH PPS final rule for the 

purpose of disbursing the $400 million 

as required by section 1109 of Public 

Law 111–152. 

We developed an adjustment model 

by age, sex, and race, as required under 

the provision. We then applied this 

adjustment to the county Medicare Part 

A and Part B spending data to account 

for the demographics of the Medicare 

beneficiaries in those counties. After 

those adjustments are applied, we 

determined the Medicare Part A and 

Part B spending by county per enrollee. 

Our proposed methodology to 

determine the Medicare Part A and Part 

B spending per enrollee by county 

adjusted for age, sex, and race is similar 

to how we calculate risk adjustment 

models for Medicare Advantage (MA) 

ratesetting. Risk adjustment for MA 

ratesetting is discussed in the annual 

announcement of calendar year MA 

capitation rates and MA and Part D 

payment policies. For more information 

on the methodology for risk adjustment 

used for MA ratesetting, we refer readers 

to the CMS Web site where we 

announce MA rates through our 45-day 

notice (http://www.cms.gov/ 

MedicareAdvtgSpecRateStats/ 

Downloads/Announcement2010.pdf). 

a. Development of Risk Adjustment 

Model 

As required by section 1109(d) of 

Public Law 111–152, we are proposing 

a risk adjustment model that accounts 

for differentials in Medicare spending 

by age, sex, and race. Consistent with 

how we develop our risk adjustment 

models for MA ratesetting as described 

above, we developed a prospective risk 

adjustment model using 2006 data for 

beneficiary characteristics and 2007 

data for Part A and Part B spending. 

However, unlike the risk adjustment 

mode used for MA which includes 

diseases and demographic factors, the 

only independent variables or 

prospective factors in the model for 

payments under section 1109 of Public 

Law 111–152 are age, sex and race, as 

required by the provision. The 

dependent variable was annualized 

Medicare Part A and B spending at the 

beneficiary level for 2007 as it is the 

most recent and complete data 

available. The categorization of age, sex, 

and race variables are described below. 


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The age, sex, race (ASR) model(s) was 

estimated using the Five Percent 

Standard Analytic Denominator file, a 

standard 5-percent sample from the 

2007 Denominator file which is also 

used to estimate CMS risk adjustment 

models for payment to MA 

organizations. We chose to use Five 

Percent Standard Analytic Denominator 

file from 2007 in order to optimize the 

amount of time after the timely claim 

submission deadlines and the latest 

available data; in other words because it 

is most complete data currently 

available. This file has the demographic 

and enrollment characteristics of all 

Medicare beneficiaries. The 

Denominator File is an abbreviated file 

of the Enrollment Data Base (EDB). The 

Denominator File contains data on all 

Medicare beneficiaries enrolled and/or 

entitled to be enrolled in Medicare in a 

given year while the EDB is the source 

of enrollment and entitlement 

information for all people who are or 

were ever entitled to Medicare. The 

model was estimated using all 

beneficiaries residing in the community 

and long-term institutions. The sample 

had 1,603,998 beneficiaries. 

The Denominator File contains a sex 

variable where the beneficiaries can 

identify themselves as male or female. 

The file also contains an age variable 

which is defined as the beneficiary’s age 

at the end of the prior year. 

Beneficiaries with an age greater than 98 

are coded as age 98. The race 

demographic variable in the 

Denominator File is populated by data 

from the Social Security Administration 

(SSA). The SSA’s data for this race 

demographic variable are collected on 

form SS–5. Prior to 1980, the SS–5 form 

included 3 categories for race: White, 

Black or Other. Since that time, Form 

SS–5 instructed a beneficiary to 

voluntarily select one of the following 5 

categories: (1) Asian, Asian-American or 

Pacific Islander; (2) Hispanic; (3) Black 

(Not Hispanic); (4) North American 

Indian or Alaskan Native; and (5) White 

(Not Hispanic). Form SS–5 is completed 

when an individual does the following: 

(1) Applies for a social security number; 

(2) requests a replacement of the social 

security card; or (3) requests changes to 

personal information on their record 

such as a name change. (Social Security 

Administration Web site instructions 

http://ssa.gov/online/ss-5.pdf). Each 

January, CMS obtains data from SSA to 

update the EDB for beneficiaries who 

were added during the previous 

calendar year as well as all living 

beneficiaries whose race is identified as 

‘‘Other’’ or ‘‘Unknown.’’ 

Discussed in the context of the ESRD 

payment system in the ESRD proposed 

rule on September 29, 2009 (74 FR 

49962), we noted concerns with using 

the EDB as a data source due to missing 

data, and that racial and ethnic 

categories are not well defined. 

However, we believe that the current 

EDB, particularly with respect to the 

more recent and ongoing updates we 

perform, remains a useful source of race 

and ethnicity data on 46 million 

Medicare beneficiaries. Additionally, 

because this is our only currently 

available data source on the racial and 

ethnic demographics of Medicare 

beneficiaries, we propose to use the EDB 

as our data source for beneficiary race 

so that we can fulfill the requirements 

of section 1109(d) of Public Law 111– 

152 to adjust county Medicare Part A 

and Part B spending by race. 

We used the MedPAR claims file as 

the source to determine Medicare 

inpatient spending. We used the 

National Claims History File to 

determine spending on DMEPOS and 

supplies. The other spending under 

Medicare Part A and Part B was 

determined using the Standard Analytic 

File. The Standard Analytic File and 

MedPAR claims file are subsets of the 

National Claims History File. These data 

files are also used in the MA ratesetting 

process and are our data source for 

Medicare spending stored at the 

beneficiary level. 

In order to determine annual 

spending (the dependent variable in the 

risk adjustment model), we annualized 

the Medicare Part A and Part B 

spending for beneficiaries with less than 

a full year of eligibility, and these 

amounts were weighted in the analysis 

by the fraction of the year they were in 

the data. 

We used a linear regression model to 

determine the demographic 

adjustments. This is consistent with 

how we model our risk adjustment for 

the MA rates. The linear regression used 

24 age-sex regression categories, 12 age 

categories each for males and females. 

The age categories are as follows; 0–34, 

35–44, 45–49, 50–54, 55–59, 60–64, 65– 

69, 70–74, 75–79, 80–84, 85–89, and 

90+. The age-sex coefficients displayed 

in the table below reflect the difference 

in Medicare Part A and Part B spending 

per enrollee in those age-sex categories 

relative to national average Part A and 

Part B spending based on our linear 

regression model. 

In addition, we used the same linear 

regression model to determine how to 

adjust Medicare Part A and Part B 

spending for race. In addition to the agesex regression categories described 

above, we included variables to adjust 

for race. We considered two methods to 

adjust for race in county spending 

because of the way that the SS–5 form 

collects race information, which is then 

reported in the same format in the EDB. 

As discussed earlier, the EDB currently 

categorizes race by the following five 

categories, as reported by the Medicare 

beneficiary: (1) Asian, Asian-American 

or Pacific Islander; (2) Hispanic; 

(3) Black (Not Hispanic); (4) North 

American Indian or Alaskan Native; and 

(5) White (Not Hispanic). One method 

categorized race by White, Black, 

Hispanic, and Other (WBHO). The 

‘‘Other’’ category includes Asian/Pacific 

Islander, American Indian/Alaska 

Native, and all others. The second 

method categorized race by White, 

Black, and Other (WBO), where 

beneficiaries who identified themselves 

as Hispanic were categorized as Other. 

The race/ethnicity categories are 

mutually exclusive; if a beneficiary 

identified themselves as Hispanic he or 

she was not further classified as another 

category, such as White or Black. In our 

regression modeling we used the largest 

group, White, as the reference group; the 

coefficients on the difference in 

spending by race, displayed in the table 

below, are additive to the reference 

group. In other words, the coefficients 

for each race category represent the 

difference in predicted Medicare Part A 

and Part B spending relative to our 

reference group. Where the coefficients 

are positive, this implies that the 

predicted spending for that category is 

higher than that of the reference group. 

Conversely, where the coefficients are 

negative, this implies that the predicted 

spending for that category is lower than 

that of the reference group. 

Below are two tables representing the 

coefficients used to adjust Medicare Part 

A and Part B spending by county. The 

first table shows the coefficients for 

each age and sex category. The second 

table shows the coefficients for race. 

These national coefficients are applied 

to each counties’ relative demographic 

for age, sex and race, so that each 

county has a risk score by age, sex and 

race. 


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Sex 

Age categories (in years) 

0–34 35–44 45–54 55–59 60–64 65–69 70–74 75–79 80–84 85–89 90–94 Greater 

than 95 

Female ...................... 0.67896 0.80089 0.96917 1.09810 1.18855 0.67358 0.83818 1.01599 1 .189727 1 .364575 1 .475495 1 .366515 

Male ........................... 0.52664 0.70067 0.82262 0.93750 1.03792 0.71932 0.90896 1.11809 1 .32812 1 .50008 1 .68184 1 .77046 

Race Coefficient 

White ...................................... Baseline. 

Black ...................................... 0.17667. 

Hispanic ................................. 0.229. 

Other ...................................... ¥0.110. 

We are proposing to adjust for race 

using the WBHO method where we 

separately account for cost differences 

associated with Hispanic beneficiaries. 

The Office of Management and Budget 

(OMB) has promulgated standards for 

the classification of Federal data on race 

and ethnicity. Under OMB’s 

classification standards, the category of 

Hispanic is treated as an ethnic category 

as opposed to a race category. The 

current OMB Standards of 1997 require 

collection of specific demographic data 

using a total of five race categories, plus 

other (62 FR 58782 through 58790). The 

five race categories are—(1) American 

Indian or Alaska Native; (2) Asian; (3) 

Black or African American; (4) Native 

Hawaiian or Other Pacific Islander; and 

(5) White. In addition, OMB specified 

two separate ethnic categories— 

Hispanic or Latino, and not Hispanic or 

Latino. However, as explained above, 

Hispanic or Latino ethnicity is treated as 

a race category by EDB, and 

beneficiaries can self-identify as 

Hispanic among mutually exclusive 

racial categories. Despite the 

inconsistency in reporting by the OMB 

and the EDB, we propose to treat the 

category of Hispanic as a separate 

category for purposes of the race 

adjustment required by section 1109 of 

Public Law 111–152. We found that the 

coefficient for the Hispanic category is 

statistically significant, suggesting that 

Medicare Part A and Part B spending 

associated with this category of 

beneficiaries is different from the 

spending for our reference group and 

that it should be a separate coefficient 

to adjust county spending. In addition, 

the EDB treats Hispanic as a separate 

racial classification, consistent with our 

WBHO method, therefore; we believe 

that our proposal appropriately 

interprets the required race adjustment. 

Therefore, we propose to adjust for race 

using the WBHO method. 

For purposes of this supplemental 

proposed rule, we also adjusted county 

spending using the WBO methodology 

to compare the two approaches. We 

found minimal difference in the county 

rankings under the two methodologies. 

We found that some counties would 

qualify as an eligible county only under 

the WBO methodology, and others 

would no longer qualify as an eligible 

county using this alternative. The 

decision to use the WBHO methodology 

affects whether 9 subsection (d) 

hospitals, located in 5 counties, would 

be eligible to receive a payment under 

section 1109. In Table 3, we publish the 

differences in counties, eligible 

hospitals, and payments by State under 

the two methodologies. This is the first 

time we have developed an adjustment 

for Medicare spending based on race, 

and we welcome public comment on 

our proposal to use the WBHO 

methodology to adjust for race as 

required by section 1109 of Public Law 

111–152. We also welcome public 

comment on the WBO methodology to 

adjust for race though we note that we 

are not proposing this methodology at 

this time. 

b. Calculation of County Level Part A 

and Part B Spending 

In order to rank counties by Medicare 

Part A and B spending, we first 

calculated Medicare Part A and Part B 

county level spending for each county 

in the 50 States and the District of 

Columbia using a similar methodology 

used to establish county level FFS rates 

for MA payments. Using a 5 year 

average of each county’s actual 

spending (from 2002 to 2006), CMS’s 

Office of the Actuary calculated an 

average geographic adjuster (AGA), 

which reflects the county’s expenditure 

relative to the national expenditure. We 

believe a 5-year average is appropriate, 

as it accounts for fluctuations in year-toyear expenditures, which could distort 

the counties’ historic level of spending 

and is consistent with how MA rates are 

calculated. The AGA was then applied 

to the 2009 United States Per Capita 

Cost estimate (USPCC), which is the 

national average cost per Medicare 

beneficiary, to determine 2009 Medicare 

Part A and Part B spending for each 

county. We welcome public comment 

on this methodology to calculate 

county-level Part A and Part B 

spending. 

3. Application of the Age/Sex/Race 

Adjustment to Part A and Part B County 

Spending 

To estimate the county level risk 

scores for 2009, beneficiary enrollment 

information was first extracted from the 

EDB. We chose to calculate Medicare 

Part A and Part B county spending for 

2009 to be consistent with how we are 

required to determine qualifying 

hospitals’ payment amounts, under 

section 1109(c) of Public Law 111–152. 

That is, section 1109(c) of Public Law 

111–152 requires that qualifying 

hospitals located in the bottom quartile 

of counties with the lowest Medicare 

Part and Part B spending per enrollee 

will receive a portion of the allotted 

$400 million based on their FY 2009 

operating payments. Therefore, we 

propose to calculate Medicare Part A 

and Part B County spending for 2009 as 

well. We only include beneficiaries 

enrolled in Medicare Part A and/or Part 

B, consistent with the language of 

section 1109(d) of Public Law 111–152, 

which refers to spending under Part A 

and B. Based on these criteria, there 

were 30,666,295 beneficiaries included 

in the adjustment process. To determine 

the age, sex and race make-up of the 

Part A and/or Part B beneficiaries for 

each county, we used the EDB to 

identify date of birth, sex, race, and 

State/county of residence to create a 

person level file with the data needed to 

run the ASR model. 

A county level average risk score was 

developed for each county in the United 

States by applying the ASR model to 

each individual in the county enrolled 

in Medicare Part A and/or Part B, 

summing the resulting risk scores and 

dividing by the number of beneficiaries 

by county enrolled in Medicare Part A 

and/or Part B. The county level 

Medicare Part A and or Part B spending 

was adjusted by dividing the county 

level Medicare Part A and/or Part B 

spending by the county level average 

risk score. The resulting spending 

distribution was then sorted lowest to 

highest dollars the 786 counties in the 

lowest quartile of spending (that is, 

lowest adjusted spending per enrollee) 

were determined to be eligible counties 

under section 1109 of Public Law 111– 

152. 

We invite comment on our 

methodology for determining the age, 

sex, race adjustments for determining 

adjusted Medicare Part A and B 

spending by county for the purpose of 

determining eligible counties under 

section 1109 of Public Law 111–152. 


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3. Qualifying Hospitals and Annual 

Payment Amounts 

We have developed a methodology to 

identify the qualifying hospitals located 

in our list of eligible counties. 

Consistent with section 1109(d) of 

Public Law 111–152, a qualifying 

hospital is a ‘‘subsection (d) hospital’’ (as 

defined for purposes of section 1886(d) 

of the Act) that is ‘‘located in’’ an eligible 

county (as identified using the 

methodology proposed in section B). A 

subsection (d) hospital is defined in 

section 1886(d)(1)(B) of the Act in part 

as a ‘‘hospital located in one of the fifty 

States or the District of Columbia’’. The 

term ‘‘subsection (d) hospital’’ does not 

include hospitals located in the 

territories or hospitals located in Puerto 

Rico. Section 1886(d)(9)(A) of the Act 

separately defines a ‘‘subsection (d) 

Puerto Rico hospital’’ as a hospital that 

is located in Puerto Rico and that 

‘‘would be a subsection (d) hospital 

* * * if it were located in one of the 50 

States.’’ Therefore, Puerto Rico hospitals 

are not eligible for these additional 

payments. Indian Health Services 

hospitals enrolled as a Medicare 

provider meet the definition of a 

subsection(d) hospital and can qualify 

to receive this payment if they are 

located in an eligible county. In 

addition, hospitals that are MDHs and 

sole community hospitals (SCHs), 

though they can be paid under a 

hospital-specific rate instead of under 

the Federal standardized amount under 

the IPPS, are ‘‘subsection (d)’’ hospitals. 

The statutory definition of a ‘‘subsection 

(d)’’ hospital in section 1886(d)(1)(B) of 

the Act specifically excludes hospitals 

and hospital units excluded from the 

IPPS, such as psychiatric, rehabilitation, 

long term care, children’s, and cancer 

hospitals. In addition, critical access 

hospitals (CAHs) are not considered 

qualifying hospitals because they do not 

meet the definition of a ‘‘subsection (d) 

hospital’’ as they are paid under section 

1814(l) of the Act. CAHs are not paid 

under the IPPS; rather they are paid 

under a reasonable cost methodology, so 

they do not meet the definition of 

‘‘qualifying hospital’’ under section 

1109(d) of Public Law 111–152. 

For the purposes of section 1109 of 

Public Law 111–152, we are proposing 

to identify ‘‘qualifying hospitals’’ based 

on their Medicare Provider number or 

Centers for Medicare and Medicaid 

Services Certification Number (CCN), 

because this is also how hospitals 

identify themselves when they file their 

Medicare cost reports. We also propose 

that in order to meet the definition of a 

‘‘qualifying hospital’’, the facility, as 

identified by the Medicare Provider 

Number or CCN, must: (1) Have existed 

as a subsection (d) hospital as of April 

1, 2010; (2) be geographically located in 

an eligible county; and (3) have received 

IPPS operating payments (in accordance 

with section 1886(d)) of the Act under 

their Medicare provider number in FY 

2009. We used the Online Survey, 

Certification and Reporting (OSCAR) 

database to determine a hospital’s 

county location associated with that 

CCN provider number. County data in 

OSCAR is supplied by the U.S Postal 

Service and is cross walked to the 

address reported by the provider. Under 

this proposal, the address listed for a 

hospital’s Medicare provider number 

must be currently located in a qualifying 

county in order for a hospital to meet 

the definition of ‘‘qualifying hospital.’’ 

We have published a list of the 

qualifying IPPS hospitals that we have 

identified based on the factors described 

above in Table 3. We invite comment on 

our methodology for identifying 

qualifying hospitals. We also invite 

comment on whether our list is accurate 

and whether any providers are missing 

from this list using the methodology 

described above. 

4. Payment Determination and 

Distribution 

As mentioned above, under section 

1109(b), the total pool of payments 

available to qualifying hospitals for FY 

2011 and FY 2012 is $400 million. The 

statute is not specific as to the timing of 

these payments. Since Congress has 

allocated a set amount—$400 million— 

for hospitals for FYs 2011 and 2012 

under this provision, we believe it is 

consistent with the statute to spread 

these payments over the 2-year period. 

We are proposing to distribute $150 

million for FY 2011 and $250 million 

for FY 2012. Because this is a new 

policy, we are proposing to distribute a 

smaller amount of money for the first 

year ($150 million for FY 2011 and $250 

million for FY 2012) so that the public 

will have an opportunity to review our 

proposal and finalized policy in the FY 

2011 IPPS/LTCH PPS final rule, and 

notify us of any possible revisions to the 

list of qualifying hospitals, so that we 

can adjust payments for FY 2012. This 

will ensure that we correctly identify 

qualifying hospitals and their proper 

payment amounts without exceeding 

the program’s funding. We invite public 

comment to give hospitals the 

opportunity to request that we make 

changes to the qualifying hospital list in 

order to ensure the accuracy of the 

qualifying hospital list based on the 

methodology set forth in the final rule. 

However, we are proposing to identify 

eligible counties, qualifying hospitals 

and their payment amounts under 

section 1109 of Public Law 111–152 

only once. Because Congress has 

allocated a specific amount of money, 

we are proposing to identify eligible 

counties, qualifying hospitals and their 

payment amounts once in order to 

ensure we do not exceed the fixed 

amount of money and to ensure 

predictability of payments. 

We propose to distribute payments 

through the individual hospital’s 

Medicare contractor through an annual 

one-time payment during each of FY 

2011 and FY 2012. We believe that 

annual payments made by the FI or 

A/B MACs would be an expeditious 

way to give the qualifying hospitals the 

money allotted under section 1109 of 

Public Law 111–152. Alternatively, 

these payments could be distributed to 

qualifying hospitals at the time of cost 

report settlement for the qualifying 

providers’ fiscal year end FY 2011 and 

FY 2012 cost reports. However, cost 

report settlement typically takes several 

years beyond a hospital’s fiscal year 

end. If we distributed these additional 

payments at the time of cost report 

settlement, it may take several years 

until hospitals receive these additional 

payments. Therefore, we believe our 

proposal to give hospitals their section 

1109 payments as annual payments 

during FY 2011 and FY 2012 presents 

the most expedient method to distribute 

these payments to hospitals, and is in 

the spirit of the intent of Congress. We 

welcome public comment on our 

proposal to distribute $150 million in 

FY 2011 and $250 million in FY 2012 

through an annual payment in each of 

those years made to the qualifying 

providers through their FI or A/B MAC. 

We propose that qualifying hospitals 

report these additional payments on 

their Medicare hospital cost report 

corresponding to the appropriate cost 

reporting period that the hospitals have 

received the payments. On the Medicare 

Hospital Cost report, Form 2552 has an 

‘‘other adjustment’’ line on Worksheet E, 

Part A that can used by hospitals to 

report the payments received under 

section 1109 of Public Law 111–152. We 

plan to issue additional cost reporting 

instructions for qualifying hospitals to 

report these additional payments on a 

subscripted line of the ‘‘other 

adjustment’’ line to identify this 

payment. We note that we are requiring 

these payments be reported on the cost 

report for tracking purposes only; these 

additional payments will not be 

adjusted or settled by the FI or A/B 

MAC on the cost report. 


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30930 Federal Register / Vol. 75, No. 105 / Wednesday, June 2, 2010 / Proposed Rules 

5. Hospital Weighting Factors 

Section 1109(c) of Public Law 111– 

152 requires that the payment amount 

for a qualifying hospital shall be 

determined ‘‘in proportion to the portion 

of the amount of the aggregate payments 

under section 1886(d) of the Social 

Security Act to the hospital for fiscal 

year 2009 bears to the sum of all such 

payments to all qualifying hospitals for 

such fiscal year.’’ We are proposing that 

the portion of a hospital’s payment 

under section 1109 is based on the 

proportion of their IPPS operating 

payments made in FY 2009 relative to 

the total IPPS operating payments made 

to all qualifying hospitals in FY 2009. 

These FY 2009 IPPS operating payments 

made under section 1886(d) include 

DRG and wage adjusted payments made 

under the IPPS standardized amount 

with add-on payments for operating 

DSH, operating IME, operating outliers 

and new technology (collectively 

referred to in this proposed rule as the 

IPPS operating payment amount). We 

are proposing to include IME MA 

payments made to IPPS hospitals 

because these payments are made under 

section 1886(d) of the Act. Under 42 

CFR 412.105(g) of the regulations and as 

implemented in Transmittal A–98–21 

(Change Request 332), hospitals that are 

paid under the IPPS and train residents 

in approved GME programs may submit 

claims associated with MA enrollees to 

the FI/MAC for the purpose of receiving 

an IME payment. No IPPS operating 

payment or other add-on payment is 

made for these MA enrollees. This is 

consistent with how the IPPS includes 

these IME MA payments when adjusting 

for budget neutrality of the IPPS 

standardized amounts. 

In addition, we are including in the 

FY 2009 IPPS operating payment 

amount beneficiary liabilities 

(coinsurance, copayments, and 

deductibles) because the payments 

made under section 1886(d) of the Act 

‘‘are subject to the provisions of section 

1813.’’ That is, the payment received by 

the hospital includes the amount paid 

by Medicare, as well as the amount for 

which the beneficiary is responsible, as 

set forth in section 1813 of the Act. We 

propose to exclude IPPS capital 

payments because they are payments 

made under section 1886(g) of the Act. 

We also propose to exclude payments 

for organ acquisition costs because it is 

a payment made under section 1881(d) 

of the Act and we propose to exclude 

payments for blood clotting factor 

because they are payments made under 

section 1886(a)(4) of the Act. 

Consistent with our IPPS ratesetting 

process, we are proposing to use the FY 

2009 MedPAR inpatient claims data to 

determine the FY 2009 IPPS operating 

payments amount made to qualifying 

hospitals in order to set the ratio for 

determining a qualifying hospital’s 

share of the $400 million payment 

under section 1109 of Public Law 111– 

152. Though these claim payments may 

be later changed and adjusted at cost 

report settlement, this settlement 

generally occurs after FY 2011 and FY 

2012. Furthermore, we believe that use 

of the FY 2009 MedPAR inpatient 

claims data is consistent with our 

proposal to make the payments under 

section 1109 of Public Law 111–152 in 

two annual payments in FY 2011 and 

2012 instead of waiting for cost report 

settlement. Furthermore, we use 

MedPAR data in other areas of the IPPS, 

including calculating IPPS relative 

weights, budget neutrality factors, 

outlier thresholds and the standardized 

amount. The FY 2009 MedPAR data can 

be ordered to allow the public to verify 

qualifying hospitals’ FY 2009 IPPS 

operating payments. Interested 

individuals may order these files 

through the Web site at: http:// 

www.cms.hhs.gov/LimitedDataSets/ by 

clicking on MedPAR Limited Data Set 

(LDS)-Hospital (National). This Web 

page describes the file and provides 

directions and further detailed 

instructions for how to order. 

Persons placing an order must send 

the following: a Letter of Request, the 

LDS Data Use Agreement and Research 

Protocol (refer to the Web site for further 

instructions), the LDS Form, and a 

check for $3,655 to: 

Mailing address if using the U.S. Postal 

Service: Centers for Medicare & 

Medicaid Services, RDDC Account, 

Accounting Division, P.O. Box 7520, 

Baltimore, MD 21207–0520. 

Mailing address if using express mail: 

Centers for Medicare & Medicaid 

Services, OFM/Division of 

Accounting—RDDC, Mailstop C3–07– 

11, 7500 Security Boulevard, 

Baltimore, MD 21244–1850. 

For this proposed rule, we used the 

December 2009 update to the FY 2009 

MedPAR data (which is the latest 

available update to the file) to determine 

the proposed qualifying hospitals’ IPPS 

operating payment amounts. For the FY 

2011 IPPS/LTCH PPS final rule, we plan 

on using the March 2010 update to the 

FY 2009 MedPAR data to determine 

qualifying hospitals’ IPPS operating 

payment amounts which will then be 

used to set the hospital weighting 

factors for FYs 2011 and 2012 

As discussed earlier in section II.E.3. 

of the preamble to this supplemental 

proposed rule, qualifying hospitals can 

include SCHs and MDHs as they meet 

the definition of subsection (d) 

hospitals. SCHs are paid in the interim 

(prior to cost report settlement) on a 

claim by claim basis at the amount that 

is the higher of the payment based on 

the hospital-specific rate or the IPPS 

Federal rate based on the standardized 

amount. At cost report settlement, the FI 

or A/B MAC determines if the hospital 

would receive higher IPPS payments in 

the aggregate using the hospitals 

specific rate (on all claims) or the 

Federal rate (on all claims). The FI or 

A/B MAC then assigns the hospital the 

higher payment amount (either the 

hospital specific rate for all claims or 

the Federal rate amount for all claims) 

for the cost reporting period. To 

determine the FY 2009 operating 

payment amount for SCHs that meet the 

definition of a qualifying hospital, we 

propose to use the IPPS operating 

payment made on the Medicare IPPS 

claim in the FY 2009 MedPAR rather 

than the SCH’s final payment rate that 

is determined at cost report settlement. 

We believe this approach is consistent 

with the treatment of other qualifying 

hospitals under our proposal, and again 

allows for the timely distribution of 

funds in two annual payments, as 

discussed above. MDHs are paid the 

sum of the Federal payment amount 

plus 75 percent of the amount by which 

the hospital specific rate exceeds the 

Federal payment amount. This amount 

is considered their IPPS operating 

payment reported on their Medicare 

IPPS claim. 

In order to calculate payment 

amounts consistent with section 1109(c) 

of Public Law 111–152, we propose to 

use a weighting factor for each 

qualifying hospital that is equal to the 

qualifying hospital’s FY 2009 IPPS 

operating payment amount (as described 

above) divided by the sum of FY 2009 

IPPS operating payment amounts for all 

qualifying hospitals. We believe this 

methodology is consistent with the 

requirement of section 1109(c) of Public 

Law 111–152, because qualifying 

hospitals with a larger proportion of 

operating payments would have a 

proportionately higher weighting factor 

and would receive the proportionately 

larger share of the $400 million, while 

hospitals with a smaller proportion of 

operating payments would have 

proportionately smaller weighting factor 

and would receive proportionately 

smaller shares of the $400 million. We 

welcome public comment on our 

methodology to determine the amount 

of money distributed to qualifying 

hospitals consistent with the language 


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in section 1109(c) of Public Law 111– 

152. 

6. Results 

In calculating county-level Medicare 

Part A and B spending, we have found 

that there are 3,144 counties in the 

United States. Therefore, there are 786 

counties that rank in the lowest quartile 

of counties with regards to adjusted 

Medicare Part A and Part B spending 

per beneficiary. We have listed the 786 

eligible counties in Table 2. Of those 

786 eligible counties, there are only 276 

counties in which qualifying hospitals 

are located, using the methodology we 

proposed in section II.E.3. of the 

preamble to this supplemental proposed 

rule. Using Medicare provider numbers, 

as proposed above in section II.E.3. of 

the preamble to this supplemental 

proposed rule, we have identified 415 

IPPS hospitals that are currently located 

in those eligible counties and received 

IPPS operating payments in FY 2009. 

We have listed the qualifying IPPS 

provider numbers, their counties and 

their weighting factors in Table 2. We 

invite public comment on our proposed 

methodology for adjusting spending for 

age, sex, and race as well as the 

alternative methodology discussed in 

section II.E.2.a. of the preamble to this 

supplemental proposed rule. For these 

two methodologies (WBHO and WBO), 

we list the number of eligible counties, 

the number of eligible counties in which 

a qualifying hospital is located, the 

payment amount, and the percentage of 

the total payment under section 1109 of 

Public Law 111–152 by State in Table 3. 

We invite public comment on the 

accuracy of the lists of eligible counties, 

qualifying hospitals and qualifying 

hospitals’ payment weighting factors 

(based on the proposed methodologies 

described above). 

7. Finalization of Eligible Counties, 

Qualifying Hospitals and Qualifying 

Hospitals’ Weighting Factors 

Based on public comments, it is 

possible that we will finalize a 

methodology to determine the list of 

eligible counties and hospitals that 

differs from our current proposal. A 

change in our methodology could, in 

turn, result in changes to the list of 

eligible counties or qualifying hospitals. 

We note again that we are proposing to 

identify eligible counties, qualifying 

providers and their payments under 

section 1109 of Public Law 111–152 

only once in the FY 2011 IPPS/LTCH 

PPS final rule. Based on this proposal, 

the methodology for determining a final 

list of eligible counties would produce 

the actual list of eligible counties that 

would be finalized in the FY 2011 IPPS 

final rule and would not be updated in 

a future fiscal year based on updated 

data. 

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BILLING CODE 4120–01–C 

F. Rural Community Hospital 

Demonstration Program 

1. Background 

Section 410A(a) of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), 

Public Law 108–173, required the 

Secretary to establish a demonstration 

program to test the feasibility and 

advisability of establishing ‘‘rural 

community hospitals’’ to furnish 

covered inpatient hospital services to 

Medicare beneficiaries. The 

demonstration pays rural community 

hospitals for such services under cost 

based methodology for Medicare 

payment purposes for covered inpatient 

hospital services furnished to Medicare 

beneficiaries. A rural community 

hospital, as defined in section 

410A(f)(1) of MMA, is a hospital that— 

• Is located in a rural area (as defined 

in section 1886(d)(2)(D) of the Act) or is 

treated as being located in a rural area 

under section 1886(d)(8)(E) of the Act; 

• Has fewer than 51 beds (excluding 

beds in a distinct part psychiatric or 

rehabilitation unit) as reported in its 

most recent cost report; 

• Provides 24-hour emergency care 

services; and 

• Is not designated or eligible for 

designation as a CAH under section 

1820 of the Act. 

Subsection 410A(a)(4) of the MMA, in 

conjunction with paragraphs (2) and (3) 

of subsection 410A(a), provided that the 

Secretary was to select for participation 

no more than 15 rural community 

hospitals in rural areas of States that the 

Secretary identified as having low 

population densities. Using 2002 data 

from the U.S Census Bureau, we 

identified the 10 States with the lowest 

population density in which rural 

community hospitals were to be located 

in order to participate in the 

demonstration: Alaska, Idaho, Montana, 

Nebraska, Nevada, New Mexico, North 

Dakota, South Dakota, Utah, and 

Wyoming. (Source: U.S. Census Bureau, 

Statistical Abstract of the United States: 

2003). 

We originally solicited applicants for 

the demonstration in May 2004; 13 

hospitals began participation with cost 

report years beginning on or after 

October 1, 2004. (Four of these 13 

hospitals withdrew from the program 

and became CAHs). In a notice 

published in the Federal Register on 

February 6, 2008 (73 FR 6971), we 

announced a solicitation for up to 6 

additional hospitals to participate in the 

demonstration program. Four additional 

hospitals were selected to participate 

under this solicitation. These four 

additional hospitals began under the 

demonstration payment methodology 

with the hospital’s first cost reporting 

period starting on or after July 1, 2008. 

Three hospitals (two of the hospitals 

were among the thirteen hospitals that 

were original participants in the 

demonstration and one of the hospitals 

was among the four hospitals that began 

the demonstration in 2008) withdrew 

from the demonstration during CY 2009. 

(Two of these hospitals indicated that 

they will be paid more for Medicare 

inpatient services under the rebasing 

allowed under the SCH methodology 

allowed by the Medicare Improvement 

for Patients and Providers Act of 2008 

(Pub. L. 110–275). The other hospital 

restructured to become a CAH.) For 

purposes of the analyses that follow in 

section II.F.3 of the preamble, we make 

the assumption that there are 10 

currently participating hospitals (8 

hospitals that are actively participating 

since the initial demonstration period 

had not yet concluded for them at the 

time of the passage of Public Law 111– 

148 and 2 hospitals that concluded the 

demonstration in December 2009 upon 

the conclusion of their initial 

demonstration period). For the 2 

hospitals that concluded the 

demonstration in December 2009, we 

assume that they will continue the 

demonstration under the 5-year 

extension provided by Affordable Care 

Act since they participated in their 

entire initial 5-year demonstration 

period, which we believe indicates that 

those hospitals favored the payment rate 

provided in the demonstration and will 

continue to avail themselves of such 

reimbursement. 

Section 410A(a)(5) of Public Law 108– 

173 required a 5-year demonstration 

period of participation. Prior to the 

enactment of Public Law 111–148, for 

the seven currently participating 

hospitals that began the demonstration 

during FY 2005 (‘‘originally 

participating hospitals’’), the 

demonstration was scheduled to end for 

each of these hospitals on the last day 

of its cost reporting period that ends in 

FY 2010. The end of the participation 

for the three participating hospitals that 

began the demonstration in CY 2008 

was scheduled to be September 30, 

2010. 

In addition, section 410A(c)(2) of 

Public Law 108–173 requires that, ‘‘[i]n 

conducting the demonstration program 

under this section, the Secretary shall 

ensure that the aggregate payments 

made by the Secretary do not exceed the 

amount which the Secretary would have 

paid if the demonstration program 

under this section was not 

implemented.’’ This requirement is 

commonly referred to as ‘‘budget 

neutrality’’. 

Generally, when we implement a 

demonstration program on a budget 

neutral basis, the demonstration 

program is budget neutral in its own 

terms; in other words, the aggregate 

payments to the participating hospitals 

do not exceed the amount that would be 

paid to those same hospitals in the 

absence of the demonstration program. 

Typically, this form of budget neutrality 

is viable when, by changing payments 

or aligning incentives to improve overall 

efficiency, or both, a demonstration 

program may reduce the use of some 

services or eliminate the need for others, 

resulting in reduced expenditures for 

the demonstration program’s 

participants. These reduced 

expenditures offset increased payments 

elsewhere under the demonstration 

program, thus ensuring that the 

demonstration program as a whole is 

budget neutral or yields savings. 

However, the small scale of this 

demonstration program, in conjunction 

with the payment methodology, makes 

it extremely unlikely that this 

demonstration program could be viable 

under the usual form of budget 

neutrality. Specifically, cost-based 

payments to participating small rural 

hospitals are likely to increase Medicare 

outlays without producing any 

offsetting reduction in Medicare 

expenditures elsewhere. Therefore, a 

rural community hospital’s 

participation in this demonstration 

program is unlikely to yield benefits to 

the participant if budget neutrality were 

to be implemented by reducing other 

payments for these same hospitals. 

In the past six IPPS final regulations, 

spanning the period for which the 

demonstration has been implemented, 

we have adjusted the national inpatient 

PPS rates by an amount sufficient to 

account for the added costs of this 

demonstration program, thus applying 

budget neutrality across the payment 

system as a whole rather than merely 

across the participants in this 

demonstration program. As we 

discussed in the FY 2005, FY 2006, FY 

2007, FY 2008, FY 2009, and FY 2010 

IPPS final rules (69 FR 49183; (70 FR 

47462); (71 FR 48100); (72 FR 47392); 

(73 FR 48670); and (74 FR 43922)), we 

believe that the language of the statutory 

budget neutrality requirements permits 

the agency to implement the budget 

neutrality provision in this manner. 

In light of the statute’s budget 

neutrality requirement, we proposed in 

the May 4, 2010 FY 2011 IPPS/LTCH 

PPS proposed rule (75 FR 24012) a 

methodology to calculate a budget 

neutrality adjustment factor to the FY 


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2011 national IPPS rates. In the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed 

rule, the only amount that was 

identified to be offset for the FY 2011 

IPPS/LTCH final rule was that by which 

the costs of the demonstration program, 

as indicated by settled cost reports 

beginning in FY 2007 for hospitals 

participating in the demonstration 

during FY 2007, exceeded the amount 

that was identified in the FY IPPS 2007 

final rule as the budget neutrality offset 

for FY 2007. No dollar amount was 

specified for purpose of this offset, 

because of a delay in the settlement 

process of FY 2007 cost reports. Due to 

the timing of the proposed rule in 

relation to the passage of Public Law 

111–148, we were unable to include in 

the proposed budget neutrality 

adjustment factor to the FY 2011 

national IPPS rates an offset that would 

accont for the estimated financial 

impact that the demonstration would 

have for certain time frames under the 

extension required by such Act. 

In this supplemental proposed rule, 

we propose that such an adjustment 

would incorporate the following 4 

components: (1) The estimated costs 

that would be incurred in FY 2011 for 

the 10 currently participating hospitals 

as a result of the demonstration’s 

continuation in FY 2011; (2) the 

estimated cost incurred in FY 2010 for 

the 7 ‘‘originally participating hospitals’’ 

that were not accounted for in the FY 

2010 IPPS final rule but that now must 

be accounted for as a result of the 

demonstration being continued by the 

Affordable Care Act’s 5-year extension 

for such hospitals; (3) the estimated FY 

2011 demonstration costs associated 

with the participation of up to 20 new 

hospitals; and (4) a factor by which the 

cost of the demonstration program in 

2007, as indicated by settled cost reports 

beginning in FY 2007, exceeded the 

amount that was identified in the FY 

IPPS 2007 final rule as the budget 

neutrality offset for FY 2007. 

2. Section 410A of the MMA as 

Amended by Section 3123 of the Public 

Law 111–148 and as Further Amended 

by Section 10313 of Public Law 111– 

148. 

Section 410Aof the MMA as amended 

by section 3123 of Public Law 111–148, 

and as further amended by section 

10313 of Public Law 111–148, affects 

this demonstration in several ways. 

First, the Secretary is required to 

conduct the demonstration for an 

additional 5-year period that begins on 

the date immediately following the last 

day of the initial 5-year period under 

section 410A(a)(5) of the MMA as 

amended. (Section 410A(g)(1) of the 

MMA as added by section 3123(a) of 

Public Law 111–148 and as further 

amended by section 10313 of Public 

Law 111–148). Further, the Affordable 

Care Act requires that in the case of a 

rural community hospital that is 

participating in the demonstration 

program as of the last day of the initial 

5-year period, the Secretary shall 

provide for the continued participation 

of such rural hospital in the 

demonstration program during the 

5-year extension unless the hospital 

makes an election, in such form and 

manner as the Secretary may specify, to 

discontinue such participation. (Section 

410A(g)(4)(A) of MMA as added by 

section 3123(a) of Public Law 111–148 

and as amended by section 10313 of 

Public Law 111–148). In addition, it 

provides that during the 5-year 

extension period, the Secretary shall 

expand the number of States with low 

population densities determined by the 

Secretary to 20. (Section 410A(g)(2) of 

MMA as added by section 3123(a) of 

Public Law 111–148 and as amended by 

section 10313 of Public Law 111–148.) 

Further, the Secretary is required to use 

the same criteria and data that the 

Secretary used to determine the States 

under section 410A(a)(2) of MMA for 

purposes of the initial 5-year period. It 

also allows not more than 30 rural 

community hospitals in such States to 

participate in the demonstration during 

the 5-year extension period. (Section 

410A(g)(3) of MMA as added by section 

3123(a) of Public Law 111–148 and as 

amended by section 10313 of Public 

Law 111–148.) Additionally, it provides 

that the amount of payment under the 

demonstration program for covered 

inpatient hospital services furnished in 

a rural community hospital, other than 

services furnished in a psychiatric or 

rehabilitation unit of the hospital which 

is a distinct part, is the reasonable costs 

of providing such services for 

discharges occurring in the first cost 

reporting period beginning on or after 

the first day of the 5-year extension 

period. (Section 410A(g)(4)(b) of MMA 

as added by section 3123(a) of Public 

Law 111–148 and as amended by 

section 10313 of Public Law 111–148.) 

For discharges occurring in a 

subsequent cost reporting period paid 

under the demonstration, the formula in 

section 410A(b)(1)(B) of MMA as 

amended would apply. In addition, 

various other technical and conforming 

changes were made to section 410A of 

MMA, as amended by section 3123(a) of 

Public Law 111–148 and as amended by 

section 10313 of Public Law 111–148. 

3. Proposed FY 2011 Budget Neutrality 

Adjustment 

In order to ensure that the 

demonstration is budget neutral as is 

required by the statute, we are 

proposing to adjust the national IPPS 

rates in the FY 2011 IPPS final rule to 

account for any added costs attributable 

to the demonstration. Specifically, the 

proposed budget neutrality adjustment 

would account for: (1) The estimated 

costs of the demonstration in FY 2011 

for the 10 currently participating 

hospitals; (2) the estimated FY 2010 

costs of the demonstration that were not 

accounted for in the FY 2010 IPPS/RY 

2010 LTCH PPS final rule for the seven 

‘‘originally participating hospitals’’ 

because we estimated those hospitals’ 

FY 2010 costs under the assumption 

that the demonstration would be 

concluding before the end of FY 2010 

for those hospitals; (3) the estimated FY 

2011 costs for up to 20 new hospitals 

selected to participate in the 

demonstration; and (4) the amount by 

which the costs of the demonstration 

program, as indicated by settled cost 

reports beginning in FY 2007 for 

hospitals participating in the 

demonstration during FY 2007, 

exceeded the amount that was identified 

in the FY 2007 IPPS final rule as the 

budget neutrality offset for FY 2007. 

a. Component of the Proposed FY 2011 

Budget Neutrality Adjustment That 

Accounts for Estimated FY 2011 Costs 

of the Demonstration of the Ten 

Currently Participating Hospitals 

The component of the proposed FY 

2011 budget neutrality adjustment to the 

national IPPS rates that accounts for the 

estimated cost of the demonstration in 

FY 2011 for the ten currently 

participating hospitals would be 

calculated by utilizing separate 

methodologies for the 7 hospitals that 

have participated in the demonstration 

since its inception and that, as 

explained previously, we consider to be 

continuing to participate in the 

demonstration (‘‘originally participating 

hospitals’’), and the 3 hospitals that are 

currently participating in the 

demonstration that were among the 4 

hospitals that joined the demonstration 

in 2008. Different methods are used 

because fiscal intermediaries’ most 

recent final settlements of cost reports 

are for periods beginning in FY 2006 for 

the ‘‘originally participating hospitals,’’ 

whereas we are relying on available 

submitted documentation for the 

hospitals that began participation in the 

demonstration in 2008. Because the 

hospitals that began the demonstration 

in 2008 have no settled cost reports for 


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the demonstration, we are using as 

submitted cost documents. The budget 

neutrality analysis is based on the 

assumption that all 10 of these hospitals 

will continue the demonstration under 

the 5-year extension period provided by 

the Affordable Care Act. We believe that 

this assumption is warranted since they 

have participated in the initial 5 year 

demonstration period so far, which we 

believe indicates that they will choose 

to continue to avail themselves of the 

levels of reimbursement under the 

demonstration. 

The estimate of the portion of the 

proposed budget neutrality adjustment 

that accounts for the estimated costs of 

the demonstration in FY 2011 for the 7 

‘‘originally participating hospitals’’ is 

based on data from their second year 

cost reports—that is, cost reporting 

periods beginning in FY 2006. We 

propose to use these cost reports 

because they are the most recent 

complete cost reports and thus we 

believe they enable us to estimate FY 

2011 costs as accurately as possible. In 

addition, we estimate the cost of the 

demonstration in FY 2011 for 2 of the 

4 hospitals that joined the 

demonstration in 2008 based on data 

from each of their cost reporting periods 

beginning January 1, 2008. Similarly, we 

propose to use these cost reports 

because they are the most recent cost 

reports and thus we believe they enable 

us to estimate FY 2011 costs for these 

2 hospitals as accurately as possible. 

Since one of the 4 hospitals that began 

in 2008 has withdrawn, there is one 

hospital remaining among those that 

began in that year. The remaining 

hospital of the 4 that began in 2008 is 

an Indian Health Service provider. 

Historically, the hospital has not filed 

standard Medicare cost reports. In order 

to estimate its costs, we are proposing 

to use an analysis of Medicare inpatient 

costs and payments submitted by the 

hospital for the cost reporting period 

October 1, 2005 through September 30, 

2006. We are proposing to use this data 

because it represents a detailed analysis 

of the hospital’s cost-payment profile, 

and we expect that such an account will 

not change appreciably from year to 

year because it is a relatively small 

provider serving a limited population. 

When we add together the estimated 

costs of the demonstration in FY 2011 

for the 7 ‘‘originally participating 

hospitals’’ that have participated in the 

demonstration since its inception and 

the 3 hospitals selected in 2008 that are 

still participating, the total estimated 

cost is $20,930,484. This estimated 

amount reflects the difference between 

these 10 participating hospitals’ 

estimated costs in FY 2011 under the 

methodology set forth in Public Law 

108–173 as amended by Public Law 

111–148 and the estimated amount the 

hospitals would have been paid under 

the IPPS in FY 2011. With the exception 

of the Indian Health Service provider, 

the estimated costs under the 

demonstration are derived from data on 

the hospitals’ cost reports. The cost 

reports state the dollar amount 

attributable to Medicare inpatient costs 

for the cost report year. They also state 

the dollar amount that would be paid if 

the inpatient prospective payment 

system were in effect. For each hospital, 

the difference between these two 

amounts is updated according to the 

market basket update factors for 

inpatient hospital costs reported by the 

CMS Office of the Actuary for the years 

between the cost report year and FY 

2011. In accordance with guidance from 

the Office of the Actuary, we also 

assume a 2 percent annual volume 

increase. In the FY 2011 final rule, we 

may revise this estimate if updated cost 

report data becomes available. 

b. Portion of the Proposed FY 2011 

Budget Neutrality Adjustment That 

Accounts for Estimated FY 2010 Costs 

of the Demonstration That Were Not 

Accounted for in the FY 2010 IPPS 

Final Rule for the Seven ‘‘Originally 

Participating Hospitals’’ 

As explained above, subsection 

(g)(4)(A) of 410A of the MMA as added 

by section 3123(a) of Public Law 111– 

148 as amended by section 10313 of 

Public Law 111–148, provided for the 

continued participation of rural 

community hospitals that were 

participating in the demonstration as of 

the last day of the initial 5-year 

[demonstration] period. One of the 

effects of this extension is that the seven 

‘‘originally participating hospitals’’ 

(those hospitals that have participated 

in the demonstration since its inception 

and that continue to participate in the 

demonstration or were participating in 

the demonstration as of the last day of 

its initial 5-year demonstration period 

(that, is the 2 rural community hospitals 

that concluded their period of 

performance in December 2009)) which 

were scheduled to end their 

participation in the demonstration 

before the conclusion of FY 2010 would 

continue to participate for the 

remainder of FY 2010 and beyond as 

applicable. Section II.F.3. of the 

preamble, we are assuming for purposes 

of our budget neutrality analysis in 

section II. F.3.a. of the preamble that the 

seven ‘‘originally participating 

hospitals’’ are also currently 

participating hospitals. See for our 

explanation). However, we note that the 

portion of the FY 2010 budget neutrality 

adjustment to the national IPPS rates 

that was included in the FY 2010 IPPS 

final rule that accounted for the 

estimated costs of the demonstration in 

FY 2010 did not take into account costs 

of the demonstration for those hospitals 

beyond the anticipated end date of their 

initial demonstration period. (For 

example, for a hospital whose cost 

report ended in June 30, 2010, we 

counted only nine months for the 

budget neutrality adjustment for the FY 

2010 IPPS/LTCH PPS final rule. Under 

this proposal, we would also adjust the 

national IPPS rates to account for the 

estimated costs for this hospital for the 

remaining three months of FY 2010.) We 

are proposing to include a component in 

the FY 2011 budget neutrality 

adjustment to account for the estimated 

costs of the demonstration in FY 2010 

that were not accounted for in the FY 

2010 IPPS/RY 2010 LTCH PPS final rule 

for the seven ‘‘originally participating 

hospitals’’ because we calculated the FY 

2010 cost estimate for that year’s final 

rule assuming that the demonstration 

would end before the end of that fiscal 

year for those hospitals. We are 

proposing the following methodology to 

account for such estimated costs: Step 

one, for each of the seven ‘‘originally 

participating hospitals,’’ we divide the 

number of months that were not 

included in the estimate of the FY 2010 

demonstration costs included in the 

final IPPS FY 2010 rule by 12. This step 

is necessary to determine for each of the 

seven ‘‘originally participating 

hospitals’’ the fraction of FY 2010 for 

which the estimate of the FY 2010 

demonstration was not included. Step 

two, for each of the seven ‘‘originally 

participating hospitals,’’ the percentage 

that results in step one is multiplied by 

the estimate of the cost attributable to 

the demonstration in FY 2010 for the 

hospital. The estimate for the fraction of 

the hospital’s cost for fiscal year 2010 

not included in the estimate in the FY 

2010 IPPS rule is arrived at by 

multiplying this fraction by the estimate 

of costs for the entire year. The estimate 

of the costs of the demonstration for FY 

2010 for the seven ‘‘originally 

participating’’ hospitals is derived from 

data found in their cost reports for cost 

report years beginning in FY 2006. 

These cost reports show dollar amounts 

for costs for Medicare inpatient services 

(that is, the Medicare payment amount 

in that cost report year for Medicare 

inpatient services) and the dollar 

amount that would have been paid 

under the IPPS. Since these cost report 

years all ended during FY 2007, this 


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difference, respective to each of the 

seven ‘‘originally participating 

hospitals’’, is updated according to the 

market basket updates for inpatient 

hospital costs reported by the CMS 

Office of the Actuary for the years from 

FY 2008 through FY 2011. In 

accordance with guidance from the 

Office of the Actuary, we also assume an 

annual two percent volume increase. 

(This calculation is not necessary for the 

hospitals that began participating in the 

demonstration in 2008 because the 

portion of the FY 2010 budget neutrality 

adjustment that accounts for estimated 

FY 2010 demonstration costs in the FY 

2010 IPPS/RY 2010 LTCH PPS final rule 

incorporates a cost estimate for each of 

these hospitals based on the entirety of 

the Federal fiscal year.) The estimate of 

additional costs attributable to the 

demonstration in FY 2010 for the 7 

‘‘originally participating hospitals’’ that 

were not accounted for in the FY 2010 

final rule is $6,488,221. Similar to 

above, this estimate is based on the 

assumption that the seven ‘‘originally 

participating hospitals’’ will choose to 

continue participating in the 

demonstration past the end of their 

original 5-year demonstration periods. 

We believe that this assumption is valid, 

because they are participating in the 

demonstration to this date, or, for the 

case of the two hospitals that ended 

active participation in the 

demonstration program in December 

2009, they were participating as of the 

last day of their initial 5-year period. 

c. Portion of the Proposed FY 2011 

Budget Neutrality Adjustment That 

Accounts for Estimated FY 2011 Costs 

for Hospitals Newly Selected To 

Participate in the Demonstration 

Section 410A(g)(3) of MMA, as added 

by section 3123 of Public Law 111–148, 

and as amended by section 10313 of 

Public Law 111–148, provides that 

‘‘[n]otwithstanding subsection (a)(4), 

during the 5-year extension period, not 

more than 30 rural community hospitals 

may participate in the demonstration 

program under this section.’’ 

Consequently, up to 20 additional 

hospitals may be added to the 

demonstration (30 hospitals minus the 

10 currently participating hospitals). In 

order to ensure budget neutrality for 20 

new participating hospitals, we are 

proposing to include a component in 

the budget neutrality adjustment factor 

to the FY 2011 national IPPS rates to 

account for the estimated FY 2011 costs 

of those new hospitals. For purposes of 

estimating the FY 2011 costs of the 

demonstration for 20 new hospitals, we 

are proposing to estimate such costs 

from the average annual cost per 

hospital derived from the estimate of the 

10 currently participating hospitals’ 

costs attributable to the demonstration 

for FY 2011. Because the statute allows 

the potential for 20 additional hospitals 

for the demonstration, we are basing 

this estimate on the assumption that 20 

hospitals will join. Our experience 

analyzing the cost reports so far for 

demonstration hospitals shows a wide 

variation in costs among the hospitals. 

Given the wide variation in cost profiles 

that might occur for additional 

hospitals, we believe that estimating the 

total demonstration cost for FY 2011 for 

20 additional hospitals from the average 

annual cost of the currently existing 

hospitals yields the most accurate 

prediction because it is reflective of the 

historical trend of participant behavior 

under the demonstration and should 

give an accurate as possible prediction 

of future participant behavior. We 

believe that, although there is variation 

in costs, formulating an estimate from 

the average costs of as many as 10 

hospitals gives as good as possible a 

prediction of what the demonstration 

costs for each of 20 additional hospitals. 

We are estimating the average cost for 

each of the 20 additional hospitals not 

on a range of costs, but on an estimate 

of this average cost per hospital, 

obtained by dividing $20,930,484, the 

estimated cost amount for FY 2011 

identified for the 10 participating 

hospitals in subsection (a), by 10. The 

estimate for costs attributable to the 

demonstration for 20 additional 

hospitals in FY 2011 is $41,860,968. 

d. Portion of the Proposed FY 2011 

Budget Neutrality Adjustment That 

Offsets the Amount by Which the Costs 

of the Demonstration in FY 2007 

Exceeded the Amount That Was 

Identified in the Final FY 2007 IPPS 

Final Rule as the Budget Neutrality 

Offset for FY 2007 

In addition, in order to ensure that the 

demonstration in FY 2007 was budget 

neutral, we are proposing to incorporate 

a component into the budget neutrality 

adjustment factor to the FY 2011 

national IPPS rates, which would offset 

the amount by which the costs of the 

demonstration program as indicated by 

settled cost reports beginning in FY 

2007 for hospitals participating in the 

demonstration during FY 2007 exceeded 

the amount that was identified in the FY 

2007 IPPS final rule as the budget 

neutrality offset for FY 2007. 

Specifically, we are proposing the 

following methodology: 

• Step One: Calculate the FY 2007 

costs of the demonstration program 

according to the settled cost reports that 

began in FY 2007 for the then 

participating hospitals (which represent 

the third year of the demonstration for 

each of the then participating hospitals). 

(We propose to use these settled cost 

reports, which represent the third year 

of the demonstration for each of the 

then participating hospitals because 

they correspond most precisely to FY 

2007 and we therefore believe correctly 

represent FY 2007 inpatient costs for the 

demonstration during that period). 

• Step Two: Subtract the amount that 

was offset by the budget neutrality 

adjustment for FY 2007 ($9,197,870) 

from the costs of the demonstration in 

FY 2007 as calculated in step one; and 

• Step Three: The result of step two 

is a dollar amount, for which we would 

calculate a factor that would offset such 

amounts and would be incorporated 

into the proposed overall budget 

neutrality adjustment to national IPPS 

rates for FY 2011. This specific 

component to the overall budget 

neutrality adjustment for FY 2011 

would account for the difference 

between the costs of the demonstration 

in FY 2007 and the amount of the 

budget neutrality adjustment published 

in the FY 2007 IPPS final rule and 

therefore ensures that the demonstration 

is budget neutral for FY 2007. 

Because the settlement process for the 

demonstration hospitals’ third year cost 

reports, that is, cost reporting periods 

starting in FY 2007, has experienced a 

delay, for this FY 2011 IPPS proposed 

rule, we are unable to state the costs of 

the demonstration corresponding to FY 

2007 and as a result are unable to 

propose the specific numeric 

adjustment representing this offsetting 

process that would be applied to the 

national IPPS rates. However, we expect 

the cost reports beginning in FY 2007 

for hospitals that participated during FY 

2007 to be settled before the FY 2011 

IPPS/LTCH final rule is published. 

Therefore, for the FY 2011 IPPS/LTCH 

PPS final rule, we expect to be able to 

calculate the amount by which the costs 

corresponding to FY 2007 exceeded the 

amount offset by the budget neutrality 

adjustment for FY 2007. Consequently, 

by adding this proposed amount to the 

above proposed amounts estimated in 

subsections (a) through (c) of section 

II.F.3.a. of the preamble, we arrive at a 

proposed amount, from which we 

would be able to calculate the proposed 

budget neutrality factor which we 

would use to adjust the FY 2011 

national IPPS rates in the FY 2011 IPPS/ 

LTCH PPS final rule. 

For this supplemental proposed FY 

2011/LTCH PPS rule, the estimated 

amount for the adjustment to the 

national IPPS rates is the sum of the 

amounts specified in subsections (a) 


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through (c) above or $69,279,673 and 

the amount resulting from the proposed 

method in subsection (d) that we expect 

to be calculated in the FY 2011 IPPS/ 

LTCHPPS final rule. Subsections (a) 

through (c) state dollar amounts, which 

represent estimated costs attributable to 

the demonstration for the respective 

component of the overall estimated 

calculation of the budget neutrality 

factor for FY 2011. This estimated 

amount is based on the specific 

assumptions identified, as well as from 

data sources that are used because they 

represent either the most recently 

finalized or, if as submitted, the most 

recent available cost reports. The overall 

budget neutrality change in the final FY 

2011 IPPS/LTCH PPS rule, if any of 

these factors were to change. 

G. Proposed Changes to Payment Rates 

for IPPS for Capital-Related Costs for FY 

2011 

Although the provisions of Public 

Law 111–148, do not directly affect the 

payment rates and policies for the IPPS 

for capital-related costs, in section II. of 

the Addendum of this supplemental 

proposed rule we are proposing the 

capital IPPS standard Federal rates for 

FY 2011. This is necessary because the 

wage index changes required by the 

provisions of Public Law 111–148 

(discussed above in section II.A. of this 

preamble) affect the proposed budget 

neutrality adjustment factor for changes 

in DRG classifications and weights and 

the geographic adjustment factor (GAF) 

since the GAF values are derived from 

the wage index values (see § 412.316(a)). 

In addition, the provisions of Public 

Law 111–148, (discussed above in this 

preamble) also necessitate a revision to 

the proposed outlier payment 

adjustment factor since a single set of 

thresholds is used to identify outlier 

cases for both inpatient operating and 

inpatient capital-related payments (see 

§ 412.312(c)). The outlier thresholds are 

set so that operating outlier payments 

are projected to be 5.1 percent of total 

operating IPPS DRG payments. Section 

412.308(c)(2) provides that the standard 

Federal rate for inpatient capital-related 

costs be reduced by an adjustment factor 

equal to the estimated proportion of 

capital-related outlier payments to total 

inpatient capital-related PPS payments. 

The proposed capital IPPS standard 

Federal rates for FY 2011 are discussed 

in section II. of the Addendum of this 

supplemental proposed rule. 

H. Payment for Critical Access Hospital 

Outpatient Services and Ambulance 

Services 

Section 1834(g) of the Act establishes 

the payment rules for outpatient 

services furnished by a critical access 

hospital (CAH). Section 403(d) of Public 

Law 106–113 (BBRA) amended section 

1834(g) of the Act to provide for two 

methods of payment for outpatient 

services furnished by a CAH. 

Specifically, section 1834(g)(1) of the 

Act, as amended by Public Law 106– 

113, provided that the amount of 

payment for outpatient services 

furnished by a CAH is equal to the 

reasonable costs of the CAH in 

providing such services (the physician 

or other practitioner providing the 

professional service receives payment 

under the Medicare Physician Fee 

Schedule). In the alternative, the CAH 

may make an election, under section 

1834(g)(2) of the Act, to receive amounts 

that are equal to ‘‘the reasonable costs’’ 

of the CAH for facility services plus, 

with respect to the professional services, 

the amount otherwise paid for 

professional services under Medicare, 

less the applicable Medicare deductible 

and coinsurance amount. The election 

made under section 1834(g)(2) of the 

Act is sometimes referred to as ‘‘method 

II’’ or ‘‘the optional method.’’ 

Throughout this section of this 

preamble, we refer to this election as 

‘‘the optional method.’’ Section 202 of 

Public Law 106–554 (BIPA) amended 

section 1834(g)(2)(B) of the Act to 

increase the payment for professional 

services under the optional method to 

115 percent of the amount otherwise 

paid for professional services under 

Medicare. In addition, section 405(a)(1) 

of Public Law 108–173 (MMA) amended 

section 1834(g)(l) of the Act by inserting 

the phrase ‘‘equal to 101 percent of’’ 

before the phrase ‘‘the reasonable costs.’’ 

However, the MMA did not make a 

corresponding change to section 

1834(g)(2)(A) of the Act regarding the 

amount of payment for facility services 

under the optional method. 

Section 1834(l)(8), as added by 

section 205 of Public Law 106–554, 

establishes the payment methodology 

for ambulance services furnished by a 

CAH or by an entity that is owned and 

operated by a CAH. This provision 

states that payment is made at ‘‘the 

reasonable costs incurred in furnishing 

ambulance services if such services are 

furnished by a critical access hospital 

(as defined in section 1861(mm)(1) of 

the Act), or by an entity that is owned 

and operated by a critical access 

hospital, but only if the critical access 

hospital or entity is the only provider or 

supplier of ambulance services that is 

located within a 35-mile drive of such 

critical access hospital.’’ 

Section 3128(a) of Public Law 111– 

148 amended sections 1834(g)(2)(A) and 

1834(l)(8) of the Act by inserting ‘‘101 

percent of’’ before ‘‘the reasonable costs.’’ 

As such, section 3128(a) increases 

payment for outpatient facility services 

under the optional method and payment 

for ambulance services furnished by a 

CAH or an entity owned and operated 

by a CAH, to 101 percent of reasonable 

costs. Section 3128(b) states that the 

amendments made under section 

3128(a) shall take effect as if they were 

included in the enactment of section 

405(a) of Public Law 108–173. Section 

405(a) of Public Law 108–173, which 

provided that, in general, inpatient, 

outpatient, and covered SNF services 

provided by a CAH would be 

reimbursed at 101 percent of reasonable 

cost, was applicable to payments for 

services furnished during cost reporting 

periods beginning on or after January 1, 

2004. 

In order to implement section 3128 of 

Public Law 111–148, we are proposing 

to amend the regulations at 

§ 413.70(b)(3)(ii)(A) to state that, 

effective for cost reporting periods 

beginning on or after January 1, 2004, 

under the optional method, payment for 

facility services will be made at 101 

percent of reasonable cost. Accordingly, 

regardless of whether a physician/ 

practitioner has reassigned his/her 

billing rights to the CAH, payment for 

CAH facility services will be made at 

101 percent of reasonable costs. In 

addition, we are proposing to 

implement the change in payment for 

ambulance services provided by section 

3128 of Public Law 111–148 by 

amending the regulations at 

§ 413.70(b)(5)(i) to state that effective for 

cost reporting periods beginning on or 

after January 1, 2004, payment for 

ambulance services furnished by a CAH 

or an entity that is owned and operated 

by a CAH is 101 percent of the 

reasonable costs of the CAH or the 

entity in furnishing those services, but 

only if the CAH or the entity is the only 

provider or supplier of ambulance 

services located within a 35-mile drive 

of the CAH or the entity. We note that 

we do not believe these proposals will 

result in additional payments to CAHs 

for prior periods because we believe in 

fact that CMS has paid CAHs for these 

services at 101 percent of reasonable 

costs during these prior periods. 

I. Extension of Certain Payment Rules 

for Long-Term Care Hospital Services 

and Moratorium on the Establishment of 

Certain Hospitals and Facilities 

1. Background 

On December 29, 2007 the Medicare, 

Medicaid, and SCHIP Extension Act of 

2007 (MMSEA) (Pub. L. 110–173) was 

enacted. Section 114 of MMSEA, 


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entitled ‘‘Long-term care hospitals,’’ 

made a number of changes affecting 

payments to LTCHs for inpatient 

services. In May 6, 2008 and May 22, 

2008 Federal Register (73 FR 24871 and 

73 FR 29699, respectively), we issued 

two interim final rules (IFCs), 

implementing provisions of section 114 

of the MMSEA. The May 6, 2008 IFC 

implemented section 114(c)(3) of the 

MMSEA which required a 3-year delay 

in the application of certain provisions 

of the payment adjustment for short-stay 

outliers (SSOs), and section 114(e)(4)(1) 

and (2) which specified revisions to the 

RY 2008 standard Federal rate for 

LTCHs. The May 22, 2008 IFC 

implemented section 114(c)(1) and 

(c)(2), providing for a 3-year delay in the 

application of the 25 percent threshold 

payment adjustment for discharges from 

LTCHs and LTCH satellite facilities that 

were admitted from certain referring 

hospitals in excess of various percentage 

thresholds. The May 22, 2008 IFC also 

implemented section 114(d) of the 

MMSEA relating to the 3-year 

moratorium on the establishment of new 

LTCHs and LTCH satellite facilities and 

on increases in beds in existing LTCHs 

and LTCH satellite facilities. 

In addition, we revised regulations at 

§ 412.523(d)(3) implementing section 

114(c)(4) of MMSEA. Our regulations 

provided that for a 3-year period 

beginning on December 29, 2007, the 

Secretary shall not make the one-time 

prospective adjustment to the LTCH 

PPS payment rates earlier than 

December 29, 2010 and later than 

December 29, 2012 (73 FR 26804). 

Section 4302 of the American Recovery 

and Reinvestment Act of 2009 (ARRA) 

( Pub. L. 111–5) enacted on February 17, 

2009, included several amendments to 

section 114(c) and (d) of the MMSEA. 

The provisions of section 4302 of the 

ARRA were implemented in an IFC 

which was published with the FY 2010 

IPPS/RY 2010 LTCH PPS final rule (74 

FR 43990 through 43994). In that same 

final rule, we responded to comments 

and finalized the MMSEA provisions in 

the May 6, 2008 and the May 22, 2008 

IFCs that had not otherwise modified by 

the ARRA. We intend to finalize the 

ARRA provisions and respond to 

comments on the ARRA IFC, in the FY 

2011 IPPS/LTCH PPS final rule. 

The discussion in section XX pertain 

to the specific changes to the LTCH PPS 

policies that are mandated by 

amendments to section 114(c) and (d) of 

the MMSEA, as amended by section 

4302 of the ARRA and further amended 

by section 3106 of Public Law 111–148 

as amended by section 10312 of Public 

Law 111–148. 

Section 114(c) and (d) of the MMSEA 

as amended by section 4302 of ARRA as 

amended by section 3106 of the Public 

Law 111–148 and as further amended by 

section 10312 of Public Law 111–148 

provides for a 2-year extension to 

payment policies relating to long-term 

care hospitals (LTCHs) and LTCH 

satellite facilities. Specifically, these 

provisions affect payment adjustments 

for short stay outliers (SSOs), the onetime prospective adjustment to the 

standard Federal rate, the 25 percent 

payment threshold policy, and the 

moratorium on the establishment of new 

LTCHs and LTCH satellite facilities. In 

this supplementary proposed rule for 

the LTCH PPS, we are implementing the 

policies mandated by the amendments 

to section 114(c) and (d) of the MMSEA 

as amended by section 4302 of the 

ARRA and as further amended by 

section 3106 of Public Law 111–148, 

and section 10312 of Public Law 111– 

148, and are proposing to revise the 

regulations accordingly to incorporate 

those changes. In the sections below, we 

will briefly describe each of these 

policies and propose to incorporate into 

the regulations their 2-year extension. 

2. Short-Stay Outlier Policy 

In the FY 2003 LTCH PPS final rule 

(67 FR 55995), we established a special 

payment policy for SSO cases at 

§ 412.529. SSO cases are cases with a 

covered LOS that is less than or equal 

to five-sixths of the geometric average 

LOS for each LTC–DRG. When we 

established the SSO policy, we 

explained that ‘‘[a] short stay outlier 

case may occur when a beneficiary 

receives less than the full course of 

treatment at the LTCH before being 

discharged’’ (67 FR 55995). 

We later refined the SSO policy in the 

RY 2008 LTCH PPS final rule. 

Specifically, the RY 2008 LTCH PPS 

final rule added an additional payment 

methodology at § 412.529(c)(3)(i) for a 

SSO case with a covered length of stay 

(LOS) that is less than or equal to one 

standard deviation from the geometric 

ALOS of the same DRG under the IPPS 

as the LTC–DRG to which the case had 

been assigned (referred to as the ‘‘IPPS 

comparable threshold’’). The Medicare 

payment for that SSO case where the 

covered LOS is less than or equal to the 

‘‘IPPS comparable threshold’’ would be 

based on the least of the following: 

• 100 percent of the estimated cost of 

the case. 

• 120 percent of the LTC–DRG 

specific per diem amount multiplied by 

the covered LOS of the particular case. 

• The full LTC–DRG. 

++ An amount comparable to the 

hospital IPPS per diem amount 

determined under § 412.529(d)(4). 

Under that SSO payment formula, cases 

where the covered LOS is greater than 

the ‘‘IPPS comparable threshold,’’ the 

fourth payment option would be 

replaced with the blend of the 120 

percent of the LTC–DRG specific per 

diem amount and an amount 

comparable to the IPPS per diem 

amount determined under 

§ 412.529(d)(4). (See (72 FR 26905 

through 26918).) 

Section 114(c)(3) of MMSEA 

established a 3-year delay of the 

application of the methodology at 

§ 412.529(c)(3)(i) that was added in the 

RY 2008 LTCH PPS final rule. It 

specified that the Secretary shall not 

apply the amendments finalized on May 

11, 2007 (72 FR 26992) made to the 

short-stay outlier payment provision for 

long-term care hospitals contained in 

§ 412.529(c)(3)(i) or any similar 

provisions for the 3-year period 

beginning on the date of enactment of 

this Act [December 29, 2007]. Section 

114(c)((3) of the MMSEA as amended by 

section 3106(a) of the Public Law 111– 

148, and as amended by section 

10312(a) of Public Law 111–148, adds 

an additional 2 years to the 3-year delay 

of the application of § 412.529(c)(3)(i). 

Specifically, these provisions together 

result in the phrase ‘‘3-year period’’ 

being replaced with the phrase ‘‘5-year 

period’’ each place it appears in 114(c) 

of MMSEA as amended by the ARRA. 

Thus, the reference to the 3-year period 

in delay of application of 

§ 412.529(c)(3)(i) is changed to be 5-year 

period of delay. Consequently, the 

Secretary will not apply for the 5-year 

period beginning on the date of 

enactment of MMSEA (December 29, 

2007) the policy at § 412.529(c)(3)(i). We 

note that this provision of the law is 

self-implementing and in this 

supplementary proposed rule, we are 

proposing to incorporate existing law 

regarding the additional 2 year delay 

into the regulations at § 412.529(c)(3)(i) 

to reflect this policy change. 

3. The One-time Adjustment of the 

Standard Federal Rate 

In the August 30, 2002 LTCH PPS 

final rule (67 FR 56027), we provided in 

§ 412.523(d)(3) of the regulations, for the 

possibility of making a one-time 

prospective adjustment to the LTCH 

PPS rates by July 1, 2008, so that the 

effect of any significant difference 

between actual payments and estimated 

payments for the first year of the LTCH 

PPS would not be perpetuated in the 

LTCH PPS rates for future years. 

Later, section 114(c)(4) of MMSEA 

was enacted which provided a 3-year 

delay in the application of 


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§ 412.523(d)(3). Specifically, section 

114(c)(4) of MMSEA provides that the 

’’Secretary shall not, for the 3-year 

period beginning on the date of the 

enactment of this Act, make the one 

time prospective adjustment to longterm care hospital prospective payment 

rates provided for in section 

412.523(d)(3) of title 42, Code of Federal 

Regulations, or any similar provision.’’ 

The effect of this provision was that no 

one-time budget neutrality adjustment 

could be made earlier than December 

29, 2010. (Following the enactment of 

MMSEA, we modified the regulations at 

§ 412.523(d)(3) to capture the 3-year 

delay required by section 

114(c)(4)MMSEA and our proposal to 

conform our regulation to more 

accurately reflect the purpose of 

providing for a possible one-time budget 

neutrality adjustment.) (See 73 FR 

26800 through 26805). Now, section 

3106(a) of Public Law 111–148, together 

with section 10312 of Public Law 111– 

148 results in, an additional 2 years 

being added to the existing 3-year delay 

of § 412.523(d)(3). Specifically, these 

amendments together result in the 

phrase ‘‘3-year period’’ being replaced 

with the phrase ‘‘5-year period’’ each 

place it appears in 114(c) of MMSEA as 

amended by the ARRA. Thus, the 

reference to the 3-year period in delay 

of application § 412.523(d)(3) is changed 

to be a 5-year period of delay. 

Consequently, the Secretary shall not 

apply for the 5-year period beginning on 

the date of the enactment of MMSEA 

(December 29, 2007) the one-time 

prospective adjustment provided for in 

§ 412.523(d)(3). We note that this 

provision of the law is selfimplementing and we are proposing to 

incorporate existing law regarding this 

additional 2-year delay of the one-time 

budget neutrality adjustment into the 

regulations at § 412.523(d)(3) to reflect 

this policy. Thus, we are proposing to 

revise § 412.523(d)(3) to specify that the 

Secretary is precluded from making the 

one-time adjustment until December 29, 

2012. 

4. Modification of Certain Payment 

Adjustments to Certain LTCHs and 

LTCH Satellite Discharges 

The timeframes outlined in section 

114(c)(1) and (2) of MMSEA are 

amended by ARRA and section 3106(a) 

of Public Law 111–148, and as further 

amended by section 10312(a) of Public 

Law 111–148 are increased from 3 years 

to 5 years, thereby extending for an 

additional 2 years the delay in 

application of the 25 percent patient 

threshold amount under § 412.534 and 

§ 412.536 for certain LTCHS and LTCH 

satellite facilities and the increases in 

the patient thresholds outlined in 

section 114(c)(2) of MMSEA as they 

apply to an ‘‘applicable’’ long-term care 

hospital or satellite facility as set forth 

in section 114(c)(2)(A) and (B) of 

MMSEA as amended. Specifically, 

§ 3106(a) of Public Law 111–148 

together with section 10312 of Public 

Law 111–148, results in the substituting 

of the phrase ‘‘5-year period’’ for the 

phrase ‘‘3-year period’’ each time it 

appears in section 114(c) of MMSEA as 

amended by ARRA. This provision of 

the law is self-implementing. 

With respect to section 114(c)(1) of 

MMSEA as amended by ARRA (Delay in 

Application of [the] 25 Percent Patient 

Threshold Payment Adjustment), 

section 3106(a) of the Public Law 111– 

148 and as further amended by section 

10312(a) of Public Law 111–148 results 

in an additional 2-year delay being 

added to the existing 3-year delay in 

application of the 25 percent threshold 

amount under § 412.534 and § 412.536. 

Specifically, under § 114(c)(1)(A) and 

(B) of MMSEA as amended by the ARRA 

and the Affordable Care Act, the 

Secretary shall not apply, for cost 

reporting periods beginning on or after 

July 1, 2007 for a 5-year period—(A) 

§ 412.536 of title 42, Code of Federal 

Regulations, or any similar provision, to 

free standing long-term care hospitals or 

to a long-term care hospital, or satellite 

facility, that as of December 29, 2007, 

was co-located with an entity that is a 

provider-based, off-campus location of a 

subsection (d) hospital which did not 

provide services payable under section 

1886(d) of the Act at the off-campus 

location; and (B) such section or 

§ 412.534 of title 42, Code of Federal 

Regulations, or any similar provisions, 

to a long-term care hospital identified 

by the amendment made by section 

4417(a) of the BBA. In order to 

incorporate existing law requiring that 

application of the above provisions will 

not be applied prior to cost reporting 

periods beginning on July 1, 2012, we 

are proposing to modify our regulations 

at § 412.534(h)(4) and § 412.536(a)(1). 

With respect to section 114(c)(2) of 

MMSEA as amended by ARRA and 

section 3106(a) of Public Law 111–148 

and as amended by section 10312 of 

Public Law 111–148 the effective date 

provided in section 114(c)(2)(C) of 

MMSEA is amended such that the 

provision specifies that subparagraphs 

A and B [of section 114(c)(2)] shall 

apply to cost reporting periods 

beginning on or after October 1, 2007 (or 

July 1, 2007, in the case of a satellite 

facility described in § 412.22(h)(3)(i) of 

title 42, Code of Federal Regulations) for 

a 5-year period.) The effect of this selfimplementing effective date change is 

that under section 114(c)(2)(A) of 

MMSEA the time period during which 

the increased percentage thresholds 

apply to an ‘‘applicable long-term care 

hospital or satellite facility’’ which is 

located in a rural area or which is colocated with an urban single or MSAdominant hospital, under 42 CFR 

412.534(d) and (e) is increased from a 

3-year period to a 5-year period. Thus, 

for the 5-year period beginning on or 

after October 1, 2007, payment to an 

‘‘applicable LTCH hospital or LTCH 

satellite that is located in a rural area or 

is co-located with a MSA-dominant 

hospital or urban single hospital under 

paragraphs (d) and (e), of 42 CFR 

412.534, shall not be subject to any 

payment adjustment under such section 

if no more than 75 percent of the 

hospital’s Medicare discharges (other 

than discharges described in paragraph 

(d)(2) or (e)(3) of such section are 

admitted from a co-located hospital. We 

are proposing to incorporate into our 

regulations at 412.534(d)(1) through 

(d)(3) and (e)(1) through (e)(3); the 

above-described self-implementing the 

Affordable Care Act changes by 

extending the sunsetting of the 

threshold percentage increase an 

additional 2 years, to cost reporting 

periods beginning on or after October 1, 

2012, as applicable, July 1, 2007 for a 

satellite facility described in 42 CFR 

412.22(h)(3)(i).) 

In addition, the change in the 

effective date change required in section 

114(c)(2)(C) of MMSEA, as amended by 

ARRA and the Affordable Care Act, is 

that the time period during which the 

increased percentage threshold 

applicable to an ‘‘applicable’’ LTCH or 

satellite, as defined in section 

114(c)(2)(ii) of the MMSEA as amended 

by section 4302(a)(2)(A) of the ARRA, 

which is co-located with another 

hospital is increased from a 3-year 

period to a 5-year period. Thus, for the 

5-year period beginning on or after 

October 1, 2007, payment to an 

‘‘applicable’’ LTCH or LTCH satellite 

facility that is co-located with another 

hospital shall not be subject to any 

payment adjustment under § 412.534 if 

no more than 50 percent of the 

hospital’s Medicare discharges (other 

than discharges described in paragraph 

(c)(3) of such section) are admitted from 

a co-located hospital. We are proposing 

to incorporate this self-implementing 

Affordable Care Act change into our 

regulations at § 412.534(c)(1), (2) and (3) 

by extending the sunsetting of the 

threshold percentage increase an 

additional 2 years, to cost reporting 

periods beginning on or after October 1, 

2012 or July 1, 2012, as applicable. 


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5. Moratorium on the Increase in 

Number of Beds in Existing Long-Term 

Care Hospitals or Long-Term Care 

Hospital Satellite Facilities 

Section 114(d) of MMSEA provides 

for a 3-year moratorium with two 

distinct aspects, one for the 

establishment and classification of a 

LTCH or a LTCH satellite facility, other 

than an existing LTCH or facility, and 

the other for the increase of hospital 

beds in existing LTCHs and LTCH 

satellite facilities. Specifically, section 

114(d)(1)(A) of MMSEA provides that, 

during the 3-year period beginning on 

the date of enactment of this Act on 

December 29, 2007, the Secretary shall 

impose a moratorium ‘‘subject to 

paragraph (2), on the establishment and 

classification of a long-term care 

hospital or satellite facility, other than 

an existing long-term care hospital or 

facility.’’ Section 114(d)(1)(B) of 

MMSEA unamended, provides that, 

during the 3-year period beginning of 

the date of enactment of this Act, the 

Secretary shall impose a moratorium 

‘‘subject to paragraph (3), on an increase 

of long-term care hospital beds in 

existing long-term care hospitals or 

satellite facilities.’’ 

Sections 114(d)(2) of MMSEA 

unamended provides for exceptions to 

the moratorium on the development of 

a LTCH or LTCH satellite facility, other 

than an existing LTCH or LTCH satellite 

facility, imposed by section 114(d)(1)(A) 

of MMSEA. (The definition of an 

existing LTCH and satellite facility for 

purposes of this policy is codified at 

§ 412.23(e)(7)(i).) Specifically, under 

this MMSEA provision, the moratorium, 

is effective from December 29, 2007 

through December 28, 2010 unless one 

of the following three exceptions has 

been met: 

• The LTCH began ‘‘its qualifying 

period for payment as a long-term care 

hospital under section 412.23(e) of title 

42, Code of Federal Regulations, on or 

before the date of enactment of this 

Act.’’ (See section 114(d)(2)(A) of 

MMSEA). 

• The LTCH has a binding written 

agreement with an outside, unrelated 

party for the actual construction, 

renovation, lease, or demolition for a 

LTCH and has expended before 

December 29, 2007 at least 10 percent of 

the estimated cost of the project or, if 

less, $2,500,000. (See section 

114(d)(2)(B) of MMSEA). 

• The LTCH has obtained an 

approved certificate of need in a State 

where one is required on or before 

December 29, 2007 (see section 

114(d)(2)(C) of MMSEA). (See 73 FR 

29705 through 29707 and 74 FR 43985). 

The moratorium on an increase of 

beds is subject to the exception at 

section 114(d)(3) of MMSEA. 

Specifically, section 114(d)(3) of the 

MMSEA unamended stated that the 

moratorium on an increase in beds shall 

not apply if an existing LTCH or LTCH 

satellite facility is ‘‘located in a State 

where there is only one other long-term 

care hospital; and requests an increase 

in beds following the closure or the 

decrease in the number of beds of 

another long-term care hospital in the 

State.’’ We implemented section 114(d) 

in the May 22, 2008 IFC (73 FR 29704 

through 29707); the FY 2010 IPPS/RY 

2010 LTCH PPS final rule (74 FR 43985 

through 43990) and § 412.23(e)(5) 

through (e)(7). 

Section 4302 of the ARRA added 

another exception to the moratorium on 

increases in the number of beds at 

existing LTCHs and LTCH satellite 

facilities. Specifically, section 4302(b) of 

the ARRA, added an additional 

exception to the bed-increase 

moratorium in an existing hospital or 

satellite facility ‘‘* * * if the hospital or 

facility obtained a certificate of need for 

an increase in beds that is in a State for 

which such certificate of need is 

required and that was issued on or after 

April 1, 2005, and before December 29, 

2007, * * *.’’ Accordingly, we revised 

our regulations at § 412.23(e)(7)(B) to 

include this new exception to the 

moratorium on an increase in the 

number of beds in existence in an 

existing LTCH or LTCH satellite facility 

beyond those in existence on December 

29, 2007. (See 74 FR 43991 and 43992) 

Section 114(d) of MMSEA as 

amended by section 4302(b) of ARRA 

and section 3106(b) of Public Law 111– 

148 and section 10312(b) of Public Law 

111–148 adds an additional 2 years to 

the 3-year moratorium on the 

development of new LTCHs and LTCH 

satellite facilities and on the increase in 

the number of beds in existing LTCHs 

and LTCH satellites promulgated by 

MMSEA. Specifically, it raises the 

length of the moratorium specified in 

section 114(d) of MMSEA as amended 

by ARRA from a 3-year period to a 5- 

year period. Therefore, the moratorium 

will be in effect until December 28, 

2012. In this supplementary proposed 

rule, we are proposing to revise 

§ 412.23(e)(6)(i) and (e)(7)(ii) by 

changing the ending date of the 

moratorium provisions from December 

28, 2010 to December 28, 2012 to reflect 

these self-implementing Affordable Care 

Act changes. 

J. Long-Term Care Hospital Proposed 

Market Basket Update and Other 

Proposed Changes 

1. Background 

In section VII. of the preamble of the 

May 4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule, we discuss our proposed 

changes to the payment rates, factors, 

and specific policies under the LTCH 

PPS for FY 2011. Although a number of 

the provisions of Public Law 111–148 

and Public Law 111–152 affect the 

LTCH PPS, due to the timing of the 

passage of the legislation, we were 

unable to address those provisions in 

the May 4, 2010 FY 2011 IPPS/LTCH 

PPS proposed rule. Therefore, the 

proposed policies and payment rates in 

that proposed rule do not reflect the 

new legislation. 

Below we address the provisions of 

Public Law 111–148 and Public Law 

111–152 that affect our proposed 

policies and payment rates for FY 2011 

under the LTCH PPS. In addition, we 

have issued further instructions 

implementing the provisions of Public 

Law 111–148, as amended, that affect 

the policies and payment rates for RY 

2010 under the LTCH PPS. Specifically, 

we have established revised RY 2010 

rates and factors elsewhere is this 

Federal Register consistent with the 

provisions of sections 3401(c) and (p) 

and 10319(b) of Pub L. 111–148 and 

section 1105(b) of Public Law 111–152, 

as amended. 

2. Revision of Certain Market Basket 

Updates as Required by Public Law 

111–148 and Public Law 111–152 

Section 1886(m)(3)(A)(ii) of the Act, 

as added by section 3401(c) of Public 

Law 111–148, specifies that for each of 

rate years 2010 through 2019, any 

annual update to the standard Federal 

rate shall be reduced by the other 

adjustment specified in new section 

1886(m)(4) of the Act. Furthermore, 

section 1886(m)(3)(A)(i) of the Act 

specifies that for rate year 2012 and 

subsequent rate years, any annual 

update to the standard Federal rate shall 

be reduced by the productivity 

adjustment described in section 

1886(b)(3)(B)(xi)(II) of the Act. Section 

1886(m)(3)(A)(ii) and sections 

1886(m)(4)(A) and (B) of the Act, require 

a 0.25 percentage point reduction for 

rate year 2010 and a 0.50 percentage 

point reduction for rate year 2011. 

Section 1886(m)(3)(B) of the Act 

provides that the application of 

paragraph 3 of 1886(m) of the Act may 

result in the annual update being less 

than zero for a rate year, and may result 

in payment rates for a rate year being 

less than such payment rates for the 


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preceding rate year. Furthermore, 

section 3401(p) of Public Law 111–148 

specifies that the amendments made by 

section 3401(c) of Public Law 111–148 

shall not apply to discharges occurring 

before April 1, 2010. 

We note that in the May 4, 2010 FY 

2011 IPPS/LTCH PPS proposed rule, 

since the annual update to the LTCH 

PPS policies, rates and factors now 

occurs on October 1st, we proposed to 

adopt the term ‘‘fiscal year’’ (FY) rather 

than ‘‘rate year’’ (RY) under the LTCH 

PPS beginning October 1, 2010 to 

conform with the standard definition of 

the Federal fiscal year (October 1 

through September 30) used by other 

PPSs, such as the IPPS (see 75 FR 24046 

through 24027). Consequently, in that 

proposed rule and in this supplemental 

proposed rule, for purposes of clarity, 

when discussing the annual update for 

the LTCH PPS, we employed ‘‘FY’’ 

rather than ‘‘RY’’ because it is our intent 

that the phrase ‘‘FY’’ be used 

prospectively in all circumstances 

dealing with the LTCH PPS. Similarly, 

although the language of section 3401(c) 

of Public Law 111–148 and section 

10319 of Public Law 111–148, and 

section 1105(b) of Public Law 111–152 

refer to years 2010 and thereafter under 

the LTCH PPS as ‘‘rate year,’’ consistent 

with our proposal to change the 

terminology used under the LTCH PPS 

from ‘‘rate year’’ to ‘‘fiscal year,’’ for 

purposes of clarity, in this supplemental 

proposed rule, when discussing the 

annual update for the LTCH PPS, 

including the provisions of the 

Affordable Care Act, we will continue to 

employ ‘‘FY’’ rather than ‘‘RY’’ for 2011 

and subsequent years because it is our 

intent that ‘‘FY’’ be used prospectively in 

all circumstances dealing with the 

LTCH PPS. 

3. Proposed Change to Reflect the 

Market Basket Update for LTCHs for RY 

2010 (§ 412.523(c)(vi)) 

In the FY 2010 IPPS/RY 2010 LTCH 

PPS final rule appearing in the Federal 

Register on August 27, 2009 (74 FR 

43754), we established policies, 

payment rates and factors for 

determining payments under the LTCH 

PPS for RY 2010 (October 1, 2009 

through September 30, 2010). The 

provisions of the Affordable Care Act 

affect some of the policies, payment 

rates and factors for determining 

payments under the LTCH PPS for RY 

2010 (some of which are discussed 

elsewhere in this supplemental 

proposed rule). In a separate notice 

published elsewhere in this Federal 

Register, we establish revised RY 2010 

LTCH PPS rates and factors consistent 

with the provisions of section 

1886(m)(3) of the Act as added by 

section 3401(c) of Public Law 111–148, 

and section 1886(m)(4) of the Act as 

added by section 3401(c) of Public Law 

111–148 and amended by section 

10319(b) of Public Law 111–148, as 

further amended by section 1105(b) of 

Public Law 111–152, as well as section 

3401(p) of the Public Law 111–148. 

Section 1886(m)(3)(A)(ii) of the Act 

provides for each of RYs 2010 through 

2019, the annual update to the standard 

Federal rate is reduced by the ‘‘other 

adjustment’’ described in section 

1886(m)(4) of the Act. Specifically, 

sections 1886(m)(3)(A)(ii) and (4)(A) of 

the Act require a 0.25 percentage point 

reduction to the annual update to the 

standard Federal rate for RY 2010. 

Section 1886(m)(3)(A) of the Act on its 

face explicitly provides for a revised 

annual update to the standard Federal 

rate beginning RY 2010, thus resulting 

in a single revised RY 2010 standard 

Federal rate. Section 3401(p) of the 

Public Law 111–148 provides that, 

notwithstanding the previous provisions 

of this section, the amendments made 

by subsections (a), (c) and (d) shall not 

apply to discharges occurring before 

April 1, 2010. When read in conjunction 

we believe section 1886(m)(3)(A) of the 

Act and section 3401(p) of Public Law 

111–148 provide for a single revised RY 

2010 standard Federal rate; however, for 

payment purposes, discharges occurring 

on or after October 1, 2009 and before 

April 1, 2010, simply will not be based 

on the revised RY 2010 standard Federal 

rate. 

As discussed in a separate notice 

published elsewhere in this Federal 

Register, consistent with our historical 

practice and the methodology used in 

the FY 2010 IPPS/RY 2010 final rule, we 

establish an update to the LTCH PPS 

standard Federal rate for RY 2010 of 

1.74 percent. This annual update for RY 

2010 is based on the full forecasted 

estimated increase in the LTCH PPS 

market basket for RY 2010 of 2.5 

percent, adjusted by the 0.25 percentage 

point reduction required by sections 

1886(m)(3)(A)(ii) and (4)(A) of the Act, 

and an adjustment to account for the 

increase in case-mix in a prior period 

(FY 2007) resulting from changes in 

documentation and coding practices of 

¥0.5 percent. Therefore, in this 

supplemental proposed rule, under the 

authority of sections 1886(m)(3)(A)(ii) 

and (4)(A) of the Act, we are proposing 

to amend § 412.523(c)(3)(vi) to specify 

that the standard Federal rate for the 

LTCH PPS rate year beginning October 

1, 2009 and ending September 30, 2010, 

is the standard Federal rate for the 

previous rate year updated by 1.74 

percent. Furthermore, consistent with 

section 3401(p) of Public Law 111–148, 

we are also proposing to revise 

§ 412.523(c)(3)(vi) to specify that with 

respect to discharges occurring on or 

after October 1, 2009 and before April 

1, 2010, payments are based on the 

standard Federal rate in § 412.523(c)(v) 

updated by 2.0 percent (that is, a 

standard Federal rate of $39,896.65 (see 

74 FR 44022)). We note that the 

provisions of the law that add sections 

1886(m)(3) and (4) of the Act are selfimplementing and in this supplemental 

proposed rule, we are proposing to 

incorporate existing law regarding the 

0.25 percentage point reduction to the 

annual update to the standard Federal 

rate for RY 2010 (including the 

application of the revised standard 

Federal rate that reflects that 0.25 

percentage point reduction in making 

payments for discharges on or after 

April 1, 2010) into the regulations at 

§ 412.529(c)(3)(vi) to reflect this 

required policy change. 

4. Proposed Market Basket Update for 

LTCHs for FY 2011 

As discussed in section VII.C.2. of the 

preamble of the May 4, 2010 FY 2011 

IPPS/LTCH PPS proposed rule, we are 

proposing to continue to use the FY 

2002-based rehabilitation, psychiatric, 

long-term care (RPL) hospital market 

basket under the LTCH PPS for FY 2011. 

Also, in that proposed rule, we stated 

that at this time, the most recent 

estimate of the increase in the proposed 

LTCH PPS market basket (that is, the FY 

2002-based RPL market basket) for FY 

2011 is 2.4 percent. This increase is 

based on IHS Global Insight, Inc.’s first 

quarter 2010 forecast, with historical 

data through the 2009 fourth quarter, of 

the FY 2002-based RPL market basket 

increase. Since publication of the May 

4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule our estimate of the FY 

2002-based RPL market basket for FY 

2011 has not changed. Furthermore, as 

also stated in the May 4, 2010 FY 2011 

IPPS/LTCH PPS proposed rule, 

consistent with our historical practice of 

using market basket estimates based on 

the most recent available data, we 

propose that if more recent data are 

available when we develop the final 

rule, we would use such data, if 

appropriate. 

Section 1886(m)(3)(A)(ii) of the Act as 

added by section 3401(c) of Public Law 

111–148 specifies that for each of RYs 

2010 through 2019, any annual update 

to the standard Federal rate shall be 

reduced by the other adjustment 

specified in new section 1886(m)(4) of 

the Act. Furthermore, section 

1886(m)(3)(A)(i) of the Act specifies that 


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for rate year 2012 and each subsequent 

rate year, any annual update to the 

standard Federal rate shall be reduced 

by the productivity adjustment 

described in section 1866(b)(3)(B)(xi)(II) 

of the Act. 

For FY 2011, section 1886(m)(4)(B) of 

the Act as added by section 3401(c) of 

Public Law 111–148, as amended by 

section 10319 of Public Law 111–148 

and as further amended by section 

1105(b) of Public Law 111–152, requires 

a 0.50 percentage point reduction to the 

annual update to the standard Federal 

rate for rate year 2011. Consequently, 

the proposed market basket update 

under the LTCH PPS for FY 2011 is 1.9 

percent (that is, the most recent estimate 

of the LTCH PPS market basket of 2.4 

percent minus the 0.50 percentage 

points required in section 1886(m)(4)(B) 

of the Act. Again, we note that 

consistent with our historical practice of 

using market basket estimates based on 

the most recent available data, we 

propose that if more recent data are 

available when we develop the final 

rule, we would use such data, if 

appropriate, in determining the final 

market basket update under the LTCH 

PPS for FY 2011. (We note that in 

section III.A. of the Addendum to this 

supplemental proposed rule, for FY 

2011, we are proposing to update the 

LTCH PPS standard Federal rate by 

¥0.59 percent. This proposed update 

reflects proposed market basket update 

under the LTCH PPS for FY 2011 (of 1.9 

percent as discussed above) and a 

proposed adjustment to account for the 

increase in case-mix in the prior periods 

that resulted from changes in 

documentation and coding practices 

rather than increases in patients’ 

severity of illness (discussed in section 

VII.C.3. of the preamble of the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed 

rule).) 

5. Proposed Medicare Severity LongTerm Care Diagnosis-Related Group 

(MS–LTC–DRG) Relative Weights 

As discussed above, the proposed 

LTCH PPS policies and payment rates in 

the May 4, 2010 FY 2011 IPPS/LTCH 

PPS proposed rule do not reflect the 

provisions of the Affordable Care Act. 

The revised proposed standard Federal 

rate for FY 2011 that incorporates the 

‘‘other adjustment’’ required in section 

1886(m)(3)(A)(ii) as amended and 

described in section 1886(m)(4) as 

amended is discussed in section III.A. of 

the Addendum of this supplemental 

proposed rule. This revision to the 

proposed standard Federal rate for FY 

2011 requires us to revise the proposed 

relative weights for the MS–LTC–DRGs 

for FY 2011. This is the case since our 

established methodology for updating 

the annual update to the MS–LTC–DRG 

classifications and relative weights in a 

budget neutral manner requires that 

estimated aggregate LTCH PPS 

payments would be unaffected. That is, 

under the budget neutrality requirement 

estimated aggregate LTCH PPS 

payments would be neither greater than 

nor less than the estimated aggregate 

LTCH PPS payments that would have 

been made without the MS–LTC–DRG 

classification and relative weight 

changes. 

As discussed in section VII.B.3.g. 

(step 7) of the preamble of the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed 

rule (75 FR 24042 through 24043), we 

proposed to use our established twostep budget neutrality methodology. In 

the first step of our MS–LTC–DRG 

budget neutrality methodology, we 

calculate and apply a normalization 

factor to the proposed recalibrated 

relative weights to ensure that estimated 

payments are not influenced by changes 

in the composition of case types or the 

changes to the classification system. 

That is, the normalization adjustment is 

intended to ensure that the recalibration 

of the proposed MS–LTC–DRG relative 

weights (that is, the process itself) 

neither increases nor decreases the 

average case-mix index (CMI). The 

normalization factor is calculated using 

the ratio average CMIs (that is, the 

average MS–LTC–DRG relative weight) 

and is independent of the standard 

Federal rate. (We refer readers to the FY 

2011 IPPS/LTCH PPS proposed rule for 

additional details on the proposed 

calculation of the normalization factor 

applied used in determining the 

proposed FY 2011 MS–LTC–DRG 

relative weights (75 FR 24042 through 

24043).) Therefore, this step was not 

revised for this supplemental proposed 

rule. However, in the second step of our 

established two-step budget neutrality 

methodology (described in section 

VII.B.3.g. (step 7) of the preamble of the 

May 4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule), for FY 2011 we 

proposed to determine a budget 

neutrality adjustment factor based on 

simulating estimated total LTCH PPS 

payments. Consequently, revising the 

standard Federal rate to reflect the 

provisions of newly added sections 

1886(m)(3)(A)(ii) and (4) of the Act 

would impact the estimated aggregated 

LTCH PPS payments upon which we 

determine the proposed budget 

neutrality factor applied in determining 

the proposed FY 2011 MS–LTC–DRG 

relative weights. 

For this supplemental proposed rule, 

consistent with the proposed 

methodology described in the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed 

rule (75 FR 24042 through 24043), we 

are proposing to apply a budget 

neutrality adjustment factor of 0.987632 

in determining the proposed FY 2011 

MS–LTC–DRG relative weights, which 

was determined based on payments 

simulations after using the proposed FY 

2011 standard Federal rate that reflects 

the reductions required by sections 

1886(m)(3)(A)(ii) and (4)(A) and (B) of 

the Act (discussed above) and LTCH 

claims from the December 2009 update 

of the FY 2009 MedPAR files (that is the 

same data used in the May 4, 2010 FY 

2011 IPPS/LTCH PPS proposed rule). 

Specifically, we determined the 

proposed FY 2011 budget neutrality 

adjustment factor using the following 

three steps: (2.a.) we simulate estimated 

total LTCH PPS payments using the 

normalized proposed relative weights 

for FY 2011 and GROUPER Version 28.0 

(as described above); (2.b.) we simulate 

estimated total LTCH PPS payments 

using the FY 2010 GROUPER (Version 

27.0) and the FY 2010 MS–LTC–DRG 

relative weights shown in Table 11 of 

the FY 2010 IPPS/RY 2010 LTCH PPS 

final rule (74 FR 44183 through 44192); 

and (2.c.) we calculate the ratio of these 

estimated total LTCH PPS payments by 

dividing the estimated total LTCH PPS 

payments using the FY 2010 GROUPER 

(Version 27.0) and the FY 2010 MS– 

LTC–DRG relative weights (determined 

in step 2.b.) by the estimated total LTCH 

PPS payments using the proposed FY 

2011 GROUPER (Version 28.0) and the 

normalized proposed MS–LTC–DRG 

relative weights for FY 2011 

(determined in Step 2.a.). 

Therefore, under our established twostep budget neutrality methodology, in 

determining the proposed FY 2011 MS– 

LTC–DRG relative weights, each 

normalized proposed relative weight 

(determined as described in section 

VII.C.3.g.(step 7) of the preamble of the 

May 4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule) is multiplied by a budget 

neutrality factor of 0.987632 in the 

second step of the budget neutrality 

methodology to determine the proposed 

budget neutral FY 2011. (We note that 

in determining the proposed FY 2011 

budget neutral MS–LTC–DRG relative 

weights for this supplemental proposed 

rule, with the exception of the proposed 

budget neutrality adjustment factor of 

0.987632 discussed above, we used the 

proposed methodology as presented in 

the May 4, 2010 FY 2011 IPPS/LTCH 

PPS proposed rule (75 FR 24042 

through 24043).) Consistent with our 

historical policy of using the best 

available data, we are proposing to use 

the most recent available data for 


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determining the budget neutrality 

adjustment factor in the final rule. 

Accordingly, in determining the 

proposed FY 2011 MS–LTC–DRG 

relative weights in Table 11 in the 

Addendum to this supplemental 

proposed rule, consistent with our 

existing methodology, we are proposing 

to apply a normalization factor of 

1.10362 (computed as described in 

section VII.C.3.g. (step 7) of the 

preamble to the May 4, 2010 FY 2011 

IPPS/LTCH PPS proposed rule) and a 

budget neutrality factor of 0.987632 

(computed as described above). Table 11 

in the Addendum to this supplemental 

proposed rule lists the proposed MS– 

LTC–DRGs and their respective 

proposed relative weights, geometric 

mean length of stay, and five-sixths of 

the geometric mean length of stay (used 

in determining SSO payments under 

§ 412.529) for FY 2011. (We note that 

there are no changes to the geometric 

mean length of stay and five-sixths of 

the geometric mean length of stay that 

were published in Table 11 of the May 

4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule as the calculation of these 

statistics is independent of the standard 

Federal rate.) 

III. Other Required Information 

A. Collection of Information 

Requirements 

This document does not impose 

information collection and 

recordkeeping requirements. 

Consequently, it need not be reviewed 

by the Office of Management and 

Budget under the authority of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. Chapter 35). 

B. Waiver of 60-Day Comment Period 

We ordinarily publish a notice of 

proposed rulemaking in the Federal 

Register and permit a 60-day comment 

period, as provided in section 1871(b)(1) 

of the Act. This period, however, may 

be shortened, as provided under section 

1871(b)(2)(C) of the Act, when the 

Secretary finds good cause that a 60-day 

comment period would be 

impracticable, unnecessary, or contrary 

to the public interest and incorporates a 

statement of the finding and its reasons 

in the rule issued. For this supplemental 

proposed rule, we are waiving the 60- 

day comment period for good cause and 

allowing a comment period that 

coincides with the comment period 

provided for on the FY 2011 IPPS/LTCH 

PPS proposed rule (75 FR 23852). 

As we explained in the FY 2011 IPPS/ 

LTCH PPS proposed rule (75 FR 23859), 

due to the timing of the enactment of 

Public Law 111–148 and Public Law 

111–152, the policies and payment rates 

outlined in the proposed rule did not 

reflect the changes made by either law 

to the IPPS and LTCH PPS. This 

supplemental proposed rule addresses 

the changes that affect our proposed 

policies and payment rates for FY 2011 

under the IPPS and the LTCH PPS. 

A 60-day comment period on this 

supplemental proposed rule would be 

both impracticable and contrary to the 

public interest because it would not 

allow for coordinated consideration of 

the comments on this supplemental 

proposed rule with those on the FY 

2011 IPPS/LTCH PPS proposed rule. 

Because the issues raised in this 

supplemental proposed rule are integral 

to our consideration of comments on 

certain proposals in the FY 2011 IPPS/ 

LTCH PPS proposed rule, we do not 

believe it would be appropriate to 

review comments on the issues raised in 

this supplemental proposed rule in 

isolation from the comments received 

on the FY 2011 IPPS/LTCH PPS 

proposed rule. We further note that a 

full 60-day comment period would end 

on a date that would not allow the 

agency sufficient time to process the 

comments and respond to them in a 

meaningful manner by the August 1, 

2010 date for issuing the final rule. If we 

allowed for a full 60-day comment 

period, timely filed comments would 

receive a shorter period of time for 

consideration by the agency, and the 

agency would be left with insufficient 

time to properly respond to comments 

and appropriately resolve whether any 

of the proposed policies should be 

modified in light of comments received. 

For all of these reasons, we find good 

cause to waive the 60-day comment 

period for this rule of proposed 

rulemaking, and we are instead 

providing for a comment period that 

coincides with the comment period 

provided for the FY 2011 IPPS/LTCH 

PPS proposed rule that appeared in the 

May 4, 2010 Federal Register. 

IV. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

List of Subjects 

42 CFR Part 412 

Administrative practice and 

procedure, Health facilities, Medicare, 

Puerto Rico, Reporting and 

recordkeeping requirements. 

42 CFR Part 413 

Health facilities, Kidney diseases, 

Medicare, Puerto Rico, Reporting and 

recordkeeping requirements. 

For the reasons stated in the preamble 

of this proposed rule, the Centers for 

Medicare & Medicaid Services is 

proposing to amend 42 CFR chapter IV 

as follows: 

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

1. The authority citation for part 412 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh), and sec. 124 of Public Law 106–113 

(113 Stat. 1501A–332). 

§ 412.23 [Amended] 

2. In § 412.23, paragraphs (e)(6)(i) and 

(e)(7)(ii) are amended by removing the 

date ‘‘December 28, 2010’’ and adding 

the date ‘‘December 28, 2012’’ in its 

place. 

3. Section 412.64 is amended by— 

A. Revising paragraphs (d)(1) and 

(e)(4). 

B. Adding a new paragraph (m). 

§ 412.64 Federal rates for inpatient 

operating costs for Federal fiscal year 2005 

and subsequent fiscal years. 

* * * * * 

(d) Applicable percentage change for 

fiscal year 2005 and for subsequent 

fiscal years. 

(1) Subject to the provisions of 

paragraph (d)(2) of this section, the 

applicable percentage change for 

updating the standardized amount is— 

(i) For fiscal year 2005 through fiscal 

year 2009, the percentage increase in the 

market basket index for prospective 

payment hospitals (as defined in 

§ 413.40(a) of this subchapter) for 

hospitals in all areas. 

(ii) For fiscal year 2010, for 

discharges— 

(A) On or after October 1, 2009 and 

before April 1, 2010, the percentage 

increase in the market basket index for 

prospective payment hospitals (as 

defined in § 413.40(a) of this 

subchapter) for hospitals in all areas; 

and 

(B) On or after April 1, 2010 and 

before October 1, 2010, the percentage 

increase in the market basket index 

minus 0.25 percentage points for 


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prospective payment hospitals (as 

defined in § 413.40(a) of this 

subchapter) for hospitals in all areas. 

(iii) For fiscal year 2011, the 

percentage increase in the market basket 

index minus 0.25 percentage points for 

prospective payment hospitals (as 

defined in § 413.40(a) of this 

subchapter) for hospitals in all areas. 

* * * * * 

(e) * * * 

(4) CMS makes an adjustment to the 

wage index to ensure that aggregate 

payments after implementation of the 

rural floor under section 4410 of the 

Balanced Budget Act of 1997 (Pub. L. 

105–33) and the imputed floor under 

paragraph (h)(4) of this section are equal 

to the aggregate prospective payments 

that would have been made in the 

absence of such provisions as follows: 

(i) Beginning October 1, 2008, such 

adjustment is transitioned from a 

nationwide to a statewide adjustment as 

follows: 

(A) From October 1, 2008 through 

September 30, 2009, the wage index is 

a blend of 20 percent of a wage index 

with a statewide adjustment and 80 

percent of a wage index with a 

nationwide adjustment. 

(B) From October 1, 2009 through 

September 30, 2010, the wage index is 

a blend of 50 percent of a wage index 

with a statewide adjustment and 50 

percent of a wage index with a 

nationwide adjustment. 

(ii) Beginning October 1, 2010, such 

adjustment is a full nationwide 

adjustment. 

* * * * * 

(m) Adjusting the wage index to 

account for the Frontier State floor. 

(1) General criteria. For discharges 

occurring on or after October 1, 2010, 

CMS adjusts the hospital wage index for 

hospitals located in qualifying States to 

recognize the wage index floor 

established for frontier States. A 

qualifying frontier State meets both of 

the following criteria: 

(i) At least 50 percent of counties 

located within the State have a reported 

population density less than 6 persons 

per square mile. 

(ii) The State does not receive a nonlabor related share adjustment 

determined by the Secretary to take into 

account the unique circumstances of 

hospitals located in Alaska and Hawaii. 

(2) Amount of wage index adjustment. 

A hospital located in a qualifying State 

will receive a wage index value not less 

than 1.00. 

(3) Process for determining and 

posting wage index adjustments. (i) 

CMS uses the most recent Population 

Estimate data published by the U.S. 

Census Bureau to determine county 

definitions and population density. This 

analysis will be periodically revised, 

such as for updates to the decennial 

census data. 

(ii) CMS will include a listing of 

qualifying Frontier States and denote 

the hospitals receiving a wage index 

increase attributable to this provision in 

its annual updates to the hospital 

inpatient prospective payment system 

published in the Federal Register. 

4. Section 412.73 is amended by— 

A. Revising paragraph (c)(15). 

B. Adding a new paragraph (c)(16). 

The revision and addition read as 

follows: 

§ 412.73 Determination of the hospital 

specific rate based on a Federal fiscal year 

1982 base period. 

* * * * * 

(c) * * * 

(15) For Federal fiscal year 2003 

through Federal fiscal year 2009. For 

Federal fiscal year 2003 through Federal 

fiscal year 2009, the update factor is the 

percentage increase in the market basket 

index for prospective payment hospitals 

(as defined in § 413.40(a) of this 

chapter). 

(16) For Federal fiscal year 2010 and 

subsequent years. For Federal fiscal year 

2010 and subsequent years, the update 

factor is the percentage increase 

specified in § 412.64(d). 

* * * * * 

§ 412.75 [Amended] 

5. In § 412.75, paragraph (d) is 

amended by removing the citation 

‘‘§ 412.73(c)(15)’’ and adding the citation 

‘‘§ 412.73(c)(15) and § 412.73(c)(16)’’ in 

its place. 

§ 412.77 [Amended] 

6. In § 412.77, paragraph (e) is 

amended by removing the reference 

‘‘(c)(15)’’ and adding the reference 

‘‘(c)(16)’’ in its place. 

§ 412.78 [Amended] 

7. In § 412.78, paragraph (e) is 

amended by removing the citation 

‘‘§ 412.73(c)(15)’’ and adding the citation 

‘‘§ 412.73(c)(15) and § 412.73(c)(16)’’ in 

its place. 

§ 412.79 [Amended] 

8. In § 412.79, paragraph (d) is 

amended by removing the phrase ‘‘and 

(c)(15)’’ and adding the phrase ‘‘through 

(c)(16)’’ in its place. 

9. Section 412.101 is revised to read 

as follows: 

§ 412.101 Special treatment: Inpatient 

hospital payment adjustment for lowvolume hospitals. 

(a) Definitions. Beginning in FY 2011, 

the terms used in this section are 

defined as follows: 

Medicare discharges means discharge 

of inpatients entitled to Medicare Part 

A, including discharges associated with 

individuals whose inpatient benefits are 

exhausted or whose stay was not 

covered by Medicare and also 

discharges of individuals enrolled in a 

MA organization under Medicare Part C. 

Road miles means ‘‘miles’’ as defined 

in § 412.92(c)(1). 

(b) General considerations. (1) CMS 

provides an additional payment to a 

qualifying hospital for the higher 

incremental costs associated with a low 

volume of discharges. The amount of 

any additional payment for a qualifying 

hospital is calculated in accordance 

with paragraph (c) of this section. 

(2) In order to qualify for this 

adjustment a hospital must meet the 

following criteria: 

(i) For FY 2005 through FY 2010, a 

hospital must have less than 200 total 

discharges, which includes Medicare 

and non-Medicare discharges, during 

the fiscal year, as reflected in its cost 

report specified in paragraph (b)(3) of 

this section, and be located more than 

25 road miles (as defined in paragraph 

(a) of this section from the nearest 

‘‘subsection (d)’’ (section 1886(d) of the 

Act) hospital. 

(ii) For FY 2011 and FY 2012, a 

hospital must have less than 1,600 

Medicare discharges, as defined in 

paragraph (a) of this section, during the 

fiscal year, as reflected in its cost report 

specified in paragraph (b)(3) of this 

section, and be located more than 15 

road miles, as defined in paragraph (a) 

of this section, from the nearest 

‘‘subsection (d)’’ (section 1886(d) of the 

Act) hospital. 

(iii) For FY 2013 and subsequent 

fiscal years, a hospital must have less 

than 200 total discharges, which 

includes Medicare and non-Medicare, 

during the fiscal year, as reflected in its 

cost report specified in paragraph (b)(3) 

of this section, and be located more than 

25 road miles as defined in paragraph 

(a) of this section from the nearest 

‘‘subsection (d)’’ (section 1886(d) of the 

Act) hospital. 

(3) The fiscal intermediary or 

Medicare administrative contractor 

makes the determination of the 

discharge count for purposes of 

determining a hospital’s qualification 

for the adjustment based on the 

hospital’s most recently submitted cost 

report and for qualification for FYs 2011 

and 2012 other documentation of 


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Medicare discharges (as defined in 

paragraph (a) of this section). 

(4) In order to qualify for the 

adjustment, a hospital must provide its 

fiscal intermediary or Medicare 

administrative contractor with sufficient 

evidence that it meets the distance 

requirement specified under paragraph 

(b)(2) of this section. The fiscal 

intermediary or Medicare administrative 

contractor will base its determination of 

whether the distance requirement is 

satisfied upon the evidence presented 

by the hospital and other relevant 

evidence, such as maps, mapping 

software, and inquiries to State and 

local police, transportation officials, or 

other government officials. 

(c) Determination of the adjustment 

amount. The low-volume adjustment for 

hospitals that qualify under paragraph 

(b) of this section are as follows for the 

applicable fiscal year: 

(1) For FY 2005 through FY 2010, the 

adjustment is 25 percent for each 

Medicare discharge. 

(2) For FY 2011 and FY 2012, the 

adjustment is as follows: 

Medicare discharge range 

Payment 

adjustment 

(percent 

add-on) 

1–200 ...................................... 25.0000 

201–301 .................................. 23.3333 

301–400 .................................. 21.6667 

401–500 .................................. 20.0000 

501–600 .................................. 18.3333 

601–700 .................................. 16.6667 

701–800 .................................. 15.0000 

801–900 .................................. 13.3333 

901–1,000 ............................... 11.6667 

1,001–1,100 ............................ 10.0000 

1,101–1,200 ............................ 8.3333 

1,201–1,300 ............................ 6.6667 

1,301–1,400 ............................ 5.0000 

1,401–1,500 ............................ 3.3333 

1,501–1,599 ............................ 1.6667 

1,600 or more ......................... 0.0000 

(3) For FY 2013 and subsequent years, 

the adjustment is 25 percent for each 

Medicare discharge. 

(d) Eligibility of new hospitals for the 

adjustment. A new hospital will be 

eligible for a low-volume adjustment 

under this section once it has submitted 

a cost report for a cost reporting period 

that indicates that it meets discharge 

requirements during the applicable 

fiscal year and has provided its fiscal 

intermediary or Medicare administrative 

contractor with sufficient evidence that 

it meets the distance requirement, as 

specified under paragraph (b)(2) of this 

section. 

§ 412.108 [Amended] 

10. Section 412.108 is amended as 

follows: 

A. In paragraph (a)(1) introductory 

text the phrase ‘‘before October 1, 2011’’ 

is removed and the phrase ‘‘before 

October 1, 2012’’ is added in its place. 

B. In paragraph (c)(2)(iii) introductory 

text the phrase ‘‘before October 1, 2010’’ 

is removed and the phrase ‘‘before 

October 1, 2012’’ is added in its place. 

11. Section 412.211 is amended by 

revising paragraph (c) to read as follows: 

§ 412.211 Puerto Rico rates for Federal 

fiscal year 2004 and subsequent fiscal 

years. 

* * * * * 

(c) Computing the standardized 

amount. CMS computes a Puerto Rico 

standardized amount that is applicable 

to all hospitals located in all areas. The 

applicable percentage change for 

updating the Puerto Rico specific 

standardized amount is as follows: 

(1) For fiscal year 2004 through fiscal 

year 2009, increased by the applicable 

percentage change specified in 

§ 412.64(d)(1)(ii)(A). 

(2) For fiscal year 2010, increased by 

the market basket index for prospective 

payment hospitals (as defined in 

§ 413.40(a) of this subchapter) for 

hospitals in all areas. 

(3) For fiscal year 2011, increased by 

the applicable percentage change 

specified in § 412.64(d)(1)(iii). 

* * * * * 

§ 412.230 [Amended] 

12. In § 412.230 paragraph 

(d)(1)(iv)(E) is amended by removing the 

figures ‘‘86’’ and ‘‘88’’ adding the figures 

‘‘82’’ and ‘‘84’’ in their place, 

respectively. 

§ 412.232 [Amended] 

13. In § 412.232, paragraph (c)(3) is 

amended by removing the figure ‘‘88’’ 

and adding the figure ‘‘85’’ in its place. 

§ 412.234 [Amended] 

14. In § 412.234, paragraph (b)(3) is 

amended by removing the figure ‘‘88’’ 

and adding the figure ‘‘85’’ in its place. 

§ 412.523 [Amended] 

15. Section 412.523 is amended as 

follows: 

A. Revise paragraph (c)(3)(vi). 

B. Add paragraph (c)(3)(vii). 

C. Paragraph (d)(3) is amended by 

removing the phrase ‘‘December 29, 

2010, and by no later than October 1, 

2012’’ and adding the phrase ‘‘December 

29, 2012,’’ in its place. 

The revision and addition read as 

follows: 

§ 412.523 Methodology for calculating the 

Federal prospective payment rates. 

* * * * * 

(c) * * * 

(3) * * * 

(vi) For long-term care hospital 

prospective payment system rate year 

beginning October 1, 2009 and ending 

September 30, 2010. (A) The standard 

Federal rate for long-term care hospital 

prospective payment system rate year 

beginning October 1, 2009 and ending 

September 30, 2010 is the standard 

Federal rate for the previous long-term 

care hospital prospective payment 

system rate year updated by 1.74 

percent. The standard Federal rate is 

adjusted, as appropriate, as described in 

paragraph (d) of this section. 

(B) With respect to discharges 

occurring on or after October 1, 2009 

and before April 1, 2010, payments are 

based on the standard Federal rate in 

paragraph (c)(3)(v) of this section 

updated by 2.0 percent. 

(vii) For long-term care hospital 

prospective payment system fiscal year 

beginning October 1, 2010, and ending 

September 30, 2011. The standard 

Federal rate for the long-term care 

hospital prospective payment system 

fiscal year beginning October 1, 2010, 

and ending September 30, 2011, is the 

standard Federal rate for the previous 

long-term care hospital prospective 

payment system rate year updated by 

¥0.59 percent. The standard Federal 

rate is adjusted, as appropriate, as 

described in paragraph (d) of this 

section. 

* * * * * 

§ 412.529 [Amended] 

16. In § 412.529, paragraphs (c)(2) 

introductory text and (c)(3) introductory 

text are amended by removing the date 

‘‘December 29, 2010’’ and adding in its 

place the date ‘‘December 29, 2012’’ each 

time it appears. 

§ 412.534 [Amended] 

17. Section 412.534 is amended as 

follows: 

A. Paragraphs (c)(1), (c)(2), (d)(1), 

(d)(2), (e)(1), (e)(2) are amended by 

removing the date ‘‘October 1, 2010’’ and 

adding in its place the date ‘‘October 1, 

2012’’ each time it appears. 

B. Paragraphs (c)(3), (d)(3), (e)(3), 

(h)(4), and (h)(5) are amended by 

removing the date ‘‘July 1, 2010’’ and 

adding in its place the date ‘‘July 1, 

2012’’ each time it appears. 

§ 412.536 [Amended] 

18. In § 412.536, paragraph (a)(2) 

introductory text is amended by 

removing the date ‘‘July 1, 2010’’ and 

adding the date ‘‘July 1, 2012’’ in its 

place. 


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PART 413—PRINCIPLES OF 

REASONABLE COST 

REIMBURSEMENT; PAYMENT FOR 

END-STAGE RENAL DISEASE 

SERVICES; OPTIONAL 

PROSPECTIVELY DETERMINED 

PAYMENT RATES FOR SKILLED 

NURSING FACILITIES 

19. The authority citation for part 413 

continues to read as follows: 

Authority: Secs. 1102, 1812(d), 1814(b), 

1815, 1833(a), (i), and (n), 1861(v), 1871, 

1881, 1883, and 1886 of the Social Security 

Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 

1395g, 1395l(a), (i), and (n), 1395x(v), 

1395hh, 1395rr, 1395tt, and 1395ww); and 

sec. 124 of Public Law 106–133 (113 Stat. 

1501A–332). 

20. Section 413.70 is amended as 

follows: 

A. Revise paragraph (b)(3)(ii)(A). 

B. Redesignate paragraph (b)(5)(i) as 

(b)(5)(i)(A). 

C. In newly redesignated paragraph 

(b)(5)(i)(A), the phrase ‘‘on or after 

December 21, 2000,’’ is removed and the 

phrase ‘‘on or after December 21, 2000 

and on or before December 31, 2003,’’ is 

added in its place. 

D. Add a new paragraph (b)(5)(i)(B). 

The revision and addition read as 

follows: 

§ 413.70 Payment for services of a CAH. 

* * * * * 

(b) * * * 

(3) * * * 

(ii) * * * 

(A) Effective for cost reporting periods 

beginning on or after January 1, 2004, 

for facility services not including any 

services for which payment may be 

made under paragraph (b)(3)(ii)(B) of 

this section, 101 percent of the 

reasonable costs of the services as 

determined under paragraph (b)(2)(i) of 

this section; and 

* * * * * 

(5) * * * 

(i) * * * 

(B) Effective for cost reporting periods 

beginning on or after January 1, 2004, 

payment for ambulance services 

furnished by a CAH or an entity that is 

owned and operated by a CAH is 101 

percent of the reasonable costs of the 

CAH or the entity in furnishing those 

services, but only if the CAH or the 

entity is the only provider or supplier of 

ambulance services located within a 35- 

mile drive of the CAH or the entity. 

* * * * * 

Authority: 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: May 13, 2010. 

Marilyn Tavenner, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: May 18, 2010. 

Kathleen Sebelius, 

Secretary. 

Note: The following Addendum and 

Appendix will not appear in the Code of 

Federal Regulations. 

Addendum: FY 2011 Supplemental 

Proposed Payment Rates 

I. Supplemental Proposed FY 2011 

Prospective Payment Systems Payment 

Rates for Hospital Inpatient Operating 

and Capital Related Costs 

As discussed in section II.B. of the 

preamble to this supplemental proposed rule, 

changes to the applicable percentage 

increase, wage index, and rural community 

hospital demonstration mandated by the 

Affordable Care Act necessitate the 

recalculation of the FY 2011 proposed budget 

neutrality factors, outlier threshold and 

standardized amounts. In the FY 2011 IPPS/ 

LTCH PPS proposed rule we explained our 

methodology for calculating the FY 2011 

proposed budget neutrality factors (75 FR 

24062 through 24073). Except as explained 

below, we apply this same methodology in 

recalculating these budget neutrality 

adjustments to reflect the changes to the 

standardized amount required by the 

Affordable Care Act. A complete discussion 

of our computation of the FY 2011 proposed 

budget neutrality factors, outlier threshold 

and standardized amounts is found below. 

A. Updating the Average Standardized 

Amounts 

As discussed section II.B. of the preamble 

to this supplemental proposed rule, sections 

3401(a) and section 10319(a) of Public Law 

111–148, amends section 1886(b)(3)(B)(i) of 

the Act to provide that the FY 2011 

applicable percentage increase for IPPS 

hospitals equals the rate-of-increase in the 

hospital market basket for IPPS hospitals in 

all areas minus a 0.25 percentage point, 

subject to the hospital submitting quality 

information under rules established by the 

Secretary in accordance with section 

1886(b)(3)(B)(viii) of the Act. For hospitals 

that fail to submit quality data consistent 

with section 1886(b)(3)(B)(viii) of the Act, the 

update is equal to the market basket 

percentage increase minus a 0.25 percentage 

point less an additional 2.0 percentage 

points. Therefore, for this supplemental 

proposed rule, based on IHS Global Insight, 

Inc.’s first quarter 2010 forecast of the FY 

2011 market basket increase, the estimated 

update to the FY 2011 operating standardized 

amount is 2.15 percent (that is, the FY 2011 

estimate of the market basket rate-of-increase 

of 2.4 percent minus 0.25 percentage points) 

for hospitals in all areas, provided the 

hospital submits quality data in accordance 

with our rules. For hospitals that do not 

submit quality data, the estimated update to 

the operating standardized amount is 0.15 

percent (that is, the adjusted FY 2011 

estimate of the market basket rate-of-increase 

of 2.15 percent minus 2.0 percentage points). 

B. Proposed Budget Neutrality Adjustments 

Factors for Recalibration of DRG Weights and 

Updated Wage Index 

In the FY 2011 IPPS/LTCH PPS proposed 

rule we explained our methodology for 

calculating the FY 2011 proposed DRG 

reclassification and recalibration and 

updated wage index budget neutrality factor 

(75 FR 24064). Except as explained below, 

we apply this same methodology in 

recalculating this budget neutrality 

adjustment to reflect the changes to the 

standardized amount required by the 

Affordable Care Act. 

As discussed above, sections 3401(a) and 

section 10319(a) of Public Law 111–148 

amends section 1886(b)(3)(B)(i) of the Act, 

which defines the applicable percentage 

increase. Although these amendments 

modify the applicable percentage increase 

applicable to the FY 2010 rates under the 

IPPS, section 3401(p) of Public Law 111–148 

states that the amendments do not apply to 

discharges occurring prior to April 1, 2010. 

Accordingly, for purposes of determining 

payment amounts for discharges occurring on 

or after April 1, 2010, in order to comply 

with the statute in section 3401(p) of Public 

Law 111–148, we applied the revised FY 

2010 rates effective with discharges on or 

after April 1, 2010 until the end of FY 2010. 

However, for purposes of determining the 

budget neutrality adjustments for FY 2011, 

the statute requires us to simulate the FY 

2010 hospital as if hospitals were paid for all 

of FY 2010 based on the FY 2010 rates that 

are effective for payments for discharges 

occurring on or after April 1, 2010. 

For FY 2011 we are proposing a proposed 

DRG reclassification and recalibration factor 

of 0.996867 and a proposed budget neutrality 

factor of 1.000070 for changes to the wage 

index. We multiplied the proposed DRG 

reclassification and recalibration budget 

neutrality factor of 0.996867 by the proposed 

budget neutrality factor of 1.000070 for 

changes to the wage index to determine the 

proposed DRG reclassification and 

recalibration and updated wage index budget 

neutrality factor of 0.996937 (as required by 

sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E)(i) 

of the Act). 

C. Reclassified Hospitals—Budget Neutrality 

Adjustment 

Due to the Affordable Care Act, it is also 

necessary to revise the reclassification budget 

neutrality factor. As discussed in section II.A. 

of the preamble to this supplemental 

proposed rule, section 3137(c) of Public Law 

111–148 revised the average hourly wage 

standards resulting in our estimate that 23 

additional hospitals will be reclassified (or 

receive their primary reclassifications. Using 

the methodology proposed in the FY 2011 

IPPS proposed rule, and incorporating the 

provision above, we computed a factor of 

0.991476 for reclassification budget 

neutrality, as required by section 

1886(d)(8)(D) of the Act. 


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D. Rural and Imputed Floor Budget 

Neutrality 

We make an adjustment to the wage index 

to ensure that aggregate payments after 

implementation of the rural floor under 

section 4410 of the BBA (Pub. L. 105–33) and 

the imputed floor under § 412.64(h)(4) of the 

regulations are made in a manner that 

ensures that aggregate payments to hospitals 

are not affected. As discussed in section III.B. 

of the preamble of the FY 2009 IPPS final 

rule (73 FR 48570 through 48574), we 

adopted as final State level budget neutrality 

for the rural and imputed floors, effective 

beginning with the FY 2009 wage index. In 

response to the public’s concerns and taking 

into account the potentially significant 

payment cuts that could occur to hospitals in 

some States if we implemented this change 

with no transition, we decided to phase in, 

over a 3-year period, the transition from the 

national rural floor budget neutrality 

adjustment on the wage index to the State 

level rural floor budget neutrality adjustment 

on the wage index. In FY 2011 IPPS/LTCH 

PPS proposed rule, in the absence of 

provisions of Public Law 111–148, the 

proposed adjustment would have been 

completely transitioned to the State level 

methodology, such that the wage index that 

was proposed in the FY 2011 IPPS/LTCH 

PPS proposed rule was determined by 

applying 100 percent of the State level 

budget neutrality adjustment. However, 

section 3141 of Public Law 111–148 restores 

the budget neutrality adjustment for the rural 

and imputed floors to a uniform, national 

adjustment, beginning with the FY 2011 

wage index. 

Using the same methodology in prior final 

rules to calculate the national rural and 

imputed floor budget neutrality adjustment 

factor (which was part of the methodology to 

calculate the blended rural and imputed floor 

budget neutrality adjustment factors), to 

determine the proposed wage index adjusted 

by the national rural and imputed floor 

budget neutrality adjustment, we used FY 

2009 discharge data and proposed FY 2011 

wage indices to simulate IPPS payments. 

First, we compared the national simulated 

payments without the rural and imputed 

floors applied to national simulated 

payments with the rural and imputed floors 

applied to determine the national rural and 

imputed floor budget neutrality adjustment 

factor of 0.995425. This national adjustment 

was then applied to the wage indices to 

produce a national rural and imputed floor 

budget neutral wage index. 

E. Proposed Rural Community Hospital 

Demonstration Program Adjustment 

As discussed in section II.F. of the 

preamble to this supplemental proposed rule, 

section 410A of Public Law 108–173 requires 

the Secretary to establish a demonstration 

that will modify reimbursement for inpatient 

services for up to 15 small rural hospitals. 

Section 410A(c)(2) of Public Law 108–173 

requires that ‘‘in conducting the 

demonstration program under this section, 

the Secretary shall ensure that the aggregate 

payments made by the Secretary do not 

exceed the amount which the Secretary 

would have paid if the demonstration 

program under this section was not 

implemented.’’ In the proposed rule we did 

not apply an adjustment to the standardized 

amount to ensure the effects of the rural 

community hospital demonstration are 

budget neutral. However, section 450(a) of 

the MMA as amended by sections 3123 and 

10313 of Public Law 111–148 extends the 

demonstration for an additional 5 years, and 

allows not more than 30 hospitals to 

participate in the 20 least densely populated 

States. 

In order to achieve budget neutrality, we 

are proposing to adjust the national IPPS 

rates by an amount sufficient to account for 

the added costs of this demonstration. In 

other words, we are proposing to apply 

budget neutrality across the payment system 

as a whole rather than merely across the 

participants of this demonstration, consistent 

with past practice. We believe that the 

language of the statutory budget neutrality 

requirement permits the agency to implement 

the budget neutrality provision in this 

manner. The statutory language requires that 

‘‘aggregate payments made by the Secretary 

do not exceed the amount which the 

Secretary would have paid if the 

demonstration * * * was not implemented,’’ 

but does not identify the range across which 

aggregate payments must be held equal. As 

mentioned section II.F. of the preamble to 

this supplemental proposed rule, the 

proposed estimated amount for the 

adjustment to the national IPPS rates for FY 

2011 is $69,279,673. Accordingly to account 

for the changes in the Affordable Care Act, 

we computed a proposed factor of 0.999313 

for the rural community hospital 

demonstration program adjustment. We note 

that because the settlement process for the 

demonstration hospitals’ third year cost 

reports, that is, cost reporting periods starting 

in FY 2007, has experienced a delay, for this 

FY 2011 IPPS proposed rule, we are unable 

to state the costs of the demonstration 

corresponding to FY 2007 and as a result are 

unable to propose the specific numeric 

adjustment representing this offsetting 

process that would be applied to the national 

IPPS rates (as discussed above). However, we 

expect the cost reports beginning in FY 2007 

for hospitals that participated during FY 

2007 to be settled before the FY 2011 IPPS/ 

LTCH final rule is published. Therefore, for 

the FY 2011 IPPS/LTCH PPS final rule, we 

expect to be able to calculate the amount by 

which the costs corresponding to FY 2007 

exceeded the amount offset by the budget 

neutrality adjustment for FY 2007. 

F. Proposed FY 2011 Outlier Fixed-Loss Cost 

Threshold 

In order to compute the FY 2011 proposed 

outlier threshold, we used the same 

methodology in this supplemental proposed 

rule that we used in the FY 2011 IPPS/LTCH 

PPS proposed rule (75 FR 24068 through 

24069; and incorporated the provisions of 

Pub. L. 111–148 and Pub. L. 111–152 as 

discussed above). However, as discussed in 

section II.A. of the preamble to this 

supplemental proposed rule, in accordance 

with section 10324(a) of Public Law 111–148, 

beginning in FY 2011, we are proposing to 

create a wage index floor of 1.00 for all 

hospitals located in States determined to be 

Frontier States. We noted that the Frontier 

State floor adjustments will be calculated and 

applied after rural and imputed floor budget 

neutrality adjustments are calculated for all 

labor market areas, so as to ensure that no 

hospital in a Frontier State will receive a 

wage index lesser than 1.00 due to the rural 

and imputed floor adjustment. In accordance 

with section 10324(a) of Public Law 111–148, 

the Frontier State adjustment will not be 

subject to budget neutrality, and will only be 

extended to hospitals geographically located 

within a Frontier State. However, for 

purposes of estimating the proposed outlier 

threshold for FY 2011, it is necessary to 

apply this provision by adjusting the wage 

index of those eligible hospitals in a Frontier 

State when calculating the outlier threshold 

that results in outlier payments being 5.1 

percent of total payments for FY 2011. If we 

did not take into account this provision, our 

estimate of total FY 2011 payments would be 

too low, and as a result, our proposed outlier 

threshold would be too high, such that 

estimated outlier payments would be less 

than our projected 5.1 percent of total 

payments. 

We are proposing an outlier fixed-loss cost 

threshold for FY 2011 equal to the 

prospective payment rate for the DRG, plus 

any IME and DSH payments, and any addon payments for new technology, plus 

$24,165. 

G. FY 2011 Proposed Outlier Adjustment 

Factors 

Using the same methodology in this 

supplemental proposed rule that we used in 

the FY 2011 IPPS/LTCH PPS proposed rule 

(75 FR 24069; and incorporating the 

provisions of the Affordable Care Act as 

discussed above), we computed the following 

proposed FY 2011 outlier adjustment factors 

that are applied to the proposed FY 2011 

standardized amount for the proposed FY 

2011 outlier threshold: 

Operating 

standardized amounts Capital federal rate 

National ............................................................................................................................ 0.948995 0.943217 

Puerto Rico ...................................................................................................................... 0.951459 0.925238 


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H. Proposed FY 2011 Standardized Amount 

We calculated the proposed FY 2011 

standardized amounts using the methodology 

proposed in the FY 2011 IPPS proposed rule 

taking into account the changes required by 

the provisions of Public Law 111–148. Tables 

1A and 1B in this supplemental proposed 

rule contain the proposed national 

standardized amount that we are applying to 

all hospitals, except hospitals in Puerto Rico. 

The proposed Puerto Rico-specific amounts 

are shown in Table 1C. The proposed 

amounts shown in Tables 1A and 1B differ 

only in that the labor-related share applied to 

the proposed standardized amounts in Table 

1A is 68.8 percent, and the labor-related 

share applied to the proposed standardized 

amounts in Table 1B is 62 percent. 

In addition, Tables 1A and 1B include the 

proposed standardized amounts reflecting 

the adjusted marker basket update of 2.15 

percent update for FY 2011, and proposed 

standardized amounts reflecting the 2.0 

percentage point reduction to the update (a 

0.15 percent update) applicable for hospitals 

that fail to submit quality data consistent 

with section 1886(b)(3)(B)(viii) of the Act. 

Below is a revised table reflecting the 

changes required by the provisions of the 

Affordable Care Act that details the 

calculation of the proposed FY 2011 

standardized amounts. We note that our 

proposed adjustment for documentation and 

coding discussed at (75 FR 24065 through 

24067) has not changed since publication of 

the FY 2011 IPPS/LTCH proposed rule. 

Similar to the FY 2011 IPPS/LTCH PPS 

proposed rule, the adjustment of 0.957 is 

reflected within the table below. 

BILLING CODE 4120–01–P 

The proposed labor-related and nonlaborrelated portions of the national average 

standardized amounts for Puerto Rico 

hospitals for FY 2011 are set forth in Table 

1C in this supplemental proposed rule. (The 

labor-related share applied to the Puerto 

Rico-specific standardized amount is either 

62.1 percent or 62 percent, depending on 

which is more advantageous to the hospital.) 


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I. Proposed Adjustments for Area Wage 

Levels 

The following wage index tables were 

revised in this supplemental proposed rule as 

a result of the provisions of Public Law 111– 

148: Tables 2, 4A, 4B, 4C, 4D–2, 4J, and 9A. 

(These tables are also available on the CMS 

Web site.) 

II. Supplemental Proposed FY 2011 

Prospective Payment Systems Payment Rates 

for Capital Related Costs 

Although the provisions of Public Law 

111–148, do not directly affect the payment 

rates and policies for the IPPS for capitalrelated costs, as discussed in section II.G. of 

the preamble of this supplemental proposed 

rule, we are proposing the capital IPPS 

standard Federal rates for FY 2011. This is 

necessary because the wage index changes 

required by the provisions of Public Law 

111–148 (discussed above in section II.A. of 

preamble to this supplemental proposed rule) 

affect the proposed budget neutrality 

adjustment factor for changes in DRG 

classifications and weights and the 

geographic adjustment factor (GAF) since the 

GAF values are derived from the wage index 

values (see § 412.316(a)). In addition, the 

provisions of Public Law 111–148, also 

necessitate a revision to the proposed outlier 

payment adjustment factor since a single set 

of thresholds is used to identify outlier cases 

for both inpatient operating and inpatient 

capital-related payments (see § 412.312(c)). 

In this supplemental proposed rule, we 

have calculated the proposed FY 2011 capital 

Federal rates, offsets, and budget neutrality 

factors using the same methodology we 

proposed in the May 4, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule (CMS–1498–P) that 

was used to calculate the proposed rates 

included in that rule which did not reflect 

the provision of Public Law 111–148. For a 

complete description of this methodology, 

please see the May 4, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule (75 FR 24073 

through 24082). 

A. Proposed Capital Standard Federal Rate 

Update for FY 2011 

The proposed factors used in the update 

framework are not affected by the provisions 

of the Affordable Care Act. Therefore, the 

proposed update factor for FY 2011 is not 

being revised from the proposed capital IPPS 

standard Federal rate update factor discussed 

in section III.A.1. of the Addendum to the 

May 4, 2010 FY 2011 IPPS proposed rule and 

remains at 1.5 percent for FY 2011. 

A full discussion of the proposed update 

framework is provided in that proposed rule 

(75 FR 24074 through 24076). 

B. Proposed Outlier Payment Adjustment 

Factor 

Based on the thresholds as set forth in 

section III.A.6. of this Addendum, we 

estimate that outlier payments for capitalrelated costs would equal 5.68 percent for 

inpatient capital-related payments based on 

the proposed capital Federal rate in FY 2011. 

Therefore, we are proposing to apply an 

outlier adjustment factor of 0.9432 in 

determining the capital Federal rate. For FY 

2010, after taking into account the provisions 

of the Affordable Care Act, we estimated that 

outlier payments for capital would equal 5.22 

percent of inpatient capital-related payments 

(which required an outlier adjustment factor 

of 0.9478) based on the capital Federal rate 

in FY 2010 (as discussed elsewhere in this 

Federal Register). Thus, we estimate that the 

percentage of capital outlier payments to 

total capital standard payments for FY 2011 

would be higher than the percentage for FY 

2010. This increase in capital outlier 

payments is primarily due to the estimated 

decrease in capital IPPS payments per 

discharge. That is, because capital payments 

per discharge are projected to be slightly 

lower in FY 2011 compared to FY 2010, as 

shown in Table III. in section VIII. of the 

Appendix to this supplemental proposed 

rule, more cases would qualify for outlier 

payments. 

The outlier reduction factors are not built 

permanently into the capital rates; that is, 

they are not applied cumulatively in 

determining the capital Federal rate. The 

proposed FY 2011 outlier adjustment of 

0.9432 is a -0.49 percent change from the FY 

2010 outlier adjustment of 0.9478. Therefore, 

the net change in the outlier adjustment to 

the proposed capital Federal rate for FY 2011 

is 0.9951 (0.9432/0.9478). Thus, the proposed 

outlier adjustment decreases the proposed FY 

2011 capital Federal rate by 0.49 percent 

compared with the FY 2010 outlier 

adjustment. 

A single set of thresholds is used to 

identify outlier cases for both inpatient 

operating and inpatient capital-related 

payments (see § 412.312(c)). The outlier 

thresholds are set so that operating outlier 

payments are projected to be 5.1 percent of 

total operating IPPS DRG payments. The 

proposed outlier thresholds for FY 2011 are 

in section III.A.6. of this Addendum. For FY 

2011, a case would qualify as a cost outlier 

if the cost for the case plus the IME and DSH 

payments is greater than the prospective 

payment rate for the MS–DRG plus the fixedloss amount of $24,165. 

C. Proposed Budget Neutrality Adjustment 

Factor for Changes in DRG Classifications 

and Weights and the GAF 

Using the methodology discussed in 

section III.A.3. of the Addendum to the May 

4, 2010 FY 2011 IPPS/LTCH PPS proposed 

rule (75 FR 24077 through 24079), for FY 

2011, we are proposing a GAF/DRG budget 

neutrality factor of 1.0015, which is the 

product of the proposed incremental GAF 

budget neutrality factor of 1.0023 and the 

proposed DRG budget neutrality factor of 

0.9992 (the proposed DRG budget neutrality 

factor remains unchanged from the May 4, 

2010 FY 2011 IPPS proposed rule). The GAF/ 

DRG budget neutrality factors are built 

permanently into the capital rates; that is, 

they are applied cumulatively in determining 

the capital Federal rate. This follows the 

requirement that estimated aggregate 

payments each year be no more or less than 

they would have been in the absence of the 

annual DRG reclassification and recalibration 

and changes in the GAFs. The incremental 

change in the proposed adjustment from FY 

2010 to FY 2011 is 1.0015. The cumulative 

change in the proposed capital Federal rate 

due to this adjustment is 0.9926 (the product 

of the incremental factors for FYs 1995 

though 2010 and the proposed incremental 

factor of 1.0015 for FY 2011). (We note that 

averages of the incremental factors that were 

in effect during FYs 2005 and 2006, 

respectively, and the revised FY 2010 factor 

of 0.9994 that reflect the effect of the 

provisions of the Affordable Care Act (as 

discussed elsewhere in this Federal Register) 

were used in the calculation of the 

cumulative adjustment of 0.9926 for FY 

2011.) The proposed cumulative adjustments 

for MS–DRG classifications and proposed 

changes in relative weights and for proposed 

changes in the national GAFs through FY 

2011 is 0.9926. The following table 

summarizes the adjustment factors for each 

fiscal year: 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C The proposed factor accounts for the 

proposed MS–DRG reclassifications and 

recalibration and for proposed changes in the 

GAFs, which include the changes to the wage 


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index as required by the provisions of Public 

Law 111–148, as amended (as discussed in 

section II.A. of the preamble of this 

supplemental proposed rule). It also 

incorporates the effects on the proposed 

GAFs of FY 2011 geographic reclassification 

decisions made by the MGCRB compared to 

FY 2010 decisions. However, it does not 

account for changes in payments due to 

changes in the DSH and IME adjustment 

factors. 

D. Exceptions Payment Adjustment Factor 

The provisions of Public Law 111–148, as 

amended, have no effect on capital 

exceptions payments. Therefore, the special 

exceptions adjustment factor remains at 

0.9997 as discussed in section III.A.4. of the 

May 4, 2010 FY 2011 IPPS proposed rule (75 

FR 24079). 

E. Prospective MS–DRG Documentation and 

Coding Adjustment to the Capital Federal 

Rates for FY 2011 and Subsequent Years 

The provisions of Public Law 111–148, as 

amended, have no effect on the proposed 

prospective documentation and coding 

adjustment to the capital Federal rates. 

Therefore, as discussed in greater detail in 

section V.E. of the preamble of the May 4, 

2010 FY 2011 IPPS proposed rule (75 FR 

24013 through 24015), proposed an 

additional 2.9 percent reduction to the 

national capital Federal payment rate in FY 

2011, resulting in a cumulative 

documentation and coding adjustment factor 

of 0.957 for the proposed FY 2011 national 

capital Federal rate percent (that is, the 

existing ¥0.6 percent adjustment in FY 2008 

plus the ¥0.9 percent adjustment in FY 2009 

plus the proposed additional ¥2.9 percent 

adjustment, computed as 1 divided by (1.006 

× 1.009 × 1.029). 

F. Proposed Capital Standard Federal Rate 

for FY 2011 

As a result of the proposed 1.5 percent 

update and other proposed budget neutrality 

factors discussed above, we are proposing to 

establish a national capital Federal rate of 

$422.18 for FY 2011. We are providing the 

following chart that shows how each of the 

proposed factors and adjustments for FY 

2011 affects the computation of the proposed 

FY 2011 national capital Federal rate in 

comparison to the FY 2010 national capital 

Federal rate (revised to reflect the effect of 

the provisions of the Affordable Care Act (as 

discussed elsewhere in this Federal 

Register). The proposed FY 2011 update 

factor has the effect of increasing the 

proposed capital Federal rate by 1.5 percent 

compared to the FY 2010 capital Federal rate. 

The proposed GAF/DRG budget neutrality 

factor of 1.0015 has the effect of increasing 

the proposed capital Federal rate by 0.15 

percent compared to the FY 2010 capital 

Federal rate. The proposed FY 2011 outlier 

adjustment factor has the effect of decreasing 

the proposed capital Federal rate by 0.49 

percent compared to the FY 2010 capital 

Federal rate. The proposed FY 2011 

exceptions payment adjustment factor has 

the effect of decreasing the proposed capital 

Federal rate by 0.01 percent compared to the 

FY 2010 capital Federal rate. Furthermore, as 

shown in the chart below, the resulting 

cumulative adjustment for changes in 

documentation and coding that do not reflect 

real changes in patients’ severity of illness 

(that is, the proposed cumulative adjustment 

factor of 0.957 has the net effect of decreasing 

the proposed FY 2011 national capital 

Federal rate by 2.8 percent as compared to 

the FY 2010 national capital Federal rate. 

The combined effect of all the proposed 

changes would decrease the proposed 

national capital Federal rate by 

approximately 1.72 percent compared to the 

FY 2010 national capital Federal rate. 

COMPARISON OF FACTORS AND ADJUSTMENTS: FY 2010 CAPITAL FEDERAL RATE AND PROPOSED FY 2011 CAPITAL

FEDERAL RATE

FY 2010 * Proposed 

FY 2011 Change Percent change 

Update Factor 1 ........................................................................................................................ 1.0120 1.0150 1.0150 1.50 

GAF/DRG Adjustment Factor 1 ................................................................................................ 0.9994 1.0015 1.0015 0.15 

Outlier Adjustment Factor 2 ...................................................................................................... 0.9478 0.9432 0.9951 ¥0.49 

Exceptions Adjustment Factor 2 ............................................................................................... 0.9998 0.9997 0.9999 ¥0.01 

MS–DRG Documentation and Coding Adjustment Factor ...................................................... 3 0.9850 4 0.9570 5 0.9716 ¥2.84 

Capital Federal Rate ................................................................................................................ $429.56 $422.18 0.9828 ¥1.72 

1The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates. Thus, for example, the incremental 

change from FY 2010 to FY 2011 resulting from the application of the proposed 1.0015 GAF/DRG budget neutrality factor for FY 2011 is a net 

change of 1.0015. 2The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not 

applied cumulatively in determining the capital rates. Thus, for example, the proposed net change resulting from the application of the proposed 

FY 2011 outlier adjustment factor is 0.9432/0.9478, or 0.9951. 3The documentation and coding adjustment factor includes the ¥0.6 percent in FY 2008, ¥0.9 percent in FY 2009, and no additional reduction in FY 2010. 4The documentation and coding adjustment factor includes the ¥0.6 percent in FY 2008, ¥0.9 percent in FY 2009, no additional reduction in 

FY 2010 and the proposed ¥2.9 percent reduction in FY 2011. 5The change is measured from the FY 2009 cumulative factor of 0.9850. 

* The revised FY 2010 capital Federal rate, which reflects the effect of the provisions of the Affordable Care Act (as discussed elsewhere in 

this Federal Register). 

G. Proposed Special Capital Rate for Puerto 

Rico Hospitals 

Using the methodology discussed in the 

May 4, 2010 FY 2011 IPPS proposed rule (75 

FR 24081), with the changes we are 

proposing to make to the factors used to 

determine the capital rate, the proposed FY 

2011 special capital rate for hospitals in 

Puerto Rico is $199.49. (See the May 4, 2010 

FY 2011 IPPS proposed rule (75 FR 24015 

through 24016 and 24081) for additional 

information on the calculation of the 

proposed FY 2011 capital Puerto Rico 

specific rate.) 

III. Supplemental Proposed Changes to the 

Payment Rates for the LTCH PPS for FY 

2011 

A. Proposed LTCH PPS Standard Federal 

Rate for FY 2011 

1. Background 

In section VII. of the preamble of the May 

4, 2011 FY 2011 proposed rule, we discuss 

our proposed changes to the payment rates, 

factors, and specific policies under the LTCH 

PPS for FY 2011. As noted previously, on 

March 23, 2010, the Patient Protection and 

Affordable Care Act, Public Law 111–148, 

was enacted, and the Health Care and 

Education Reconciliation Act of 2010, Public 

Law 111–152, which amended certain 

provisions of Public Law 111–148, was 

enacted on March 30, 2010. Although a 

number of the provisions of Public Law 111– 

148 and Public Law 111–152 affect the LTCH 

PPS, due to the timing of the passage of the 

legislation, we were unable to address those 

provisions in the May 4, 2011 FY 2011 IPPS/ 

LTCH PPS proposed rule. Therefore, the 

proposed policies and payment rates in that 

proposed rule do not reflect the new 

legislation. Below we address the provisions 

of the Affordable Care Act that affect our 

proposed policies and payment rates for FY 

2011 under the LTCH PPS. In addition, we 

have issued further instructions 

implementing the provisions of the 

Affordable Care Act, that affect the policies 

and payment rates for RY 2010 under the 

LTCH PPS. Specifically, we have established 


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revised RY 2010 rates and factors in a 

separate notice elsewhere is this Federal 

Register consistent with the provisions of 

sections 1886(m)(3) and (4) of the Act and 

section 3401(p) of Public Law 111–148. 

2. Revision of Certain Market Basket Updates 

Incorporating the Provisions of the 

Affordable Care Act 

New section 1886(m)(3)(A)(ii) of the Act by 

specifies that for each of the rate years 2010 

through 2019, any annual update to the 

standard Federal rate, for discharges for the 

hospital for the rate year, shall be reduced by 

the other adjustment specified in new section 

1886(m)(4) of the Act. Additionally, new 

1886(m)(3)(A)(i) of the Act provides that any 

annual update to the standard Federal rate, 

for discharges occurring during the rate year, 

shall be reduced for rate year 2012 and each 

subsequent rate year by the productivity 

adjustment described in section 

1866(b)(3)(B)(xi)(II) of the Act. Sections 

1886(m)(3)(A)(ii) and (4)(A)–(B) require a 

0.25 percentage point reduction for rate year 

2010 and a 0.50 percentage point reduction 

for rate year 2011. In addition, section 

1886(m)(3)(B) of the Act provides that the 

application of section 1886(m)(3) may result 

in the annual update being less than zero for 

a rate year, and may result in payment rates 

for a rate year being less than such payment 

rates for the preceding rate year. 

Furthermore, section 3401(p) of Public Law 

111–148 specifies that the amendments made 

by section 3401(c) of Public Law 111–148 

shall not apply to discharges occurring before 

April 1, 2010. 

We note that in the May 4, 2010 FY 2011 

proposed rule, since the annual update to the 

LTCH PPS policies, rates and factors now 

occurs on October 1st, we proposed to adopt 

the term ‘‘fiscal year’’ (FY) rather than ‘‘rate 

year’’ (RY) under the LTCH PPS beginning 

October 1, 2010 to conform with the standard 

definition of the Federal fiscal year (October 

1 through September 30) used by other PPSs, 

such as the IPPS (see 75 FR 24146 through 

24147). Consequently, in that proposed rule 

and this supplemental proposed rule, for 

purposes of clarity, when discussing the 

annual update for the LTCH PPS, we 

employed ‘‘FY’’ rather than ‘‘RY’’ because it is 

our intent that the phrase ‘‘FY’’ be used 

prospectively in all circumstances dealing 

with the LTCH PPS. Similarly, although the 

language of sections 3401(c) and 10319 of 

Public Law 111–148, and section 1105(b) of 

Public Law 111–152 refers to years 2010 and 

thereafter under the LTCH PPS as ‘‘rate year,’’ 

consistent with our proposal to change the 

terminology used under the LTCH PPS from 

‘‘rate year’’ to ‘‘fiscal year,’’ for purposes of 

clarity, in this supplemental proposed rule, 

when discussing the annual update for the 

LTCH PPS, including the provisions of the 

Affordable Care Act, we will continue to 

employed ‘‘FY’’ rather than ‘‘RY’’ for 2011 and 

subsequent years because it is our intent that 

‘‘FY’’ be used prospectively in all 

circumstances dealing with the LTCH PPS. 

The proposed FY 2011 LTCH PPS standard 

Federal rate, discussed below in section 

III.A.3. of this supplemental proposed rule, 

would be calculated by applying the required 

0.50 percentage point reduction to the 

proposed FY 2011 market basket update 

consistent with sections 1886(m)(3)(A)(ii) 

and (4)(B) of the Act (that is, 1.9 percent) in 

addition to the proposed adjustment to 

account for any changes in documentation 

and coding practices that do not reflect 

increased patient severity of illness discussed 

in section VII.C.3. of the preamble of the May 

4, 2010 FY 2011 IPPS/LTCH PPS proposed 

rule (that is, 2.5 percent). 

3. Development of the Proposed FY 2011 

LTCH PPS Standard Federal Rate 

As discussed in the May 4, 2010 FY 2011 

proposed rule, while we continue to believe 

that an update to the LTCH PPS standard 

Federal rate should be based on the most 

recent estimate of the increase in the LTCH 

PPS market basket, we also believe it is 

appropriate that the standard Federal rate be 

offset by an adjustment to account for any 

changes in documentation and coding 

practices that do not reflect increased patient 

severity of illness. Such an adjustment 

protects the integrity of the Medicare Trust 

Funds by ensuring that the LTCH PPS 

payment rates better reflect the true costs of 

treating LTCH patients. 

For FY 2011, as discussed in section II.J.4. 

of the preamble of this proposed rule, the 

proposed market basket update under the 

LTCH PPS for FY 2011 is 1.9 percent (that 

is, the most recent estimate of the LTCH PPS 

market basket of 2.4 percent minus the 0.50 

percentage points required by sections 

1886(m)(3)(A)(ii) and (4)(B) of the Act. 

Furthermore, as discussed in greater detail in 

section VII.C.3. of the preamble of the May 

4, 2010 FY 2011 IPPS/LTCH PPS proposed 

rule, we performed a CMI analysis using the 

most recent available LTCH claims data (FY 

2009) under both the current MS–LTC–DRG 

and the former CMS LTC–DRG patient 

classification systems. Based on this 

evaluation, we determined that there was a 

cumulative increase in LTCH CMI of 2.5 

percent due to changes in documentation and 

coding that did not reflect real changes in 

patient severity of illness for LTCH 

discharges occurring in FY 2008 and FY 

2009. 

In this supplemental proposed rule, 

consistent with our historical practice, we are 

proposing to update the LTCH PPS standard 

Federal rate for FY 2011 based on the full 

proposed LTCH PPS market basket increase 

estimate of 2.4 percent, adjusted by the 0.50 

percentage point reduction required by 

sections 1886(m)(3)(A)(ii) and (4)(B) of the 

Act, and an adjustment to account for the 

increase in case-mix in a prior periods (FYs 

2008 and 2009) that resulted from changes in 

documentation and coding practices of ¥2.5 

percent. Consequently, the proposed update 

factor to the standard Federal rate for FY 

2011 is ¥0.59 percent (that is, we are 

proposing to apply a factor of 0.9941 in 

determining the LTCH PPS standard Federal 

rate for FY 2011, calculated as 1.019 × 1 

divided by 1.025 = 0.9941 or ¥0.59 percent 

(0.9941 minus 1 equals 0.59 percent)). 

Furthermore, consistent with our historical 

practice of updating the standard Federal rate 

for the previous rate year, in determining the 

proposed standard Federal rate for FY 2011 

in this supplemental proposed rule, we are 

applying the proposed update factor of 

0.9941 to the revised RY 2010 standard 

Federal rate that is being established in 

accordance with the provisions of sections 

1886(m)(3)(A)(ii) and (4)(A) of the Act, as 

implemented in a separate notice published 

elsewhere in this Federal Register. 

Therefore, in this supplemental proposed 

rule, under the authority of sections 

1886(m)(3)(A)(ii) and (4)(B) of the Act, we are 

proposing to amend § 412.523 to add a new 

paragraph (c)(3)(vii) to specify that the 

standard Federal rate for discharges 

occurring on or after October 1, 2010, 

through September 30, 2011, is the standard 

Federal rate for the previous rate year 

updated by ¥0.59 percent. In determining 

the proposed standard Federal rate for FY 

2011, we are applying the proposed 0.9941 

update factor to the RY 2010 Federal rate of 

$39,794.95 (as established elsewhere in this 

Federal Register). Consequently, the 

proposed standard Federal rate for FY 2011 

is $39,560.16. We also are proposing that if 

more recent data become available, we would 

use those data, if appropriate, to determine 

the update to the standard Federal rate for FY 

2011 in the final rule, and, thus, the standard 

Federal rate update specified in the proposed 

regulation text at § 412.523(c)(3)(vii) could 

change accordingly. 

B. Proposed Adjustment for LTCH PPS HighCost Outlier (HCO) Cases 

1. Background 

When we implemented the LTCH PPS in 

the FY 2003 LTCH PPS final rule, in the 

regulations at § 412.525(a), we established an 

adjustment for additional payments for 

outlier cases that have extraordinarily high 

costs relative to the costs of most discharges 

(see (67 FR 56022 through 56027)). We refer 

to these cases as high cost outliers (HCOs). 

Providing additional payments for outliers 

strongly improves the accuracy of the LTCH 

PPS in determining resource costs at the 

patient and hospital level. These additional 

payments reduce the financial losses that 

would otherwise be incurred when treating 

patients who require more costly care and, 

therefore, reduce the incentives to 

underserve these patients. We set the outlier 

threshold before the beginning of the 

applicable rate year so that total estimated 

outlier payments are projected to equal 8 

percent of total estimated payments under 

the LTCH PPS. 

Under § 412.525(a) in the regulations (in 

conjunction with § 412.503), we make outlier 

payments for any discharges if the estimated 

cost of a case exceeds the adjusted LTCH PPS 

payment for the MS–LTC–DRG plus a fixedloss amount. Specifically, in accordance with 

§ 412.525(a)(3) (in conjunction with 

§ 412.503), we pay outlier cases 80 percent of 

the difference between the estimated cost of 

the patient case and the outlier threshold, 

which is the sum of the adjusted Federal 

prospective payment for the MS–LTC–DRG 

and the fixed-loss amount. The fixed-loss 

amount is the amount used to limit the loss 

that a hospital will incur under the outlier 

policy for a case with unusually high costs. 

This results in Medicare and the LTCH 

sharing financial risk in the treatment of 

extraordinarily costly cases. Under the LTCH 

PPS HCO policy, the LTCH’s loss is limited 

to the fixed-loss amount and a fixed 


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percentage of costs above the outlier 

threshold (MS–LTC–DRG payment plus the 

fixed-loss amount). The fixed percentage of 

costs is called the marginal cost factor. We 

calculate the estimated cost of a case by 

multiplying the Medicare allowable covered 

charge by the hospital’s overall hospital costto-charge ratio (CCR). 

Under the LTCH PPS, we determine a 

fixed-loss amount, that is, the maximum loss 

that a LTCH can incur under the LTCH PPS 

for a case with unusually high costs before 

the LTCH will receive any additional 

payments. We calculate the fixed-loss 

amount by estimating aggregate payments 

with and without an outlier policy. The 

fixed-loss amount results in estimated total 

outlier payments being projected to be equal 

to 8 percent of projected total LTCH PPS 

payments. Currently, MedPAR claims data 

and CCRs based on data from the most recent 

provider specific file (PSF) (or from the 

applicable statewide average CCR if a LTCH’s 

CCR data are faulty or unavailable) are used 

to establish a fixed-loss threshold amount 

under the LTCH PPS. 

As discussed previously in this section, the 

proposed policies and payment rates in the 

May 4, 2011 FY 2011 proposed rule do not 

reflect the provisions of the Affordable Care 

Act that affect LTCH PPS payments. The 

revised proposed standard Federal rate for 

FY 2011 that was developed consistent with 

the provisions of sections 1886(m)(3)(A)(ii) 

and (4)(B) of the Act is discussed above in 

section III.A.3. of the Addendum of this 

supplemental proposed rule. This revision to 

the proposed standard Federal rate for FY 

2011 requires us to revise the proposed high 

cost outlier fixed-loss amount for FY 2011. 

This is necessary in order to maintain the 

requirement that the fixed-loss amount 

results in estimated total outlier payments 

being projected to be equal to 8 percent of 

projected total LTCH PPS payments. 

2. The Proposed LTCH PPS Fixed-Loss 

Amount for FY 2011 

When we implemented the LTCH PPS, as 

discussed in the August 30, 2002 LTCH PPS 

final rule (67 FR 56022 through 56026), we 

established a fixed-loss amount so that total 

estimated outlier payments are projected to 

equal 8 percent of total estimated payments 

under the LTCH PPS. To determine the fixedloss amount, we estimate outlier payments 

and total LTCH PPS payments for each case 

using claims data from the MedPAR files. 

Specifically, to determine the outlier 

payment for each case, we estimate the cost 

of the case by multiplying the Medicare 

covered charges from the claim by the 

applicable CCR. Under § 412.525(a)(3) (in 

conjunction with § 412.503), if the estimated 

cost of the case exceeds the outlier threshold 

(the sum of the adjusted Federal prospective 

payment for the MS–LTC–DRG and the fixedloss amount), we pay an outlier payment 

equal to 80 percent of the difference between 

the estimated cost of the case and the outlier 

threshold (the sum of the adjusted Federal 

prospective payment for the MS–LTC–DRG 

and the fixed-loss amount). 

As discussed in the May 4, 2010 FY 2011 

proposed rule, we are proposing to continue 

to use our existing methodology to calculate 

the proposed fixed-loss amount for FY 2011 

in order to maintain estimated HCO 

payments at the projected 8 percent of total 

estimated LTCH PPS payments. (For an 

explanation of our rationale for establishing 

an HCO payment ‘‘target’’ of 8 percent of total 

estimated LTCH payments, we refer readers 

to the August 30, 2002 LTCH PPS final rule 

(67 FR 56022 through 56024).) Consistent 

with our historical practice of using the best 

data available, in determining the proposed 

fixed-loss amount for FY 2011, we use the 

most recent available LTCH claims data and 

CCR data. Specifically, for this proposed rule, 

we used LTCH claims data from the 

December 2009 update of the FY 2009 

MedPAR files and CCRs from the December 

2009 update of the PSF to determine a fixedloss amount that would result in estimated 

outlier payments projected to be equal to 8 

percent of total estimated payments in FY 

2011 because these data are the most recent 

complete LTCH data currently available. (We 

note that these are the same data used to 

determine the proposed FY 2011 fixed-loss 

amount in the May 4, 2010 FY 2011 proposed 

rule.) Consistent with the historical practice 

of using the best available data, we are 

proposing that if more recent LTCH claims 

data become available, we will use them for 

determining the fixed-loss amount for FY 

2011 in the final rule. Furthermore, we are 

proposing to determine the proposed FY 

2011 fixed-loss amount based on the MS– 

LTC–DRG classifications and relative weights 

from the version of the GROUPER that will 

be in effect as of the beginning of FY 2011, 

that is, proposed Version 28.0 of the 

GROUPER (discussed in section VII.D. of the 

preamble of this supplemental proposed 

rule). 

In this proposed rule, we are proposing to 

establish a fixed-loss amount of $19,254 for 

FY 2011. Thus, we would pay an outlier case 

80 percent of the difference between the 

estimated cost of the case and the outlier 

threshold (the sum of the adjusted Federal 

LTCH payment for the MS–LTC–DRG and the 

fixed-loss amount of $19,254). 

The proposed fixed-loss amount for FY 

2011 of $19,254 is slightly higher than the 

revised RY 2010 fixed-loss amount of 

$18,615 (established elsewhere in this 

Federal Register). Based on our payment 

simulations using the most recent available 

data and the proposed 0.59 percent reduction 

to the standard Federal rate for FY 2011, the 

proposed increase in the fixed-loss amount 

for FY 2011 would be necessary to maintain 

the existing requirement that estimated 

outlier payments would equal 8 percent of 

estimated total LTCH PPS payments. (For 

further information on and our rationale for 

the existing 8 percent HCO ‘‘target’’ 

requirement, we refer readers to the August 

30, 2002 LTCH PPS final rule (67 FR 56022 

through 56024.) Maintaining the fixed-loss 

amount at the current level would result in 

HCO payments that are greater than the 

current 8 percent regulatory requirement 

because a higher fixed-loss amount would 

result in fewer cases qualifying as outlier 

cases as well as decreases the amount of the 

additional payment for a HCO case because 

the maximum loss that a LTCH must incur 

before receiving an HCO payment (that is, the 

fixed-loss amount) would be larger. For these 

reasons, we believe that proposing to raise 

the fixed-loss amount is appropriate and 

necessary to maintain that estimated outlier 

payments would equal 8 percent of estimated 

total LTCH PPS payments as required under 

§ 412.525(a). 

As we noted in the May 4, 2010 FY 2011 

proposed rule (75 FR 24089), under some 

rare circumstances, a LTCH discharge could 

qualify as a SSO case (as defined in the 

regulations at § 412.529 in conjunction with 

§ 412.503) and also as a HCO case. In this 

scenario, a patient could be hospitalized for 

less than five-sixths of the geometric average 

length of stay for the specific MS–LTC–DRG, 

and yet incur extraordinarily high treatment 

costs. If the costs exceeded the HCO 

threshold (that is, the SSO payment plus the 

fixed-loss amount), the discharge is eligible 

for payment as a HCO. Thus, for a SSO case 

in FY 2011, the HCO payment would be 80 

percent of the difference between the 

estimated cost of the case and the outlier 

threshold (the sum of the proposed fixed-loss 

amount of $19,254 and the amount paid 

under the SSO policy as specified in 

§ 412.529). 

C. Computing the Proposed Adjusted LTCH 

PPS Federal Prospective Payments for FY 

2011 

In accordance with § 412.525, the proposed 

standard Federal rate is adjusted to account 

for differences in area wages by multiplying 

the proposed labor-related share of the 

proposed standard Federal rate by the 

appropriate proposed LTCH PPS wage index 

(as shown in Tables 12A and 12B of the 

Addendum of this proposed rule). The 

proposed standard Federal rate is also 

adjusted to account for the higher costs of 

hospitals in Alaska and Hawaii by 

multiplying the proposed nonlabor-related 

share of the proposed standard Federal rate 

by the appropriate cost-of-living factor 

(shown in the chart in section V.C.5. of the 

Addendum of the May 4, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule). In this proposed 

rule, we are proposing to establish a standard 

Federal rate for FY 2011 of $39,560.16, as 

discussed in section V.A.3. of the Addendum 

of this supplemental proposed rule. We 

illustrate the methodology to adjust the 

proposed LTCH PPS Federal rate for FY 2011 

in the following example: 

Example: During FY 2011, a Medicare 

patient is in a LTCH located in Chicago, 

Illinois (CBSA 16974). The proposed FY 2011 

LTCH PPS wage index value for CBSA 16974 

is 1.0573 (Table 12A of the Addendum of this 

proposed rule). The Medicare patient is 

classified into MS–LTC–DRG 28 (Spinal 

Procedures with MCC), which has a proposed 

relative weight for FY 2011 of 1.0834 (Table 

11 of the Addendum of this supplemental 

proposed rule). 

To calculate the LTCH’s total adjusted 

Federal prospective payment for this 

Medicare patient, we compute the wageadjusted proposed Federal prospective 

payment amount by multiplying the 

unadjusted proposed standard Federal rate 

($39,560.16) by the proposed labor-related 

share (75.407 percent) and the proposed 

wage index value (1.0573). This wageadjusted amount is then added to the 


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proposed nonlabor-related portion of the 

unadjusted proposed standard Federal rate 

(24.593 percent; adjusted for cost of living, if 

applicable) to determine the adjusted 

proposed Federal rate, which is then 

multiplied by the proposed MS–LTC–DRG 

relative weight (1.0834) to calculate the total 

adjusted proposed Federal LTCH PPS 

prospective payment for FY 2011 

($45,046.57). The table below illustrates the 

components of the calculations in this 

example. 

Unadjusted Proposed Standard Federal Prospective Payment Rate ................................................................................. $39,560.16 

Proposed Labor-Related Share ........................................................................................................................................... × 0.75407 

Labor-Related Portion of the Proposed Federal Rate ........................................................................................................ = $29,831.13 

Proposed Wage Index (CBSA 16974) ................................................................................................................................ × 1.0573 

Proposed Wage-Adjusted Labor Share of Federal Rate .................................................................................................... = $31,540.45 

Proposed Nonlabor-Related Portion of the Federal Rate ($39,560.16 × 0.24593) ............................................................ + $9,729.03 

Adjusted Proposed Federal Rate Amount ........................................................................................................................... = $41,269.48 

Proposed MS–LTC–DRG 28 Relative Weight .................................................................................................................... × 1.0834 

Total Adjusted Federal Prospective Payment .............................................................................................................. = $44,711.36 

IV. Tables 

This section contains the tables referred to 

throughout the preamble to this proposed 

rule and in this Addendum. Tables 1A, 1B, 

1C, 1D, 1E, 2, 4A, 4B, 4C, 4D–2, 4J, 9A, 10, 

and 11 are presented below. The tables 

presented below are as follows: 

Table 1A.—Supplemental Proposed National 

Adjusted Operating Standardized 

Amounts, Labor/Nonlabor (68.8 Percent 

Labor Share/31.2 Percent Nonlabor Share If 

Wage Index Is Greater Than 1). 

Table 1B.—Supplemental Proposed National 

Adjusted Operating Standardized 

Amounts, Labor/Nonlabor (62 Percent 

Labor Share/38 Percent Nonlabor Share If 

Wage Index Is Less Than or Equal To 1). 

Table 1C.—Supplemental Proposed Adjusted 

Operating Standardized Amounts for 

Puerto Rico, Labor/Nonlabor. 

Table 1D.—Supplemental Proposed Capital 

Standard Federal Payment Rate. 

Table 1E.—Supplemental Proposed LTCH 

Standard Federal Prospective Payment 

Rate. 

Table 2.—Acute Care Hospitals Case-Mix 

Indexes for Discharges Occurring in 

Federal Fiscal Year 2009; Proposed 

Hospital Wage Indexes for Federal Fiscal 

Year 2011; Hospital Average Hourly Wages 

for Federal Fiscal Years 2009 (2005 Wage 

Data), 2010 (2006 Wage Data), and 2011 

(2007 Wage Data); and 3-Year Average of 

Hospital Average Hourly Wages. 

Table 4A.—Proposed Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Acute Care Hospitals in Urban Areas by 

CBSA and by State—FY 2011. 

Table 4B.—Proposed Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Acute Care Hospitals in Rural Areas by 

CBSA and by State—FY 2011. 

Table 4C.—Proposed Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Acute Care Hospitals That Are Reclassified 

by CBSA and by State—FY 2011. 

Table 4D–2.—Urban Areas with Acute Care 

Hospitals Receiving the Statewide Rural 

Floor or Imputed Floor Wage Index—FY 

2011. 

Table 4J.—Proposed Out-Migration 

Adjustment for Acute Care Hospitals—FY 

2011. 

Table 9A.—Hospital Reclassifications and 

Redesignations—FY 2011. 

Table 10.—Geometric Mean Plus the Lesser 

of .75 of the National Adjusted Operating 

Standardized Payment Amount (Increased 

to Reflect the Difference Between Costs and 

Charges) or .75 of One Standard Deviation 

of Mean Charges by Medicare Severity 

Diagnosis-Related Group (MS–DRG)—April 

2010. 

Table 11.—Supplemental Proposed MS– 

LTC–DRGs, Relative Weights, Geometric 

Average Length of Stay, and Short-Stay 

Outlier (SSO) Threshold for Discharges 

Occurring from October 1, 2010 through 

September 30, 2011 under the LTCH PPS. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 


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Appendix: Regulatory Impact Analysis 

I. Overall Impact 

We have examined the impacts of this 

proposed rule as required by Executive Order 

12866 (September 1993, Regulatory Planning 

and Review) and the Regulatory Flexibility 

Act (RFA) (September 19, 1980, Pub. L. 96– 

354), section 1102(b) of the Social Security 

Act, the Unfunded Mandates Reform Act of 

1995 (Pub. L. 104–4), Executive Order 13132 

on Federalism, and the Congressional Review 

Act (5 U.S.C. 804(2)). 

Executive Order 12866 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). 

We have determined that this proposed 

rule is a major rule as defined in 5 U.S.C. 

804(2). We estimate that the proposed 

changes for FY 2011 acute care hospital 

operating and capital payments will 

redistribute in excess of $100 million among 

different types of inpatient cases. The 

proposed applicable percentage increase to 

the IPPS rates required by the statute, in 

conjunction with other proposed payment 

changes in this proposed rule, would result 

in an estimated $929 million decrease in FY 

2011 operating payments (or ¥0.9 percent 

increase), and an estimated $20 million 

decrease in FY 2011 capital payments (or 

¥0.2 percent change). The impact analysis of 

the capital payments can be found in section 

VIII. of this Appendix. In addition, as 

described in section IX. of this Appendix, 

LTCHs are expected to experience an 

increase in payments by $12.9 million (or 0.3 

percent). 

Our operating impact estimate includes the 

proposed ¥2.9 percent documentation and 

coding adjustment applied to the hospitalspecific rates, the proposed ¥2.4 percent 

documentation and coding adjustment 

applied to the Puerto Rico-specific rates and 

the proposed ¥2.9 percent adjustment for 

documentation and coding changes to the 

IPPS standardized amounts, which was 

discussed in the May 4, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule (75 FR 24288). In 

addition, our operating impact estimate 

includes the proposed 2.15 percent market 

basket update to the standardized amount 

(which includes the proposed 2.4 percent 

update with the 0.25 reduction required 

under the Affordable Care Act). The 

estimates of IPPS operating payments to 

acute care hospitals do not reflect any 

changes in hospital admissions or real casemix intensity, which would also affect 

overall payment changes. 

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 considered to be 

small entities, either by being nonprofit 

organizations or by meeting the Small 

Business Administration definition of a small 

business (having revenues of $34.5 million or 

less in any 1 year). (For details on the latest 

standards for health care providers, we refer 

readers to the Table of Small Business Size 

Standards for NAIC 622 found on the Small 

Business Administration Office of Size 

Standards Web site at: http://www.sba.gov/ 

contractingopportunities/officials/size/GCSMALL-BUS-SIZE-STANDARDS.html.) For 

purposes of the RFA, all hospitals and other 

providers and suppliers are considered to be 

small entities. Individuals and States are not 

included in the definition of a small entity. 

We believe that the provisions of this 

proposed rule relating to acute care hospitals 

would have a significant impact on small 

entities as explained in this Appendix. 

Because we lack data on individual hospital 

receipts, we cannot determine the number of 

small proprietary LTCHs. Therefore, we are 

assuming that all LTCHs are considered 

small entities for the purpose of the analysis 

in section IX. of this Appendix. Medicare 

fiscal intermediaries and MACs are not 

considered to be small entities. Because we 

acknowledge that many of the affected 

entities are small entities, the analysis 

discussed throughout the preamble of this 

proposed rule constitutes our proposed 

regulatory flexibility analysis. Therefore, we 

are soliciting public comments on our 

estimates and analysis of the impact of this 

proposed rule on those small entities. 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 (SBREFA), 

Public Law 104–121, as amended by section 

8302 of Public Law 110–28, requires an 

agency to provide compliance guides for each 

rule or group of related rules for which an 

agency is required to prepare a final 

regulatory flexibility analysis. The 

compliance guides associated with this 

proposed rule are available on the CMS IPPS 

Web page at http://www.cms.hhs.gov/ 

AcuteInpatientPPS/01_overview.asp. We also 

note that the Hospital Center Web page at 

http://www.cms.hhs.gov/center/hospital.asp 

was developed to assist hospitals in 

understanding and adapting to changes in 

Medicare regulations and in billing and 

payment procedures. This Web page provides 

hospitals with substantial downloadable 

explanatory materials. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory impact 

analysis for any proposed or final rule that 

may have a significant impact on the 

operations of a substantial number of small 

rural hospitals. This analysis must conform 

to the provisions of section 603 of the RFA. 

With the exception of hospitals located in 

certain New England counties, for purposes 

of section 1102(b) of the Act, we now define 

a small rural hospital as a hospital that is 

located outside of an urban area and has 

fewer than 100 beds. Section 601(g) of the 

Social Security Amendments of 1983 (Pub. L. 

98–21) designated hospitals in certain New 

England counties as belonging to the adjacent 

urban area. Thus, for purposes of the IPPS 

and the LTCH PPS, we continue to classify 

these hospitals as urban hospitals. (We refer 

readers to Table 1 and section VI. of this 

Appendix for the quantitative effects of the 

proposed policy changes under the IPPS for 

operating costs.) 

Section 202 of the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4) also 

requires that agencies assess anticipated costs 

and benefits before issuing any rule whose 

mandates require spending in any 1 year of 

$100 million in 1995 dollars, updated 

annually for inflation. That threshold level is 

currently approximately $133 million. This 

proposed rule would not mandate any 

requirements for State, local, or Tribal 

governments, nor would it affect private 

sector costs. 

Executive Order 13132 establishes certain 

requirements that an agency must meet when 

it promulgates a proposed rule (and 

subsequent final rule) that imposes 

substantial direct requirement costs on State 

and local governments, preempts State law, 

or otherwise has Federalism implications. As 

stated above, this proposed rule would not 

have a substantial effect on State and local 

governments. 

The following analysis, in conjunction 

with the remainder of this document, 

demonstrates that this proposed rule is 

consistent with the regulatory philosophy 

and principles identified in Executive Order 

12866, the RFA, and section 1102(b) of the 

Act. The proposed rule would affect 

payments to a substantial number of small 

rural hospitals, as well as other classes of 

hospitals, and the effects on some hospitals 

may be significant. 

II. Objectives of the IPPS 

The primary objective of the IPPS is to 

create incentives for hospitals to operate 

efficiently and minimize unnecessary costs 

while at the same time ensuring that 

payments are sufficient to adequately 

compensate hospitals for their legitimate 

costs. In addition, we share national goals of 

preserving the Medicare Hospital Insurance 

Trust Fund. 

We believe the proposed changes in this 

proposed rule would further each of these 

goals while maintaining the financial 

viability of the hospital industry and 

ensuring access to high quality health care 

for Medicare beneficiaries. We expect that 

these proposed changes would ensure that 

the outcomes of the prospective payment 

systems are reasonable and equitable while 

avoiding or minimizing unintended adverse 

consequences. 

III. Limitations of Our Analysis 

The following quantitative analysis 

presents the projected effects of our proposed 

policy changes, as well as statutory changes 

effective for FY 2011, on various hospital 

groups. We estimate the effects of individual 

policy changes by estimating payments per 

case while holding all other payment policies 

constant. We use the best data available, but, 

generally, we do not attempt to make 

adjustments for future changes in such 

variables as admissions, lengths of stay, or 

case-mix. 

IV. Hospitals Included in and Excluded 

From the IPPS 

The prospective payment systems for 

hospital inpatient operating and capitalrelated costs of acute care hospitals 


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encompass most general short-term, acute 

care hospitals that participate in the 

Medicare program. There were 33 Indian 

Health Service hospitals in our database, 

which we excluded from the analysis due to 

the special characteristics of the prospective 

payment methodology for these hospitals. 

Among other short-term, acute care hospitals, 

only the 46 such hospitals in Maryland 

remain excluded from the IPPS pursuant to 

the waiver under section 1814(b)(3) of the 

Act. 

As of March 2010, there are 3,472 IPPS 

acute care hospitals to be included in our 

analysis. This represents about 64 percent of 

all Medicare-participating hospitals. The 

majority of this impact analysis focuses on 

this set of hospitals. There are also 

approximately 1,338 CAHs. These small, 

limited service hospitals are paid on the basis 

of reasonable costs rather than under the 

IPPS. (We refer readers to section VII. of this 

Appendix for a further description of the 

impact of CAH-related proposed policy 

changes.) There are also 1,270 IPPS-excluded 

hospitals and 2,169 IPPS-excluded hospital 

units. These IPPS-excluded hospitals and 

units include IPFs, IRFs, LTCHs, RNHCIs, 

children’s hospitals, and cancer hospitals, 

which are paid under separate payment 

systems. Changes in the prospective payment 

systems for IPFs and IRFs are made through 

separate rulemaking. Payment impacts for 

these IPPS-excluded hospitals and units are 

not included in this proposed rule. The 

impact of the proposed update and policy 

changes to the LTCH PPS for FY 2011 are 

discussed in section IX. of this Appendix. 

V. Effects on Hospitals and Hospital Units 

Excluded From the IPPS 

As of March 2010, there were 3,439 

hospitals and hospital units excluded from 

the IPPS. Of these, 78 children’s hospitals, 11 

cancer hospitals, and 17 RNHCIs are being 

paid on a reasonable cost basis subject to the 

rate-of-increase ceiling under § 413.40. The 

remaining providers, 228 rehabilitation 

hospitals and 961 rehabilitation units, and 

429 LTCHs, are paid the Federal prospective 

per discharge rate under the IRF PPS and the 

LTCH PPS, respectively, and 507 psychiatric 

hospitals and 1,208 psychiatric units are paid 

the Federal per diem amount under the IPF 

PPS. As stated above, IRFs and IPFs are not 

affected by rate updates discussed in this 

proposed rule. The impacts of the changes to 

LTCHs are discussed in section IX. of this 

Appendix. 

In the past, certain hospitals and units 

excluded from the IPPS have been paid based 

on their reasonable costs subject to limits as 

established by the Tax Equity and Fiscal 

Responsibility Act of 1982 (TEFRA). Cancer 

and children’s hospitals continue to be paid 

on a reasonable cost basis subject to TEFRA 

limits for FY 2011. For these hospitals 

(cancer and children’s hospitals), consistent 

with the authority provided in section 

1886(b)(3)(B)(ii) of the Act, the update is the 

percentage increase in the FY 2011 IPPS 

operating market basket. In compliance with 

section 404 of the MMA, in the FY 2010 

IPPS/RY 2010 LTCH PPS final rule (74 FR 

43930), we replaced the FY 2002-based IPPS 

operating and capital market baskets with the 

revised and rebased FY 2006-based IPPS 

operating and capital market baskets. 

Therefore, consistent with current law, based 

on IHS Global Insight, Inc.’s 2010 first 

quarter forecast, with historical data through 

the 2009 fourth quarter, we are estimating 

that the proposed FY 2011 update to the IPPS 

operating market basket would be 2.4 percent 

(that is, the current estimate of the market 

basket rate-of-increase) which was included 

in the May 4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule. However, the Affordable Care 

Act requires a 0.25 reduction to the market 

basket update resulting in a proposed 2.15 

percent applicable percentage increase for 

IPPS hospitals. RNCHIs, children’s hospitals 

and cancer hospitals are not subject to the 

reduction in the applicable percentage 

increase required under the Affordable Care 

Act. In accordance with § 403.752(a) of the 

regulations, RNHCIs are paid under § 413.40. 

Therefore, for RNHCIs, the proposed update 

is the same as for children’s and cancer 

hospitals, which is the percentage increase in 

the FY 2011 IPPS operating market basket 

increase (which was included in the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed rule) 

without the reductions required under the 

Affordable Care Act, estimated to be 2.4 

percent. 

The impact of the proposed update in the 

rate-of-increase limit on those excluded 

hospitals depends on the cumulative cost 

increases experienced by each excluded 

hospital since its applicable base period. For 

excluded hospitals that have maintained 

their cost increases at a level below the rateof-increase limits since their base period, the 

major effect is on the level of incentive 

payments these excluded hospitals receive. 

Conversely, for excluded hospitals with percase cost increases above the cumulative 

update in their rate-of-increase limits, the 

major effect is the amount of excess costs that 

will not be reimbursed. 

We note that, under § 413.40(d)(3), an 

excluded hospital that continues to be paid 

under the TEFRA system, whose costs exceed 

110 percent of its rate-of-increase limit 

receives its rate-of-increase limit plus 50 

percent of the difference between its 

reasonable costs and 110 percent of the limit, 

not to exceed 110 percent of its limit. In 

addition, under the various provisions set 

forth in § 413.40, cancer and children’s 

hospitals can obtain payment adjustments for 

justifiable increases in operating costs that 

exceed the limit. 

VI. Quantitative Effects of the Policy 

Changes Under the IPPS for Operating Costs 

A. Basis and Methodology of Estimates 

In this proposed rule, we are announcing 

proposed policy changes and payment rate 

updates for the IPPS for operating costs of 

acute care hospitals. Updates to the capital 

payments to acute care hospitals are 

discussed in section VIII. of this Appendix. 

Based on the overall percentage change in 

payments per case estimated using our 

payment simulation model, we estimate that 

total FY 2011 operating payments would 

decrease by 0.9 percent compared to FY 

2010, largely due to the documentation and 

coding adjustments and the applicable 

percentage increase applied to the IPPS rates. 

This amount reflects the proposed FY 2011 

documentation and coding adjustments 

described in the May 4, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule: ¥2.9 percent for 

the IPPS national standardized amounts, 

¥2.9 percent for the IPPS hospital-specific 

rates, and ¥2.4 percent for the IPPS Puerto 

Rico-specific standardized amount. The 

impacts do not illustrate changes in hospital 

admissions or real case-mix intensity, which 

will also affect overall payment changes. 

We have prepared separate impact analyses 

of the proposed changes to each system. This 

section deals with changes to the operating 

prospective payment system for acute care 

hospitals. Our payment simulation model 

relies on the most recent available data to 

enable us to estimate the impacts on 

payments per case of certain proposed 

changes in this proposed rule. However, 

there are other proposed changes for which 

we do not have data available that would 

allow us to estimate the payment impacts 

using this model. For those proposed 

changes, we have attempted to predict the 

payment impacts based upon our experience 

and other more limited data. 

The data used in developing the 

quantitative analyses of changes in payments 

per case presented below are taken from the 

FY 2009 MedPAR file and the most current 

Provider-Specific File that is used for 

payment purposes. Although the analyses of 

the proposed changes to the operating PPS do 

not incorporate cost data, data from the most 

recently available hospital cost report were 

used to categorize hospitals. Our analysis has 

several qualifications. First, in this analysis, 

we do not make adjustments for future 

changes in such variables as admissions, 

lengths of stay, or underlying growth in real 

case-mix. Second, due to the interdependent 

nature of the IPPS payment components, it is 

very difficult to precisely quantify the impact 

associated with each change. Third, we use 

various sources for the data used to 

categorize hospitals in the tables. In some 

cases, particularly the number of beds, there 

is a fair degree of variation in the data from 

different sources. We have attempted to 

construct these variables with the best 

available source overall. However, for 

individual hospitals, some 

miscategorizations are possible. 

Using cases from the FY 2009 MedPAR 

file, we simulated payments under the 

operating IPPS given various combinations of 

payment parameters. Any short-term, acute 

care hospitals not paid under the IPPS 

(Indian Health Service hospitals and 

hospitals in Maryland) were excluded from 

the simulations. The impact of payments 

under the capital IPPS, or the impact of 

payments for costs other than inpatient 

operating costs, are not analyzed in this 

section. Estimated payment impacts of the 

capital IPPS for FY 2011 are discussed in 

section VIII. of this Appendix. 

The changes discussed separately below 

are the following: 

• The effects of the proposed annual 

reclassification of diagnoses and procedures, 

full implementation of the MS–DRG system 

and 100 percent cost-based MS–DRG relative 

weights. 

• The effects of the proposed changes in 

hospitals’ wage index values reflecting wage 


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data from hospitals’ cost reporting periods 

beginning during FY 2007, compared to the 

FY 2006 wage data. 

• The effects of the recalibration of the 

MS–DRG relative weights as required by 

section 1886(d)(4)(C) of the Act, including 

the proposed wage and recalibration budget 

neutrality factors. 

• The effects of geographic 

reclassifications by the MGCRB that will be 

effective in FY 2011. 

• The effects of the Frontier wage index 

provision that requires that hospitals located 

in States that qualify as frontier States cannot 

have a wage index less than 1.0. This is a 

nonbudget neutral provision. 

• The effects of the rural floor and imputed 

floor with a national budget neutrality 

applied to the wage index, as required by the 

Affordable Care Act the Affordable Care Act. 

• The effects of section 505 of Public Law 

108–173, which provides for an increase in 

a hospital’s wage index if the hospital 

qualifies by meeting a threshold percentage 

of residents of the county where the hospital 

is located who commute to work at hospitals 

in counties with higher wage indexes. 

• The total estimated change in payments 

based on the proposed FY 2011 policies 

relative to payments based on FY 2010 

policies that include the applicable 

percentage increase of 2.15 (or 2.4 percent 

market basket with a 0.25 percentage 

reduction, as required under the Affordable 

Care Act). The FY 2010 operating payments 

also account for provisions under the 

Affordable Care Act that were effective for FY 

2010. 

To illustrate the impacts of the proposed 

FY 2011 changes, our analysis begins with a 

FY 2010 baseline simulation model using: 

the proposed FY 2011 applicable percentage 

increase of 2.15 percent; the FY 2010 MS– 

DRG GROUPER (Version 27.0); the most 

current CBSA designations for hospitals 

based on OMB’s MSA definitions; the FY 

2010 wage index; and no MGCRB 

reclassifications. Outlier payments are set at 

5.1 percent of total operating MS–DRG and 

outlier payments. 

Section 1886(b)(3)(B)(viii) of the Act, as 

added by section 5001(a) of Public Law 109– 

171, provides that, for FY 2007 and 

subsequent years, the update factor will be 

reduced by 2.0 percentage points for any 

hospital that does not submit quality data in 

a form and manner and at a time specified 

by the Secretary. At the time that this impact 

was prepared, 104 hospitals did not receive 

the full market basket rate-of-increase for FY 

2010 because they failed the quality data 

submission process or did not choose to 

participate. For purposes of the simulations 

shown below, we modeled the proposed 

payment changes for FY 2011 using a 

reduced update for these 104 hospitals. 

However, we do not have enough 

information at this time to determine which 

hospitals will not receive the full market 

basket rate-of-increase for FY 2011. 

Each policy change, statutory or otherwise, 

is then added incrementally to this baseline, 

finally arriving at an FY 2011 model 

incorporating all of the changes. This 

simulation allows us to isolate the effects of 

each proposed change. 

Our final comparison illustrates the 

proposed percent change in payments per 

case from FY 2010 to FY 2011. Three factors 

not discussed separately have significant 

impacts here. The first factor is the update to 

the standardized amount. In accordance with 

section 1886(b)(3)(B)(i) of the Act, we are 

proposing to update the standardized 

amounts for FY 2011 using an applicable 

percentage increase of 2.15 percent. In 

addition, we are updating the Puerto Rico 

specific amount by an applicable percentage 

increase of 2.15 percent. This includes our 

forecasted hospital market basket increase of 

2.4 percent with a 0.25 percentage reduction 

as required under the Affordable Care Act. 

(Hospitals that fail to comply with the quality 

data submission requirements to receive the 

full update will receive an update reduced by 

2.0 percentage points from 2.15 percent to 

0.15 percent.) Under section 1886(b)(3)(B)(iv) 

of the Act, the updates to the hospitalspecific amounts for SCHs and for MDHs are 

also equal to the market basket percentage 

increase, or 2.15 percent. 

A second significant factor that affects the 

changes in hospitals’ payments per case from 

FY 2010 to FY 2011 is the change in a 

hospital’s geographic reclassification status 

from one year to the next. That is, payments 

may be reduced for hospitals reclassified in 

FY 2010 that are no longer reclassified in FY 

2011. Conversely, payments may increase for 

hospitals not reclassified in FY 2010 that are 

reclassified in FY 2011. 

A third significant factor is that we 

currently estimate that actual outlier 

payments during FY 2010 will be 4.9 percent 

of total MS–DRG payments. Our FY 2010 

outlier estimate accounts for changes to the 

FY 2010 IPPS payments required under the 

Affordable Care Act. When the FY 2010 final 

rule was published, we projected FY 2010 

outlier payments would be 5.1 percent of 

total MS–DRG plus outlier payments; the 

average standardized amounts were offset 

correspondingly. The effects of the lower 

than expected outlier payments during FY 

2010 (as discussed in the Addendum to this 

proposed rule) are reflected in the analyses 

below comparing our current estimates of FY 

2010 payments per case to estimated FY 2011 

payments per case (with outlier payments 

projected to equal 5.1 percent of total MS– 

DRG payments). 

B. Analysis of Table I 

Table I displays the results of our analysis 

of the proposed changes for FY 2011. The 

table categorizes hospitals by various 

geographic and special payment 

consideration groups to illustrate the varying 

impacts on different types of hospitals. The 

top row of the table shows the overall impact 

on the 3,472 acute care hospitals included in 

the analysis. 

The next four rows of Table I contain 

hospitals categorized according to their 

geographic location: all urban, which is 

further divided into large urban and other 

urban; and rural. There are 2,502 hospitals 

located in urban areas included in our 

analysis. Among these, there are 1,365 

hospitals located in large urban areas 

(populations over 1 million), and 1,137 

hospitals in other urban areas (populations of 

1 million or fewer). In addition, there are 970 

hospitals in rural areas. The next two 

groupings are by bed-size categories, shown 

separately for urban and rural hospitals. The 

final groupings by geographic location are by 

census divisions, also shown separately for 

urban and rural hospitals. 

The second part of Table I shows hospital 

groups based on hospitals’ FY 2011 payment 

classifications, including any 

reclassifications under section 1886(d)(10) of 

the Act. For example, the rows labeled urban, 

large urban, other urban, and rural show that 

the numbers of hospitals paid based on these 

categorizations after consideration of 

geographic reclassifications (including 

reclassifications under sections 1886(d)(8)(B) 

and 1886(d)(8)(E) of the Act that have 

implications for capital payments) are 2,555; 

1,403; 1,152; and 917, respectively. 

The next three groupings examine the 

impacts of the changes on hospitals grouped 

by whether or not they have GME residency 

programs (teaching hospitals that receive an 

IME adjustment) or receive DSH payments, or 

some combination of these two adjustments. 

There are 2,434 nonteaching hospitals in our 

analysis, 798 teaching hospitals with fewer 

than 100 residents, and 240 teaching 

hospitals with 100 or more residents. 

In the DSH categories, hospitals are 

grouped according to their DSH payment 

status, and whether they are considered 

urban or rural for DSH purposes. The next 

category groups together hospitals considered 

urban or rural, in terms of whether they 

receive the IME adjustment, the DSH 

adjustment, both, or neither. 

The next five rows examine the impacts of 

the changes on rural hospitals by special 

payment groups (SCHs, RRCs, and MDHs). 

There were 183 RRCs, 340 SCHs, 187 MDHs, 

and 108 hospitals that are both SCHs and 

RRCs, and 13 hospitals that are both an MDH 

and an RRC. 

The next series of groupings are based on 

the type of ownership and the hospital’s 

Medicare utilization expressed as a percent 

of total patient days. These data were taken 

from the FY 2008 or FY 2007 Medicare cost 

reports. 

The next two groupings concern the 

geographic reclassification status of 

hospitals. The first grouping displays all 

urban hospitals that were reclassified by the 

MGCRB for FY 2011. The second grouping 

shows the MGCRB rural reclassifications. 

These groupings account for the change in 

the MGCRB reclassification policy as 

required under the Affordable Care Act. 

The final category shows the impact of the 

proposed policy changes on the 19 cardiac 

hospitals in our analysis. 

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C. Effects of the Proposed Changes to the 

MS–DRG Reclassifications and Relative CostBased Weights (Column 1) 

In Column 1 of Table I, we present the 

effects of the proposed MS–DRG 

reclassifications, as discussed in section II. of 

the preamble to this supplemental proposed 

rule. Section 1886(d)(4)(C)(i) of the Act 

requires us annually to make appropriate 

classification changes in order to reflect 

changes in treatment patterns, technology, 

and any other factors that may change the 

relative use of hospital resources. 

As discussed in the preamble of the May 

4, 2010 FY 2011 IPPS/LTCH PPS proposed 

rule, the proposed FY 2011 MS–DRG relative 

weights will be 100 percent cost-based and 

100 percent MS–DRGs. For FY 2011, the MS– 

DRGs are calculated using the FY 2009 

MedPAR data grouped to the Version 28.0 

(FY 2011) MS–DRGs. The methods of 

calculating the proposed relative weights and 

the reclassification changes to the grouper are 

described in more detail in the May 4, 2010 

FY 2011 IPPS/LTCH PPS proposed rule. The 

proposed changes to the relative weights and 

MS–DRGs shown in Column 2 are prior to 

any offset for budget neutrality. Overall, 

hospitals will experience a 0.3 percent 

increase in payments due to the changes in 

the MS–DRGs and relative weights prior to 

budget neutrality. Urban hospitals and rural 

hospitals will experience a 0.3 percent 

increase in payments under the updates to 

the relative weights and MS–DRGs. 

D. Effects of the Application of Recalibration 

Budget Neutrality (Column 2) 

Column 2 shows the effects of the changes 

to the MS–DRGs and relative weights with 

the application of the recalibration budget 

neutrality factor to the standardized amounts. 

Consistent with section 1886(d)(4)(C)(iii) of 

the Act, we are calculating a recalibration 

budget neutrality factor to account for the 

changes in MS–DRGs and relative weights to 

ensure that the overall payment impact is 

budget neutral. We revised the recalibration 

budget neutrality factor in this notice because 

we applied a 0.25 reduction to the market 

basket update to the standardized amount as 

required under the Affordable Care Act. 

The ‘‘All Hospitals’’ line in Column 1 

indicates that proposed changes due to MS– 

DRGs and relative weights will increase 

payments by 0.3 percent before application of 

the budget neutrality factor. The proposed 

recalibration budget neutrality factor is 

0.996867, which is applied to the 

standardized amount. Thus, the impact after 

accounting only for budget neutrality for 

changes to the MS–DRG relative weights and 

classification is somewhat lower than the 

figures shown in Column 1 (approximately 

0.3 percent). Consequentially, urban and 

rural hospitals will not experience a change 

in payments when recalibration budget 

neutrality is applied. 

E. Effects of Proposed Wage Index Changes 

(Column 3) 

Section 1886(d)(3)(E) of the Act requires 

that, beginning October 1, 1993, we annually 

update the wage data used to calculate the 

wage index. In accordance with this 

requirement, the proposed wage index for 

acute care hospitals for FY 2011 is based on 

data submitted for hospital cost reporting 

periods beginning on or after October 1, 2006 

and before October 1, 2007. The estimated 

impact of the updated wage data on hospital 

payments is isolated in Column 3 by holding 

the other payment parameters constant in 

this simulation. That is, Column 3 shows the 

percentage change in payments when going 

from a model using the FY 2010 wage index, 

based on FY 2006 wage data, and having a 

100-percent occupational mix adjustment 

applied, to a model using the FY 2011 prereclassification wage index, also having a 

100-percent occupational mix adjustment 

applied, based on FY 2007 wage data (while 

holding other payment parameters such as 

use of the Version 28.0 MS–DRG GROUPER 

constant). The occupational mix adjustment 

is based on the FY 2008/2009 occupational 

mix survey. The wage data was not affected 

by any of the provisions under the Affordable 

Care Act for FY 2011. 

Column 3 shows the impacts of updating 

the wage data using FY 2007 cost reports. 

Overall, the new wage data will lead to a 0.0 

percent change for all hospitals before being 

combined with the wage budget neutrality 

adjustment shown in Column 5. Among the 

regions, the largest increase is in the rural 

Middle Atlantic region, which experiences a 

0.4 percent increase before applying an 

adjustment for budget neutrality. The largest 

decline from updating the wage data is seen 

in Urban East South Central (0.5 percent 

decrease). 

F. Application of the Wage Budget Neutrality 

Factor (Column 4) 

Column 4 shows the impact of the new 

wage data with the application of the wage 

budget neutrality factor. In FY 2010, we 

began calculating separate wage budget 

neutrality and recalibration budget neutrality 

factors, in accordance with section 

1886(d)(3)(E) of the Act, which specifies that 

budget neutrality to account for wage 

changes or updates made under that 

subparagraph must be made without regard 

to the 62 percent labor-related share 

guaranteed under section 1886(d)(3)(E)(ii) of 

the Act. Therefore, for FY 2011, we are 

calculating the wage budget neutrality factor 

to ensure that payments under updated wage 

data are budget neutral without regard to the 

lower labor-related share of 62 percent 

applied to hospitals with a wage index less 

than or equal to 1. In other words, the wage 

budget neutrality is calculated under the 

assumption that all hospitals receive the 

higher labor-related share of the standardized 

amount. The wage budget neutrality factor is 

revised because the market basket update to 

the standardized amount was reduced by 

0.25 percent under the Affordable Care Act. 

Because the wage data changes did not 

change overall payments (displayed in 

Column 3), the revised wage budget 

neutrality factor is 1.00007, and the overall 

payment change is 0.0 percent. 

G. Combined Effects of Proposed MS–DRG 

and Wage Index Changes (Column 5) 

Section 1886(d)(4)(C)(iii) of the Act 

requires that changes to MS–DRG 

reclassifications and the relative weights 

cannot increase or decrease aggregate 

payments. In addition, section 1886(d)(3)(E) 

of the Act specifies that any updates or 

adjustments to the wage index are to be 

budget neutral. We computed a proposed 

wage budget neutrality factor of 1.00007, and 

a proposed recalibration budget neutrality 

factor of 0.996867 (which is applied to the 

Puerto Rico specific standardized amount 

and the hospital-specific rates). The product 

of the two budget neutrality factors is the 

cumulative wage and recalibration budget 

neutrality factor. The proposed cumulative 

wage and recalibration budget neutrality 

adjustment is 0.996937, or approximately 

¥0.3 percent, which is applied to the 

national standardized amounts. Because the 

wage budget neutrality and the recalibration 

budget neutrality are calculated under 

different methodologies according to the 

statute, when the two budget neutralities are 

combined and applied to the standardized 

amount, the overall payment impact is not 

necessarily budget neutral. However, in this 

proposed rule, we are estimating that the 

proposed changes in the MS–DRG relative 

weights and updated wage data with wage 

and budget neutrality applied will result in 

a 0.0 change in payments. 

We estimate that the combined impact of 

the proposed changes to the relative weights 

and MS–DRGs and the proposed updated 

wage data with budget neutrality applied will 

result in no change in payments for urban or 

rural hospitals. Urban New England would 

experience a 0.6 decrease in payments due to 

reductions in their case-mix and wages 

compared to the national average, while the 

urban Pacific area would experience a 0.5 

percent increase in payments because of 

above average increases in wages and casemix. Among the rural hospital categories, 

rural South Atlantic hospitals would 

experience the greatest decline in payment 

(¥0.9 percent) primarily due to the changes 

to MS–DRGs and the relative cost weights. 

H. Effects of MGCRB Reclassifications 

(Column 6) 

Our impact analysis to this point has 

assumed acute care hospitals are paid on the 

basis of their actual geographic location (with 

the exception of ongoing policies that 

provide that certain hospitals receive 

payments on other bases than where they are 

geographically located). The changes in 

Column 6 reflect the per case payment 

impact of moving from this baseline to a 

simulation incorporating the MGCRB 

decisions for FY 2011 which affect hospitals’ 

wage index area assignments. 

By spring of each year, the MGCRB makes 

reclassification determinations that will be 

effective for the next fiscal year, which 

begins on October 1. The MGCRB may 

approve a hospital’s reclassification request 

for the purpose of using another area’s wage 

index value. Hospitals may appeal denials of 

MGCRB decisions to the CMS Administrator. 

Further, hospitals have 45 days from 

publication of the IPPS rule in the Federal 

Register to decide whether to withdraw or 

terminate an approved geographic 

reclassification for the following year. 

Provisions in the Affordable Care Act 

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hourly wage reclassification criteria for 

reclassifications effective in FY 2011. 

Therefore, additional hospitals will qualify 

for MGCRB reclassification compared to the 

FY 2011 IPPS/LTCH PPS proposed rule (or 

will qualify for their primary 

reclassification), published on May 4, 2010. 

This column reflects an expectation that 

these additional hospitals will qualify for 

geographic reclassification. 

The overall effect of geographic 

reclassification is required by section 

1886(d)(8)(D) of the Act to be budget neutral. 

Therefore, for the purposes of this impact 

analysis, we are applying an adjustment of 

0.995425 to ensure that the effects of the 

section 1886(d)(10) reclassifications are 

budget neutral (section II.A. of the 

Addendum to this supplemental proposed 

rule). Geographic reclassification generally 

benefits hospitals in rural areas. We estimate 

that geographic reclassification will increase 

payments to rural hospitals by an average of 

1.6 percent. By region, all the rural hospital 

categories will experience increases in 

payments due to MGCRB reclassification 

where rural hospitals in the Mountain region 

will experience a 0.1 percent increase in 

payments and rural hospitals in the East 

South Central region will experience a 2.4 

percent increase in payments. 

Table 9A of the Addendum to this 

proposed rule reflects the approved 

reclassifications for FY 2011. 

I. Effects of the Rural Floor and Imputed 

Floor, Including Application of National 

Budget Neutrality (Column 7) 

As discussed in section III.B. of the 

preamble of the FY 2009 IPPS final rule, the 

FY 2010 IPPS/RY 2010 LTCH final rule and 

this proposed rule, section 4410 of Public 

Law 105–33 established the rural floor by 

requiring that the wage index for a hospital 

in any urban area cannot be less than the 

wage index received by rural hospitals in the 

same State. In FY 2008, we changed how we 

applied budget neutrality to the rural floor. 

Rather than applying a budget neutrality 

adjustment to the standardized amount, a 

uniform budget neutrality adjustment is 

applied to the wage index. In the FY 2009 

final rule, we finalized the policy to apply 

the rural floor budget neutrality at the State 

level with a 3-year transition. In FY 2009, 

hospitals received a blended wage index that 

is 20 percent of a wage index with the State 

level rural and imputed floor budget 

neutrality adjustment and 80 percent of a 

wage index with the national budget 

neutrality adjustment. In FY 2010, hospitals 

received a blended wage index that is 50 

percent of a wage index with the State level 

rural and imputed floor budget neutrality and 

50 percent of a wage index with the national 

budget neutrality adjustment. For FY 2011, 

the Affordable Care Act requires that we 

apply one rural floor budget neutrality to the 

wage index, nationally. The proposed FY 

2011 rural floor budget neutrality factor 

applied to the wage index is 0.995425. 

Furthermore, the FY 2005 IPPS final rule 

(69 FR 49109) established a temporary 

imputed floor for all urban States from FY 

2005 to FY 2007. The rural floor requires that 

an urban wage index cannot be lower than 

the wage index for any rural hospital in that 

State. Therefore, an imputed floor was 

established for States that do not have rural 

areas or rural IPPS hospitals. In the FY 2008 

IPPS final rule with comment period (72 FR 

47321), we finalized our proposal to extend 

the imputed floor for 1 additional year. In the 

FY 2009 IPPS final rule (73 FR 48573), we 

extended the imputed floor for an additional 

3 years through FY 2011. In the FY 2011 

IPPS/LTCH PPS proposed rule published on 

May 4, 2010, we applied rural floor budget 

neutrality at the State-level. However, the 

Affordable Care Act requires that, effective 

for FY 2011, we apply rural floor and 

imputed floor budget neutrality at the 

national level, as we did in FY 2008. 

Column 7 shows the projected impact of 

the rural floor and the imputed floor with the 

national rural and imputed floor budget 

neutrality factor applied to the wage index. 

The column compares the proposed postreclassification FY 2011 wage index of 

providers before the rural floor adjustment 

and the post-reclassification FY 2011 wage 

index of providers with the rural floor and 

imputed floor adjustment. Only urban 

hospitals can benefit from the rural floor 

provision. Because the provision is budget 

neutral, all other hospitals (that is, all rural 

hospitals and those urban hospitals to which 

the adjustment is not made) experience a 

decrease in payments due to the budget 

neutrality adjustment applied nationally to 

their wage index. 

We project that, in aggregate, rural 

hospitals will experience a 0.1 percent 

decrease in payments as a result of the 

application of rural floor budget neutrality 

because the rural hospitals located in States 

with a rural floor do not benefit from the 

rural floor, but have their wage indexes 

downwardly adjusted to ensure that the 

application of the rural floor is budget 

neutral overall within the State. We project 

hospitals located in other urban areas 

(populations of 1 million or fewer) will 

experience a 0.1 percent increase in 

payments because those providers benefit 

from the rural floor. Urban hospitals in the 

Pacific region can expect 0.9 percent increase 

in payments because a large percentage of 

hospitals in this region receive the rural 

floor. Urban hospitals in the Middle Atlantic 

can expect a 0.1 percent increase in 

payments because New Jersey hospitals 

receive the imputed floor with a national 

budget neutrality adjustment. Rural hospitals 

in all regions can expect a 0.1 to 0.2 percent 

decrease in payments because the rural and 

imputed floors only benefit urban hospitals. 

J. Effects of the Proposed Application of the 

Frontier Wage Index (Column 8) 

Section 10324(a) of Affordable Care Act 

requires that we establish a minimum postreclassified wage-index of 1.00 for all 

hospitals located in Frontier States. Frontier 

States are defined in the statute as States 

with at least 50 percent of its counties with 

a population density lesser than 6 persons 

per square mile. Based on these criteria, five 

States (Montana, North Dakota, Nevada, 

South Dakota, and Wyoming) are considered 

Frontier States and 51 hospitals located in 

those States would receive a frontier wage 

index of 1.0. This provision is not budget 

neutral and is estimated to increase IPPS 

operating payments by approximately $48 

million. 

Urban hospitals located in the West North 

Central region and urban hospitals located in 

the Mountain region will experience an 

increase in payments by 0.5 percent and 0.2, 

respectively, because many of the hospitals 

located in this region are frontier hospitals. 

Similarly, rural hospitals located in the West 

North Central and rural hospitals in the 

Mountain region will experience an increase 

in payments by 0.1 and 0.5, respectively. 

K. Effects of the Proposed Wage Index 

Adjustment for Out-Migration (Column 9) 

Section 1886(d)(13) of the Act, as added by 

section 505 of Public Law 108–173, provides 

for an increase in the wage index for 

hospitals located in certain counties that 

have a relatively high percentage of hospital 

employees who reside in the county, but 

work in a different area with a higher wage 

index. Hospitals located in counties that 

qualify for the payment adjustment are to 

receive an increase in the wage index that is 

equal to a weighted average of the difference 

between the wage index of the resident 

county, post-reclassification and the higher 

wage index work area(s), weighted by the 

overall percentage of workers who are 

employed in an area with a higher wage 

index. With the out-migration adjustment, 

small rural providers with less than 100 beds 

will experience a 0.5 percent increase in 

payments in FY 2011 relative to no 

adjustment at all. We included these 

additional payments to providers in the 

impact table shown above, and we estimate 

the impact of these providers receiving the 

out-migration increase to be approximately 

$20 million. 

L. Effects of All Proposed Changes Prior to 

Documentation and Coding (or CMI) 

Adjustment (Column 10) 

Column 10 shows our estimate of the 

changes in payments per discharge from FY 

2010 and FY 2011, resulting from all 

proposed changes reflected in this 

supplemental rule and the May 4, 2010 IPPS/ 

LTCH PPS proposed rule for FY 2011 

(including statutory changes), other than the 

proposed documentation and coding 

adjustment. Column 10 reflects the impact of 

all other FY 2011 changes relative to FY 

2010, including those shown in Columns 1 

through 9. We note that our baseline FY 2010 

operating estimates account for the 

provisions under the Affordable Care Act that 

affected the FY 2010 operating payments. 

The average increase in payments under the 

IPPS for all hospitals is approximately 2.0 

percent. This includes the 2.15 percent 

applicable percentage increase (including the 

¥0.25 reduction to the market basket 

increase required under the Affordable Care 

Act). In addition, it reflects the estimated 0.2 

percentage point difference between the 

projected outlier payments in FY 2010 (5.1 

percent of total MS–DRG payments), the 

current estimate of the percentage of actual 

outlier payments in FY 2010 (4.9 percent) as 

described in the introduction to this 

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proposed rule. Finally, it accounts for ¥0.2 

percent decrease in payments due to the 

expiration of Section 508 reclassifications 

that had been extended for FY 2010 under 

the Affordable Care Act. 

There might also be interactive effects 

among the various factors comprising the 

payment system that we are not able to 

isolate. For these reasons, the values in 

Column 10 may not equal the sum of the 

percentage changes described above. 

M. Effects of All FY 2011 Proposed Changes 

With CMI Adjustment (Column 11) 

Column 11 shows our estimate of the 

changes in payments per discharge from FY 

2010 and FY 2011, resulting from all 

proposed changes reflected in the May 4, 

2010 IPPS/LTCH PPS proposed rule for FY 

2011 and provisions described in this 

supplemental proposed rule required under 

the Affordable Care (including statutory 

changes). The FY 2010 baseline estimates 

account for the provisions under the 

Affordable Care Act that affected the FY 2010 

operating payments. Specifically, the FY 

2010 baseline payment estimates account for 

the additional ¥0.25 reduction in the 

applicable percentage increase applied to 

discharges for FY 2010 discharges occurring 

on or after April 1, 2010 and accounts for the 

extension of Section 508 reclassifications for 

FY 2010. As discussed in the FY 2011 IPPS/ 

LTCH PPS proposed rule, this column 

includes the proposed FY 2011 

documentation and coding adjustment of 

¥2.9 percent on the national standardized 

amount, ¥2.9 percent on the hospitalspecific rates, and ¥2.4 percent on the 

Puerto Rico-specific standardized amount, 

which overall accounts for a 2.9 percent 

decrease in payments. 

The average decrease in payments under 

the IPPS for all hospitals is approximately 

¥0.9 percent. As described in Column 10, 

this average decrease includes the effects of 

the 2.15 percent market basket update 

(including the ¥0.25 reduction in the 

applicable percentage increase required 

under the Affordable Care Act), the 0.2 

percentage point difference between the 

projected outlier payments in FY 2011 (5.1 

percent of total MS–DRG payments), and the 

current estimate of the percentage of actual 

outlier payments in FY 2010 (4.9 percent). In 

addition, it includes a ¥0.2 percent decrease 

in payments due to the expiration of Section 

508 reclassifications that had been extended 

for FY 2010 under the Affordable Care Act. 

Section 508 reclassification was not a budgetneutral provision. There might also be 

interactive effects among the various factors 

comprising the payment system that we are 

not able to isolate. For these reasons, the 

values in Column 11 may not equal the sum 

of the percentage changes described above. 

The overall proposed change in payments 

per discharge for hospitals paid under the 

IPPS in FY 2011 is estimated to decrease by 

0.9 percent. The payment decreases among 

the hospital categories are largely attributed 

to the proposed documentation and coding 

adjustments. Hospitals in urban areas would 

experience an estimated 0.8 percent decrease 

in payments per discharge in FY 2011 

compared to FY 2010. Hospital payments per 

discharge in rural areas are estimated to 

decrease by 1.4 percent in FY 2011 as 

compared to FY 2010. The decreases larger 

than the national average for rural areas are 

largely attributed to the differential impact of 

the MS–DRGs and wage data and due to the 

¥2.9 percent documentation and coding 

adjustment applied to the national 

standardized amount and the ¥2.9 percent 

documentation and coding adjustment to the 

hospital-specific rate applied to SCHs and 

MDHs, which generally are classified as rural 

hospitals. 

Among urban census divisions, the largest 

estimated payment decreases will be 2.0 

percent in the New England region and 1.4 

percent in the Middle Atlantic region 

because many of the urban providers in these 

regions had benefited from Section 508 

reclassification in FY 2010 that has expired 

for FY 2011. Urban hospitals in the Pacific 

will see the largest payment increases (0.6 

percent) because urban providers in this 

region will benefit from the rural floor and 

application of a national rural floor budget 

neutrality factor. Among the rural regions, 

the providers in the New England region will 

experience the largest decrease in payments 

(2.3 percent) because of the expiration of 

Section 508 reclassifications while rural 

hospitals in the Mountain region will 

experience the smallest decreases in 

payments by 0.4 percent because the rural 

providers in this region benefit from MGCRB 

reclassification and the Frontier wage index 

provision, required under the Affordable 

Care Act. 

Among special categories of rural 

hospitals, MDHs will receive an estimated 

payment decrease of 1.1 percent. MDHs are 

paid the higher of the IPPS rate based on the 

national standardized amount, that is, the 

Federal rate, or, if the hospital-specific rate 

exceeds the Federal rate, the Federal rate 

plus 75 percent of the difference between the 

Federal rate and the hospital-specific rate. 

MDHs will experience a decrease in 

payments because of the proposed 

documentation and coding adjustments 

applied to both the hospital-specific rate and 

the Federal rate. SCHs are also paid the 

higher of their hospital-specific rate or the 

Federal rate. Overall, SCHs will experience 

an estimated decrease in payments by 1.8 

percent due to the proposed documentation 

and coding adjustments to the national 

standardized amount and the hospitalspecific rates. 

Rural hospitals reclassified for FY 2011 are 

anticipated to receive a 1.0 percent payment 

decrease, and rural hospitals that are not 

reclassifying are estimated to receive a 

payment decrease of 1.9 percent. 

Cardiac hospitals are expected to 

experience a payment increase of 0.3 percent 

in FY 2011 relative to FY 2010 due to 

increases in payments attributable to changes 

in the MS–DRGs and relative weights. 

N. Impact Analysis of Table II 

Table II presents the projected impact of 

the proposed changes for FY 2011 as 

published in the May 4, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule and the provisions 

required under the Affordable Care Act in 

this notice for urban and rural hospitals and 

for the different categories of hospitals shown 

in Table I. It compares the estimated average 

payments per discharge for FY 2010 with the 

proposed payments per discharge for FY 

2011, as calculated under our models. The 

estimated FY 2010 payments per discharge 

incorporate the provisions in the Affordable 

Care Act. Thus, this table presents, in terms 

of the average dollar amounts paid per 

discharge, the combined effects of the 

proposed changes presented in Table I. The 

estimated percentage changes shown in the 

last column of Table II equal the estimated 

percentage changes in average payments per 

discharge from Column 11 of Table I. 

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BILLING CODE 4120–01–C 

VII. Effects of Other Supplemental Proposed 

Policy Changes 

In addition to those supplemental 

proposed policy changes discussed above 

that we are able to model using our IPPS 

payment simulation model, we are proposing 

to make various other changes in this 

supplemental proposed rule. Generally, we 

have limited or no specific data available 

with which to estimate the impacts of these 

changes. Our estimates of the likely impacts 

associated with these other supplemental 

proposed changes are discussed below. 

A. Effects of the Supplemental Proposed 

Low-Volume Hospital Payment Adjustment: 

Changes for FYs 2011 and 2012 

The low-volume hospital payment 

adjustment changes for FYs 2011 and 2012, 

as discussed in section II.C. of the preamble 

to this supplemental proposed rule, expands 

eligibility for the low-volume hospital 

payment adjustment to hospitals with less 

than 1,600 Medicare discharges (instead of 

the prior requirement of less than 800 total, 

Medicare and non-Medicare, discharges) and 

more than 15 miles from other IPPS hospitals 

(rather than the prior requirement of more 

than 25 miles). The payment adjustment is 

changed also, from an empirically 

determined (69 FR 49099 through 49102 and 

70 FR 47432 through 47434) additional 25 

percent payment adjustment to qualifying 

hospitals with less than 200 total discharges, 

to a continuous, linear sliding scale 

adjustment ranging from an additional 25 

percent payment adjustment to hospitals 

with 200 or less Medicare discharges to no 

additional payment to hospitals with 1,600 or 

more Medicare discharges. 

We estimate, based on FY 2009 claims 

(MedPAR) data, an additional 1,524 hospitals 

would meet the Medicare discharges 

criterion to qualify as a low-volume hospital. 

However, we are not able to estimate the 

number of these 1,524 hospitals that would 

also meet the distance criterion. The actual 

number of hospitals that would also meet the 

distance criterion to qualify as a low-volume 

hospital would be less, very likely much less, 

than the estimated 1,524 maximum number 

of potential low-volume hospitals for FY 

2011. If all 1,524 hospitals that meet the 

Medicare discharge requirement also meet 

the distance requirement, the additional 

Medicare IPPS dollars the temporary change 

to the low-volume hospital payment 

adjustment would require, at most, based on 

each hospital’s number of Medicare 

discharges and the corresponding payment 

adjustment amount, an estimated $877 

million for FY 2011. At this time, we are not 

able to estimate the impact of the change for 

FY 2012. 

B. Effects of the Supplemental Proposed 

Change for Medicare-Dependent, Small Rural 

Hospitals 

As discussed in section II.D. of the 

preamble to this supplemental proposed rule, 

section 3124 of Public Law 111–148 extends 

the MDH program for 1 additional year, from 

the end of FY 2011 (that is, for discharges 

before October 1, 2011) to the end of FY 2012 

(that is, for discharges before October 1, 

2012). The extension has no impact on FY 

2011. For FY 2012, the extension allows the 

continuation of MDH status and the payment 

methodology, for an MDH to be paid its 

hospital-specific rate, based on its FY 1982, 

1987, or 2002 costs per discharge, rather than 

the Federal rate, if this results in a greater 

aggregate payment (section II.D. of the 

preamble to this supplemental proposed 

rule). Therefore, the impact of the extension 

is one additional year of hospital-specific rate 

payments for MDHs rather than Federal rate 

payments for IPPS hospitals without special 

treatment as an MDH. 

C. Effects of the Supplemental Proposed 

Additional Payments to Qualifying Hospitals 

in Low Medicare Spending Counties 

Under section 1109 of Public Law 111–152, 

Congress has allocated $400 million to be 

spent for FYs 2011 and 2012 to qualifying 

hospitals located in the bottom quartile of 

counties with the lowest Medicare Part A and 

Part B spending per enrollee. In our proposal 

described in section II.E. of the preamble to 

this supplemental proposed rule, we have 

identified the list of eligible counties and the 

qualifying hospitals located in those counties 

that would receive the $400 million. We are 

proposing to spend $200 million in FY 2011 

and $200 million in FY 2012. This money 

will be given to the qualifying hospitals by 

the FI or A/B MAC through a one-time 

annual payment. In section II.E. of the 

preamble to this supplemental proposed rule, 

Table 2 lists the distribution of payments 

among the proposed list of qualifying 

hospitals. In addition, Table 3 in section II.E. 

of the preamble to this supplemental 


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proposed rule lists the distribution of 

payment by State for FY 2011. 

D. Effects of the Supplemental Proposed 

Implementation of the Rural Community 

Hospital Demonstration Program 

In section II.F. of the preamble of this 

supplemental rule, we discuss our 

implementation of section 410A of Public 

Law 108–173, which required the Secretary 

to establish a demonstration that would 

modify reimbursement for inpatient services 

for up to 15 small rural hospitals. Section 

410A(c)(2) Public Law 108–173 requires that 

‘‘[i]n conducting the demonstration program 

under this section, the Secretary shall ensure 

that the aggregate payments made by the 

Secretary do not exceed the amount which 

the Secretary would have paid if the 

demonstration program under this section 

was not implemented.’’ As discussed in 

section II.F. of the preamble of this 

supplemental rule, in the IPPS final rule for 

each of the previous 6 fiscal years, we have 

estimated the additional payments as a result 

of the demonstration for each of the 

participating hospitals. In order to achieve 

budget neutrality, we are proposing to adjust 

the national IPPS rates by an amount 

sufficient to account for the added costs of 

this demonstration. In other words, we are 

proposing to apply budget neutrality across 

the payment system as a whole rather than 

merely across the participants of this 

demonstration. We believe that the language 

of the statutory budget neutrality requirement 

permits the agency to implement the budget 

neutrality provision in this manner. The 

statutory language requires that ‘‘aggregate 

payments made by the Secretary do not 

exceed the amount which the Secretary 

would have paid if the demonstration * * * 

was not implemented’’ but does not identify 

the range across which aggregate payments 

must be held equal. 

An extension of this demonstration has 

been mandated by the Affordable Care Act. 

The demonstration will be extended for an 

additional 5 years and expanded to up to 30 

hospitals. We are proposing to make an 

adjustment in the FY 2011 IPPS/LTCH PPS 

final rule of $69,279,673 to the national IPPS 

rates. This amount ($69,279,673) accounts for 

the following: (1) An estimate of the 

demonstration cost for FY 2011 for the 10 

hospitals that are currently participating in 

the demonstration; (2) an estimate of the cost 

of the continuation of the 7 hospitals that 

have participated in the demonstration since 

its inception and that are still participating— 

for the portions of their cost reporting 

periods in FY 2010 that are not covered in 

the estimated cost of the demonstration in 

the FY 2010 IPPS final rule because we 

formulated these estimates under the 

assumption that the demonstration would 

end in FY 2010; and (3) an estimate of the 

cost of participation in the demonstration for 

20 additional hospitals in FY 2011. Not 

included in this amount is an adjustment that 

we proposed to make in addition for the FY 

2011 IPPS/LTCH PPS final rule to account for 

any differences between the cost of the 

demonstration program for hospitals 

participating in the demonstration during FY 

2007, as indicated by their settled cost 

reports beginning in FY 2007, and the 

amount that was offset by the budget 

neutrality adjustment for FY 2007. The 

specific numeric value associated with this 

component of the proposed adjustment to the 

national IPPS rates cannot be known until 

cost reports beginning in FY 2007 for the 

hospitals participating during FY 2007 in the 

demonstration are settled. We expect those 

cost reports to be settled prior to the 

publication of the FY 2011 IPPS/LTCH PPS 

final rule, and that we will be able to 

incorporate the estimated amount in the FY 

2011 IPPS/LTCH PPS final rule. 

E. Effects of the Supplemental Proposed 

Payment for Critical Access Hospital 

Outpatient Services and Ambulance Services 

In section II.H. of the preamble of this 

supplemental proposed rule, we discuss our 

proposal to implement section 3128 of Public 

Law 111–148 by amending the regulations at 

§ 413.70(b)(3)(ii)(A) to state that, effective for 

cost reporting periods beginning on or after 

January 1, 2004, payment for outpatient 

facility services under the optional method 

will also be made at 101 percent of 

reasonable costs. We are also proposing to 

amend the regulations at § 413.70(b)(5)(i) to 

state that effective for cost reporting periods 

beginning on or after January 1, 2004, 

payment for ambulance services furnished by 

a CAH or an entity that is owned and 

operated by a CAH is 101 percent of the 

reasonable costs of the CAH or the entity in 

furnishing those services, but only if the CAH 

or the entity is the only provider or supplier 

of ambulance services located within a 35- 

mile drive of the CAH or the entity. We do 

not believe these proposals will result in 

additional payments to CAHs for prior 

periods because we believe that in fact we 

have paid CAHs for these services at 101 

percent of reasonable costs during these prior 

periods. 

VIII. Effects of Proposed Changes in the 

Capital IPPS 

A. General Considerations 

Provisions of Public Law 111–148 

necessitated revising the May 4, 2010 FY 

2011 IPPS/LTCH PPS proposed rule. While 

the proposed IPPS payment rates for capitalrelated costs were not directly affected by 

provisions of Public Law 111–148, changes to 

the wage index as well as to the outlier 

payment adjustment factor were required by 

the law. Changes to the wage index affect the 

geographic adjustment factor (GAF) under 

the capital IPPS which is used in conjunction 

with a factor for changes in DRG 

classifications and weights to determine a 

proposed budget neutrality adjustment factor 

in calculating the proposed capital IPPS rate. 

A revision of the proposed outlier payment 

adjustment factor was required because both 

inpatient operating and inpatient capitalrelated payments use a single set of 

thresholds to identify outlier cases. Changes 

resulting from the provisions of Public Law 

111–148 are discussed in more detail in 

section II.A. of the preamble of this 

supplemental proposed rule. 

The data used in developing the impact 

analysis presented below are the same as that 

used for the impact analysis in the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed 

rule—the December 2009 update of the FY 

2009 MedPAR file and the December 2009 

update of the Provider-Specific File (PSF) 

that is used for payment purposes. Although 

the analyses of the changes to the capital 

prospective payment system do not 

incorporate cost data, we used the December 

2009 update of the most recently available 

hospital cost report data (FYs 2006 and 2007) 

to categorize hospitals. Our analysis has 

several qualifications. We use the best data 

available and make assumptions about casemix and beneficiary enrollment as described 

below. In addition, as discussed in section 

V.E. of the Preamble to the May 4, 2010 FY 

2011 IPPS/LTCH PPS proposed rule, we are 

proposing a ¥2.9 percent documentation and 

coding adjustment to the national capital rate 

for FY 2011 in addition to the ¥0.6 percent 

adjustment established for FY 2008, and the 

¥0.9 percent adjustment for FY 2009. This 

results in a cumulative adjustment factor of 

0.957 that we are proposing to apply to the 

national capital rate to account for 

improvements in documentation and coding 

under the MS–DRGs in FY 2011. We also are 

proposing to adjust the Puerto Rico-specific 

capital rate in FY 2011 to account for changes 

in documentation and coding resulting from 

the adoption of the MS–DRGs. 

Due to the interdependent nature of the 

IPPS, it is very difficult to precisely quantify 

the impact associated with each change. In 

addition, we draw upon various sources for 

the data used to categorize hospitals in the 

tables. In some cases (for instance, the 

number of beds), there is a fair degree of 

variation in the data from different sources. 

We have attempted to construct these 

variables with the best available sources 

overall. However, for individual hospitals, 

some miscategorizations are possible. 

Using cases from the December 2009 

update of the FY 2009 MedPAR file, we 

simulated payments under the capital IPPS 

for revised FY 2010 and revised FY 2011 

(both years have been revised to account for 

provisions in the Affordable Care Act that 

required changes to the wage index and 

outlier threshold, as discussed above in this 

section) for a comparison of total payments 

per case. Any short-term, acute care hospitals 

not paid under the general IPPS (Indian 

Health Service hospitals and hospitals in 

Maryland) are excluded from the 

simulations. 

The basic methodology for determining a 

capital IPPS payment is set forth at § 412.312. 

The basic methodology for calculating capital 

IPPS payments in FY 2011 is as follows: 

(Standard Federal Rate) × (DRG weight) × 

(GAF) × (COLA for hospitals located in 

Alaska and Hawaii) × (1 + DSH Adjustment 

Factor + IME adjustment factor, if 

applicable). 

In addition to the other adjustments, 

hospitals may also receive outlier payments 

for those cases that qualify under the 

threshold established for each fiscal year. We 

modeled payments for each hospital by 

multiplying the capital Federal rate by the 

GAF and the hospital’s case-mix. We then 

added estimated payments for indirect 

medical education, disproportionate share, 

and outliers, if applicable. For purposes of 


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this impact analysis, the model includes the 

following assumptions (we note that these 

are the same assumptions used for the impact 

analysis in the FY 2011 IPPS/LTCH PPS 

proposed rule (75 FR 24310): 

• We estimate that the Medicare case-mix 

index will increase by 1.0 percent in both 

FYs 2010 and 2011. 

• We estimate that the Medicare 

discharges will be approximately 11.8 

million in FY 2010 and 12 million FY 2011. 

• The capital Federal rate was updated 

beginning in FY 1996 by an analytical 

framework that considers changes in the 

prices associated with capital-related costs 

and adjustments to account for forecast error, 

changes in the case-mix index, allowable 

changes in intensity, and other factors. The 

proposed factors used in the update 

framework are not affected by the provisions 

of Pub. L. 111–148, as amended, and 

therefore, remains at the proposed 1.5 

percent for FY 2011, as discussed in section 

III.A.1. of the May 4, 2010 FY 2011 I PPS/ 

LTCH PPS proposed rule. 

• In addition to the proposed FY 2011 

update factor, the proposed FY 2011 capital 

Federal rate was calculated based on a 

proposed GAF/DRG budget neutrality factor 

of 1.0015, a proposed outlier adjustment 

factor of 0.9432, and a proposed (special) 

exceptions adjustment factor of 0.9997. 

• For FY 2011, as discussed above and in 

section V.E. of the preamble to the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed rule, 

we are proposing to apply a 0.957 adjustment 

to the proposed FY 2011 national capital rate 

for changes in documentation and coding 

that are expected to increase case-mix under 

the MS–DRGs. 

B. Results 

We used the actuarial model described 

above to estimate the potential impact of our 

proposed changes for FY 2011 on total 

capital payments per case, using a universe 

of 3,472 hospitals. As described above, the 

individual hospital payment parameters are 

taken from the best available data, including 

the December 2009 update of the FY 2009 

MedPAR file, the December 2009 update to 

the PSF, and the most recent cost report data 

from the December 2009 update of HCRIS. In 

Table III, we present a comparison of 

estimated total payments per case for FY 

2010, as revised per the Affordable Care Act, 

compared to FY 2011 based on the proposed 

FY 2011 payment policies. Column 2 shows 

estimates of payments per case under our 

model for FY 2010 (as revised). Column 3 

shows estimates of payments per case under 

our model for FY 2011. Column 4 shows the 

total percentage change in payments from 

revised FY 2010 to FY 2011. The change 

represented in Column 4 includes the 

proposed 1.5 percent update to the capital 

Federal rate and other proposed changes in 

the adjustments to the capital Federal rate. 

The comparisons are provided by: (1) 

Geographic location; (2) region; and (3) 

payment classification. 

The simulation results show that, on 

average, capital payments per case in FY 

2011 are expected to decrease as compared 

to capital payments per case in FY 2010. The 

proposed capital rate for FY 2011 would 

increase 1.5 percent as compared to the FY 

2010 capital rate. The proposed changes to 

the GAFs are expected to result, on average, 

in a slight decrease in capital payments, 

although, for rural regions, it is more of a 

contributing factor to the overall decrease in 

capital payments than to urban areas mostly 

due to the application of the rural floor to the 

wage index. We also are estimating an 

increase in outlier payments from FY 2010 to 

FY 2011 due primarily to an estimated 

decrease in capital IPPS payments per 

discharge. Since capital payments per 

discharge are projected to be slightly lower 

in FY 2011 compared to FY 2010, more cases 

would qualify for outlier payments. Because 

our impact analysis includes actuarial 

assumptions of growth from FY 2010 to FY 

2011, the analysis shows a slight increase in 

capital payments. However, the net impact of 

these proposed changes is an estimated ¥0.2 

percent change in capital payments per 

discharge from FY 2010 to FY 2011 for all 

hospitals (as shown below in Table III). 

The geographic comparison shows that, on 

average, all urban hospitals, as well as 

hospitals in large urban areas, are expected 

to experience a 0.1 percent decrease in 

capital IPPS payments per case in FY 2011 

as compared to FY 2010. Capital IPPS 

payments per case for rural hospitals are 

expected to decrease 0.6 percent. 

The change comparisons by regions show 

some regions experiencing slight increases in 

total capital payments, while other regions 

are estimated to experience slight decreases 

in capital payments from FY 2010 to FY 

2011. For the urban regions, changes in 

capital payments range from a ¥1.6 percent 

in the New England region to an increase of 

1.4 percent for the Pacific region. The rural 

regions show estimates of a ¥2.4 percent 

change in capital payments from FY 2010 to 

FY 2011 in the New England rural region to 

a 2.1 percent increase for the Mountain rural 

region. 

By type of ownership, proprietary hospitals 

are estimated to experience a 0.2 percent 

change in capital payments, voluntary 

hospitals are estimated to experience a 0.3 

percent decrease in capital payments per 

case, while there is no change estimated for 

government hospitals in capital payments per 

case from FY 2010 to FY 2011. 

Section 1886(d)(10) of the Act established 

the MGCRB. Hospitals may apply for 

reclassification for purposes of the wage 

index for FY 2011. Reclassification for wage 

index purposes also affects the GAFs because 

that factor is constructed from the hospital 

wage index. 

To present the effects of the hospitals being 

reclassified for FY 2011, we show the average 

capital payments per case for reclassified 

hospitals for FY 2010, as revised per the 

Affordable Care Act. All classifications of 

reclassified hospitals are expected to 

experience a decrease in capital payments in 

FY 2011 as compared to FY 2010. Urban 

reclassified and rural reclassified hospitals 

are expected to have a decrease in capital 

payments of ¥0.4 percent and ¥0.3 percent, 

respectively. No change is estimated in 

capital payments for urban non-reclassified 

hospitals, while rural non-reclassified 

hospital capital payments are estimated to 

decrease 0.9 percent. Other reclassified 

hospitals (that is, hospitals reclassified under 

section 1886(d)(8)(B) of the Act) are expected 

to experience a decrease of 1.6 percent in 

capital payments from FY 2010 to FY 2011. 

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IX. Effects of Supplemental Proposed 

Payment Rate Changes and Policy Changes 

Under the LTCH PPS 

A. Introduction and General Considerations 

In section II.J. of the preamble and section 

III. of the Addendum of this proposed rule, 

we are setting forth the proposed annual 

update to the payment rates for the LTCH 

PPS for FY 2011. In the preamble, we specify 

the statutory authority for the proposed 

provisions that are presented, identify those 

proposed policies and present rationale for 

our decisions as well as alternatives that 

were considered. In this section IX. of 

Appendix to this supplemental proposed 

rule, we discuss the impact of the proposed 

changes to the payment rates, factors, and 

other payment rate policies related to the 

LTCH PPS that are presented in the preamble 

of this proposed rule in terms of their 

estimated fiscal impact on the Medicare 

budget and on LTCHs. 

A number of the provisions of the 

Affordable Care Act affect the IPPS and the 

LTCH PPS and the providers and suppliers 

addressed in the May 4, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule and this 

supplemental proposed rule. The impacts of 

the Appendix to this supplemental proposed 

rule include the provisions from these laws 

effective for FY 2011. 

Currently, our database of 421 LTCHs 

includes the data for 77 nonprofit (voluntary 

ownership control) LTCHs and 301 

proprietary LTCHs. Of the remaining 43 

LTCHs, 12 LTCHs are government-owned 

and operated and the ownership type of the 

other 31 LTCHs is unknown. In the impact 

analysis, we are using the proposed rates, 

factors, and policies presented in this 

supplemental proposed rule, including the 

0.50 percentage point reduction to the market 

basket update required by sections 

1886(m)(3) and (4) of the Act and the 

proposed updated wage index values and the 

labor-related share (presented in the May 4, 

2010 FY 2010 IPPS/LTCH PPS proposed 

rule), and the best available claims and CCR 

data to estimate the change in payments for 

FY 2011. The standard Federal rate for RY 

2010 is $39,794.95, which reflects the 0.25 

percentage point reduction applied to the RY 

2010 market basket update required under 

sections 1886(m)(3) and (4) of the Act (as 

established in a separate notice published 

elsewhere in this Federal Register). 

Discharges in RY 2010 occurring on or after 

April 1, 2010 are aid under the revised RY 

2010 standard Federal rate consistent with 

section 3401(p) of Public Law 111–148. 

Discharges in RY 2010 occurring on or after 

October 1, 2009 and on or before March 31, 

2010 are paid under the standard Federal rate 

of $39,896.65 (see 74 FR 44022). 

As discussed in section III.A.3. of the 

Addendum to this proposed rule, consistent 

with our historical practice, we are proposing 

to update the standard Federal rate for FY 

2011 by ¥0.59 percent in order to establish 

the proposed FY 2011 standard Federal rate 

at $39,560.16. This includes a proposed 

market basket update of 2.4 percent with a 

0.50 percentage point reduction as required 

under sections 1886(m)(3) and (4) of the Act, 

and a proposed documentation and coding 

adjustment of ¥2.5 percent to account for 

increases in case-mix associated with the 

adoption of the MS–LTC–DRGs. Based on the 

best available data for the 421 LTCHs in our 

database, we estimate that the proposed 

update to the standard Federal rate for FY 

2011 (discussed in section III.A.3. of the 

Addendum of this supplemental proposed 

rule) and the proposed changes to the area 

wage adjustment for FY 2011 (discussed in 

section V.B. of the Addendum to the May 4, 

2010 IPPS/LTCH PPS FY 2011 IPPS/LTCH 

PPS proposed rule (75 FR 24085 through 

24086)), in addition to an estimated increase 

in HCO payments and an estimated increase 

in SSO payments, would result in an increase 

in estimated payments from RY 2010 of 

approximately $12.9 million (or about 0.3 

percent). Based on the 421 LTCHs in our 

database, we estimate RY 2011 LTCH PPS 

payments to be approximately $4.913 billion, 

an increase from FY 2010 LTCH PPS 


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payments of approximately $4.901 billion. 

Because the combined distributional effects 

and estimated changes to the Medicare 

program payments would be greater than 

$100 million, this proposed rule, in 

conjunction with the May 4, 2010 IPPS/ 

LTCH PPS FY 2011 IPPS/LTCH PPS 

proposed rule, is considered a major 

economic rule, as defined in this section. We 

note the approximately $12.9 million for the 

projected increase in estimated aggregate 

LTCH PPS payments from RY 2010 to FY 

2011 does not reflect changes in LTCH 

admissions or case-mix intensity in estimated 

LTCH PPS payments, which also would 

affect overall payment changes. 

The projected 0.3 percent increase in 

estimated payments per discharge from RY 

2010 to FY 2011 is attributable to several 

factors, including the proposed ¥0.59 

percent decrease to the standard Federal rate, 

proposed changes in the wage index values 

(including the proposed change to the laborrelated share) presented in the May 4, 2010 

FY 2011 IPPS/LTCH PPS proposed rule (75 

FR 24085 through 24086) and projected 

increases in estimated HCO and SSO 

payments. As Table IV shows, the proposed 

change attributable solely to the standard 

Federal rate is projected to result in a 

decrease of 0.5 percent in estimated 

payments per discharge from RY 2010 to FY 

2011, on average, for all LTCHs, while the 

proposed changes to the area wage 

adjustment are projected to result in an 

increase in estimated payments of 0.1 

percent, on average, for all LTCHs. 

As discussed in the May 4, 2010 FY 2011 

IPPS/LTCH proposed rule (75 FR 24085 

through 24086), we are proposing to update 

the wage index values for FY 2011 based on 

the most recent available data. In addition, 

we are proposing to decrease the laborrelated share slightly from 75.779 percent to 

75.407 percent under the LTCH PPS for FY 

2011 based on the most recent available data 

on the relative importance of the laborrelated share of operating and capital costs of 

the RPL market basket. Consistent with the 

May 4, 2010 FY 2011 IPPS/LTCH proposed 

rule, the wage data and the labor-related 

share is expected to increase LTCH PPS 

payments by 0.1 percent (75 FR 24317 

through 27318). 

Table IV below shows the impact of the 

proposed payment rate and proposed policy 

changes on LTCH PPS payments for FY 2011 

presented in this supplemental proposed 

rule, in conjunction with the May 4, 2010 FY 

2011 IPPS/LTCH PPS proposed rule, by 

comparing RY 2010 estimated payments to 

FY 2011 estimated payments. The projected 

increase in payments per discharge from RY 

2010 to FY 2011 is 0.3 percent (shown in 

Column 8). This projected increase in 

payments is attributable to the impacts of the 

proposed change to the standard Federal rate 

(¥0.5 percent in Column 6) and the 

proposed change due to the area wage 

adjustment (0. percent in Column 7), as well 

as the effect of the estimated increase in 

payments for HCO cases and SSO cases in FY 

2011 as compared to RY 2010 (0.5 percent 

and 0.3 percent, respectively). That is, 

estimated total HCO payments are projected 

to increase from RY 2010 to FY 2011 in order 

to ensure that estimated HCO payments will 

be 8 percent of total estimated LTCH PPS 

payments in FY 2011. An analysis of the 

most recent available LTCH PPS claims data 

(that is, FY 2009 claims from the December 

2009 update of the MedPAR files) indicates 

that the RY 2010 HCO threshold of $18,615 

(as established in a separate notice published 

elsewhere in this Federal Register) may 

result in HCO payments in RY 2010 that fall 

below the estimated 8 percent. Specifically, 

we currently estimate that HCO payments 

will be approximately 7.5 percent of 

estimated total LTCH PPS payments in RY 

2010. We note that the RY 2010 outlier 

payment estimate in this impact analysis 

takes into account for the revised RY 2010 

rate and outlier threshold determined 

consistent with sections 1886(m)(3) and (4) of 

the Act and section 3401(p) of Public Law 

111–148 that are used to make payments for 

discharges in RY 2010 that occur on or after 

April 1, 2010. Consistent with our estimate 

in the May 4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule, we estimate that the impact of 

the increase in HCO payments would result 

in approximately a 0.5 percent increase in 

estimated payments from RY 2010 to FY 

2011 on average for all LTCHs. Furthermore, 

in calculating the estimated increase in 

payments from RY 2010 to FY 2011 for HCO 

and SSO cases, we increased estimated costs 

by the applicable market basket percentage 

increase as projected by our actuaries, which 

increases payments by 0.3 percent relative to 

last year. We note that estimated payments 

for all SSO cases comprise approximately 14 

percent of estimated total LTCH PPS 

payments, and estimated payments for HCO 

cases comprise approximately 8 percent of 

estimated total LTCH PPS payments. 

Payments for HCO cases are based on 80 

percent of the estimated cost of the case 

above the HCO threshold, while the majority 

of the payments for SSO cases (over 65 

percent) are based on the estimated cost of 

the SSO case. 

As we discuss in detail throughout this 

supplemental proposed rule, based on the 

most recent available data, we believe that 

the provisions of this supplemental proposed 

rule in conjunction with the provisions of the 

May 4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule, relating to the LTCH PPS will 

result in an increase in estimated aggregate 

LTCH PPS payments and that the resulting 

LTCH PPS payment amounts result in 

appropriate Medicare payments. 

B. Impact on Rural Hospitals 

For purposes of section 1102(b) of the Act, 

we define a small rural hospital as a hospital 

that is located outside of an urban area and 

has fewer than 100 beds. As shown in Table 

IV, we are projecting a 0.7 percent increase 

in estimated payments per discharge for FY 

2011 as compared to RY 2010 for rural 

LTCHs that would result from the proposed 

changes presented in this supplemental 

proposed rule and those changes in the May 

4, 2010 FY 2011 IPPS/LTCH PPS proposed 

rule as well as the effect of estimated changes 

to HCO and SSO payments. This estimated 

impact is based on the data for the 26 rural 

LTCHs in our database of 421 LTCHs, for 

which complete data were available. The RY 

2010 average payment per case in Table IV 

accounts for the changes required by sections 

1886(m)(3) and (4) of the Act and section 

3401(p) of Public Law 111–148 which affects 

payments for discharges occurring on or after 

April 1, 2010, as described below in section 

IX.C.3. of the Appendix to this supplemental 

proposed rule. 

Consistent with the May 4, 2010 FY 2011 

IPPS/LTCH PPS proposed rule, the estimated 

increase in LTCH PPS payments from RY 

2010 to FY 2011 for rural LTCHs is primarily 

due to the higher than average impacts from 

the proposed changes to the area wage 

adjustment and the proposed reduction in 

the labor-related share from 75.779 to 75.407, 

which results in a estimated 0.6 percent 

increase in payments. 

C. Anticipated Effects of Proposed LTCH PPS 

Payment Rate Change and Policy Changes 

We discuss the impact of the proposed 

changes to the payment rates, factors, and 

other payment rate policies under the LTCH 

PPS for FY 2011 (in terms of their estimated 

fiscal impact on the Medicare budget and on 

LTCHs) in section II.I. of the preamble of this 

supplemental proposed rule. 

1. Budgetary Impact 

Section 123(a)(1) of the BBRA requires that 

the PPS developed for LTCHs ‘‘maintain 

budget neutrality.’’ We believe that the 

statute’s mandate for budget neutrality 

applies only to the first year of the 

implementation of the LTCH PPS (that is, FY 

2003). Therefore, in calculating the FY 2003 

standard Federal rate under § 412.523(d)(2), 

we set total estimated payments for FY 2003 

under the LTCH PPS so that estimated 

aggregate payments under the LTCH PPS 

were estimated to equal the amount that 

would have been paid if the LTCH PPS had 

not been implemented. 

As discussed in section IX.A. of this 

Appendix, we project an increase in 

aggregate LTCH PPS payments in FY 2011 of 

approximately $12.9 million (or 0.3 percent) 

based on the 421 LTCHs in our database. 

2. Impact of Moratorium and Other 

Provisions 

Section 114(c) and (d) of the Medicare, 

Medicaid, and SCHIP Extension Act of 2007 

(MMSEA) as amended by section 4302 of the 

American Recovery and Reinvestment Act of 

2009 (ARRA) provided for a 3-year delay in 

certain payment policies relating to LTCHs 

and LTCH satellite facilities. Section 3106 of 

Public Law 111–148 and section 10312 of 

Public Law 111–148 together provide for a 

2-year extension of the 3-year delay in 

implementation of certain payment policies 

relating to LTCHs and LTCH satellite 

facilities. Specifically, these provisions affect 

payment adjustments for ‘‘very’’ short stay 

outliers (SSOs), the one-time adjustment to 

the standard Federal rate, the 25 percent 

payment threshold policy, and the 

moratorium on the establishment of new 

LTCHs and LTCH satellite facilities and the 

moratorium on the increase on LTCH beds in 

existing LTCHs or satellite facilities. 

Sections 3106 and 10312 of Public Law 

111–148 together provide for a 2-year 

extension of the 3-year delay in 

implementation of the revision to the SSO 


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policy at § 412.529(c)(3)(i) that was finalized 

in the RY 2008 final rule. We estimate that 

the extension of the SSO provision will result 

in a projected increase in estimated aggregate 

LTCH PPS payments of approximately $20 

million in FY 2011. Sections 3106 and 10312 

of Public Law 111–148 together provide for 

a 2-year extension to several modifications to 

the regulations at § 412.534 and § 412.536 

required by section 114(c) of MMSEA as 

amended by section 4302 of the ARRA, 

which addressed the percentage thresholds 

between referring hospitals and LTCHs and 

satellites of LTCHs. We estimate that the 

implementation of this extension of the 

MMSEA provisions, as amended by the 

ARRA, pertaining to § 412.534 and § 412.536 

will result in a projected increase in 

estimated aggregate LTCH PPS payments of 

approximately $20 million for FY 2011. 

Regarding the 2-year extension of the 

moratorium on the development of new 

LTCHs and LTCH satellites and the increase 

in beds in existing LTCHs and LTCH 

satellites, as we noted in the May 22, 2008 

interim final rule with comment period when 

the original 3-year delay required by section 

114(d) of the MMSEA as amended by the 

ARRA, was implemented, we are unable to 

quantify the impact of the additional 2 year 

moratorium on the establishment of LTCHs, 

LTCH satellite facilities, and on the increase 

of LTCH beds in existing LTCHs or satellite 

facilities with limited exceptions. We are 

unable to provide an estimate of the impact 

of the 2-year extension of this provision 

because we have no way of determining how 

many LTCHs would have opened in the 

absence of the moratorium, nor do we have 

sufficient information at this time to 

determine how many new LTCHs will meet 

the exceptions criteria provided for in the 

statute. 

3. Impact on Providers 

The basic methodology for determining a 

per discharge LTCH PPS payment is set forth 

in § 412.515 through § 412.536. In addition to 

the basic MS–LTC–DRG payment (standard 

Federal rate multiplied by the MS–LTC–DRG 

relative weight), we make adjustments for 

differences in area wage levels, COLA for 

Alaska and Hawaii, and SSOs. Furthermore, 

LTCHs may also receive HCO payments for 

those cases that qualify based on the 

threshold established each year. 

To understand the impact of the proposed 

changes to the LTCH PPS payments 

presented in this supplemental proposed rule 

on different categories of LTCHs for FY 2011, 

it is necessary to estimate payments per 

discharge for RY 2010 using the rates, factors, 

including the FY 2010 GROUPER (Version 

27.0) and relative weights, and policies 

established in the FY 2010 IPPS/RY 2010 

LTCH PPS final rule (74 FR 43945 through 

43994 and 44021 through 44030) and to 

include any changes to payments due to the 

provisions under sections 1886(m)(3) and (4) 

of the Act and section 3401(p) of Public Law 

111–148 which affects payments for 

discharges occurring on or after April 1, 2010 

in RY 2010 (as established in a separate 

notice published elsewhere in this Federal 

Register). It is also necessary to estimate the 

payments per discharge that would be made 

under the proposed revised LTCH PPS rates, 

factors, policies, and GROUPER (Version 

28.0) for FY 2011 (as discussed in II.J. of the 

preamble and section III.A. of the Addendum 

to this supplemental proposed rule and 

section VII. of the preamble and section V. 

of the Addendum of the May 4, 2011 IPPS/ 

LTCH PPS FY 2011 proposed rule). These 

estimates of RY 2010 and FY 2011 LTCH PPS 

payments are based on the best available 

LTCH claims data and other factors, such as 

the application of inflation factors to estimate 

costs for SSO and HCO cases in each year. 

We also evaluated the change in estimated 

RY 2010 payments to estimated FY 2011 

payments (on a per discharge basis) for each 

category of LTCHs. 

Hospital groups were based on 

characteristics provided in the OSCAR data, 

FY 2006 through FY 2007 cost report data in 

HCRIS, and PSF data. Hospitals with 

incomplete characteristics were grouped into 

the ‘‘unknown’’ category. Hospital groups 

include the following: 

• Location: Large urban/other urban/rural. 

• Participation date. 

• Ownership control. 

• Census region. 

• Bed size. 

To estimate the impacts of the payment 

rates and policy changes among the various 

categories of existing providers, we used 

LTCH cases from the FY 2009 MedPAR file 

to estimate payments for RY 2010 and to 

estimate payments for FY 2011 for 421 

LTCHs. We believe that the discharges based 

on the FY 2009 MedPAR data for the 421 

LTCHs in our database, which includes 301 

proprietary LTCHs, provide sufficient 

representation in the MS–LTC–DRGs 

containing discharges for patients who 

received LTCH care for the most commonly 

treated LTCH patients’ diagnoses. 

4. Calculation of Prospective Payments 

For purposes of this impact analysis, to 

estimate per discharge payments under the 

LTCH PPS, we simulated payments on a 

case-by-case basis using LTCH claims from 

the FY 2009 MedPAR files. For modeling 

estimated LTCH PPS payments for RY 2010, 

we calculated a blended RY 2010 payment to 

account for changes in the rate in accordance 

with sections 1886(m)(3) and (4) of the Act 

and section 3401(p) of Public Law 111–148. 

Specifically, we applied the RY 2010 

standard Federal rate (that is, $39,896.65, 

under which LTCH discharges occurring on 

or after October 1, 2009, and through March 

31, 2010 are paid, and $39,794.95, under 

which LTCH discharges occurring on or after 

April 1, 2010 to September 30, 2010 are 

paid). For modeling estimated LTCH PPS 

payments for FY 2011, we applied the 

proposed FY 2011 standard Federal rate of 

$39,560.16, which would be effective for 

LTCH discharges occurring on or after 

October 1, 2010, and through September 30, 

2011. 

Furthermore, in modeling estimated LTCH 

PPS payments for both RY 2010 and FY 2011 

in this impact analysis, we applied the RY 

2010 and proposed FY 2011 adjustments for 

area wage differences and the COLA for 

Alaska and Hawaii. Specifically, we adjusted 

for area wage differences for estimated RY 

2010 payments using the current LTCH PPS 

labor-related share of 75.779 percent (74 FR 

43968), the wage index values established in 

the Tables 12A and 12B of the Addendum to 

the FY 2010 IPPS/RY 2010 LTCH PPS final 

rule (74 FR 44192 through 44213) and the RY 

2010 COLA factors shown in the table in 

section V. of the Addendum to that final rule 

(74 FR 44026). Similarly, we adjusted for area 

wage differences for estimated FY 2011 

payments using the proposed LTCH PPS FY 

2011 labor-related share of 75.407 percent 

(section VII.C.2.d. in the May 4, 2010 FY 

2011 IPPS/LTCH PPS proposed rule), the FY 

2011 proposed wage index values presented 

in Tables 12A and 12B of the Addendum to 

this proposed rule, and the FY 2011 COLA 

factors shown in the table in section V.B.5. 

of the Addendum to the May 4, 2010 FY 2011 

IPPS/LTCH PPS proposed rule. 

As discussed above, our impact analysis 

reflects an estimated change in payments for 

SSO cases as well as an estimated increase 

in payments for HCO cases (as described in 

section V.C. of the Addendum to this 

proposed rule). In modeling proposed 

payments for SSO and HCO cases in RY 

2010, we applied an inflation factor of 1.024 

percent (determined by OACT) to the 

estimated costs of each case determined from 

the charges reported on the claims in the FY 

2009 MedPAR files and the best available 

CCRs from the December 2009 update of the 

PSF. In modeling proposed payments for 

SSO and HCO cases in FY 2011, we applied 

an inflation factor of 1.049 (determined by 

OACT) to the estimated costs of each case 

determined from the charges reported on the 

claims in the FY 2009 MedPAR files and the 

best available CCRs from the December 2009 

update of the PSF. Furthermore, in modeling 

estimated LTCH PPS payments for both RY 

2010 and FY 2011 in this impact analysis, we 

applied the RY 2010 HCO fixed-loss amount 

of $18,425 (74 FR 44029) for the first half of 

RY 2010, the revised RY 2010 HCO fixed-loss 

amount of $18,615 established in conjunction 

with implementing the provisions of sections 

1886(m)(3) and (4) of the Act and section 

3401(p) of Public Law 111–148 for the 

second half of RY 2010, and the proposed FY 

2011 fixed loss amount of $19,254 (as 

discussed in section III.A. of the Addendum 

of this supplemental proposed rule). 

These impacts reflect the estimated 

‘‘losses’’ or ‘‘gains’’ among the various 

classifications of LTCHs from the RY 2010 to 

FY 2011 based on the proposed payment 

rates and policy changes presented in this 

proposed rule. Table IV illustrates the 

estimated aggregate impact of the LTCH PPS 

among various classifications of LTCHs. 

• The first column, LTCH Classification, 

identifies the type of LTCH. 

• The second column lists the number of 

LTCHs of each classification type. 

• The third column identifies the number 

of LTCH cases. 

• The fourth column shows the estimated 

payment per discharge for RY 2010 (as 

described above). 

• The fifth column shows the estimated 

payment per discharge for FY 2011 (as 

described above). 

• The sixth column shows the percentage 

change in estimated payments per discharge 

from RY 2010 to FY 2011 for proposed 

changes to the standard Federal rate (as 


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discussed in section III.A.3. of the 

Addendum to this supplemental proposed 

rule). 

• The seventh column shows the 

percentage change in estimated payments per 

discharge from RY 2010 to FY 2011 for 

proposed changes to the area wage 

adjustment at § 412.525(c) (as discussed in 

section V.B. of the Addendum to the May 4, 

2010 FY 2011 IPPS/LTCH PPS proposed 

rule). 

• The eighth column shows the percentage 

change in estimated payments per discharge 

from RY 2010 (Column 4) to FY 2011 

(Column 5) for all proposed and statutory 

changes (and includes the effect of estimated 

changes to HCO and SSO payments). 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

5. Results 

Based on the most recent available data (as 

described previously for 421 LTCHs, we have 

prepared the following summary of the 

impact (as shown in Table IV) of the 

proposed LTCH PPS payment rate and policy 

changes presented in this supplemental 

proposed rule. The impact analysis in Table 

IV shows that estimated payments per 

discharge are expected to increase 

approximately 0.3 percent, on average, for all 

LTCHs from RY 2010 to FY 2011 as a result 

of the proposed payment rate and policy 

changes presented in this supplemental 

proposed rule and the May 4, 2010 FY 2011 

IPPS/LTCH PPS proposed rule, as well as 

estimated increases in HCO and SSO 

payments. We note that we are proposing a 

¥0.59 percent increase to the standard 

Federal rate for FY 2011, based on the latest 

proposed market basket estimate (2.4 

percent), the ¥0.50 percent reduction to the 

annual update required under of sections 

1886(m)(3) and (4) of the Act, and the 

proposed adjustment for the cumulative 

effect of changes in documentation and 

coding in FYs 2008 and 2009 (¥2.5 percent). 

We noted earlier in this section that for most 

categories of LTCHs, as shown in Table IV 

(Column 6), the impact of the proposed 

decrease of approximately ¥0.6 percent to 

the standard Federal rate is projected to 

result in approximately a ¥0.5 percent 

decrease in estimated payments per 

discharge for all LTCHs from RY 2010 to FY 

2011. Because payments to cost-based SSO 

cases and a portion of payments to SSO cases 

that are paid based on the ‘‘blend’’ option of 


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the SSO payment formula at 

§ 412.529(c)(2)(iv) are not affected by the 

proposed update to the standard Federal rate, 

we estimate that the effect of the proposed 

0.59 percent reduction to the standard 

Federal rate would result in a 0.5 percent 

reduction on estimated aggregate LTCH PPS 

payments to all LTCH PPS cases, including 

SSO cases. Furthermore, as discussed 

previously in this regulatory impact analysis, 

the average increase in estimated payments 

per discharge from the RY 2010 to FY 2011 

for all LTCHs of approximately 0.3 percent 

(as shown in Table IV) was determined by 

comparing estimated FY 2011 LTCH PPS 

payments (using the proposed rates, 

proposed policies and statutory changes 

discussed in this supplemental proposed rule 

and in the May 4, 2010 FY 2011 IPPS/LTCH 

PPS proposed rule) to estimated RY 2010 

LTCH PPS payments (as described above in 

section IX.C.3. of this Appendix). 

a. Location 

Based on the most recent available data, 

the vast majority of LTCHs are located in 

urban areas. Only approximately 6 percent of 

the LTCHs are identified as being located in 

a rural area, and approximately 4 percent of 

all LTCH cases are treated in these rural 

hospitals. The impact analysis presented in 

Table IV shows that the average percent 

increase in estimated payments per discharge 

from RY 2010 to FY 2011 for all hospitals is 

0.3 percent for all proposed changes. For 

rural LTCHs, the percent change for all 

proposed changes is estimated to be 0.7 

percent, while for urban LTCHs, we estimate 

the increase to be 0.2 percent. Large urban 

LTCHs are projected to experience an 

increase of 0.3 percent in estimated payments 

per discharge from RY 2010 to FY 2011, 

while other urban LTCHs are projected to 

experience an increase of 0.1 percent in 

estimated payments per discharge from RY 

2010 to FY 2011, as shown in Table IV. 

b. Participation Date 

LTCHs are grouped by participation date 

into four categories: (1) Before October 1983; 

(2) between October 1983 and September 

1993; (3) between October 1993 and 

September 2002; and (4) after October 2002. 

Based on the most recent available data, the 

majority (approximately 49 percent) of the 

LTCH cases are in hospitals that began 

participating between October 1993 and 

September 2002, and are projected to 

experience nearly the average increase (0.2 

percent) in estimated payments per discharge 

from RY 2010 to FY 2011, as shown in Table 

IV. 

In the participation category where LTCHs 

began participating in Medicare before 

October 1983, LTCHs are projected to 

experience a higher than average percent 

increase (0.6 percent) in estimated payments 

per discharge from RY 2010 to FY 2011, as 

shown in Table IV. Approximately 4 percent 

of LTCHs began participating in Medicare 

before October 1983. The LTCHs in this 

category are projected to experience a higher 

than average increase in estimated payments 

because of increases in their wage data, 

increase under the proposed MS–LTC–DRG 

GROUPER (Version 28) and relative weights, 

and also because of estimated increases in 

their SSO payments relative to last year. 

Approximately 10 percent of LTCHs began 

participating in Medicare between October 

1983 and September 1993. These LTCHs are 

projected to experience a slightly above 

average increase (0.4 percent) in estimated 

payments from RY 2010 to FY 2011. LTCHs 

that began participating in Medicare after 

October 2002 currently represent 

approximately 38 percent of all LTCHs, and 

are projected to experience an average 

increase (0.3 percent) in estimated payments 

from RY 2010 to FY 2011. 

c. Ownership Control 

Other than LTCHs whose ownership 

control type is unknown, LTCHs are grouped 

into three categories based on ownership 

control type: voluntary, proprietary, and 

government. Based on the most recent 

available data, approximately 18 percent of 

LTCHs are identified as voluntary (Table IV). 

We expect that, for these LTCHs in the 

voluntary category, estimated FY 2011 LTCH 

payments per discharge will increase higher 

than the average (0.6 percent) in comparison 

to estimated payments in RY 2010 primarily 

because we project an increase in estimated 

HCO payments and SSO payments to be 

higher than the average for these LTCHs. The 

majority (71 percent) of LTCHs are identified 

as proprietary and these LTCHs are projected 

to experience an average increase (0.2 

percent) in estimated payments per discharge 

from RY 2010 to FY 2011. Finally, 

government-owned and operated LTCHs (3 

percent) are expected to experience a higher 

than the average increase (0.7 percent) in 

estimated payments primarily due to a larger 

than the average increase in estimated HCO 

payments and increases under the proposed 

MS–LTC–DRG GROUPER (Version 28) and 

relative weights. 

d. Census Region 

Estimated payments per discharge for FY 

2011 are projected to increase for LTCHs 

located in all regions in comparison to RY 

2010. Of the 9 census regions, we project that 

the increase in estimated payments per 

discharge will have the largest positive 

impact on LTCHs in the New England region 

(0.6 percent, as shown in Table IV). The 

estimated percent increase in payments per 

discharge from RY 2010 to FY 2011 for New 

England is largely attributable to the 

projected increase in estimated HCO and 

SSO payments (explained in greater detail 

above in section IX.A. of this Appendix). 

In contrast, LTCHs located in the East 

South Central region are projected to 

experience a slight decrease in estimated 

payments per discharge from RY 2010 to FY 

2011. The average estimated decrease in 

payments of 0.1 percent for LTCHs in the 

East South Central region is primarily due to 

estimated decreases in payments associated 

with the proposed wage index because 50 

percent of LTCHs located in this region will 

have a proposed FY 2011 wage index value 

that is less than their RY 2010 wage index 

value. Similarly, LTCHs in the South Atlantic 

and West North Central are expect to 

experience no change in payments primarily 

due to an estimated decrease in payment 

because of the proposed FY 2011 wage index 

changes and the decrease in the Federal rate. 

e. Bed Size 

LTCHs were grouped into six categories 

based on bed size: 0–24 beds; 25–49 beds; 

50–74 beds; 75–124 beds; 125–199 beds; and 

greater than 200 beds. 

We project that payments for small LTCHs 

(0–24 beds) would experience a 0.8 percent 

increase in payments due to increases in 

their wage index while large LTCHs (200+ 

beds) would experience no change in 

payments. LTCHs with between 75 and 124 

beds and between 125 and 199 beds are 

expected to experience an above average 

increase in payments per discharge from RY 

2010 to FY 2011 (0.6 percent and 0.5 percent, 

respectively) primarily due to a larger than 

average estimated increase in payments from 

the proposed FY 2011 changes to the area 

wage adjustment. 

D. Effect on the Medicare Program 

As noted previously, we project that the 

provisions of this supplemental proposed 

rule would result in an increase in estimated 

aggregate LTCH PPS payments in FY 2011 of 

approximately $12.9 million (or about 0.3 

percent) for the 421 LTCHs in our database. 

E. Effect on Medicare Beneficiaries 

Under the LTCH PPS, hospitals receive 

payment based on the average resources 

consumed by patients for each diagnosis. We 

do not expect any changes in the quality of 

care or access to services for Medicare 

beneficiaries under the LTCH PPS, but we 

expect that paying prospectively for LTCH 

services would enhance the efficiency of the 

Medicare program. 

X. Alternatives Considered 

This supplemental proposed rule contains 

a range of policies. The preamble of this 

supplemental proposed rule provides 

descriptions of the statutory provisions that 

are addressed, identifies policies and 

presents rationales for our decisions and, 

where relevant, alternatives that were 

considered. 

XI. Overall Conclusion 

A. Acute Care Hospitals 

Table I of section VI. of this Appendix 

demonstrates the estimated distributional 

impact of the IPPS budget neutrality 

requirements for the proposed MS–DRG and 

wage index changes, and for the wage index 

reclassifications under the MGCRB. Table I 

also shows an overall decrease of 0.9 percent 

in operating payments. We estimate that 

operating payments will decrease by 

approximately $929 million in FY 2011. In 

addition, we estimates the reporting of 

hospital quality data program costs at $2.4 

million, a savings of $23 million associated 

with the proposed HACs policies discussed 

in the May 4, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule, an additional $150 million to 

hospitals that qualify for an additional 

payment as provided under section 1109 of 

Public Law 111–152, and all other proposed 

operating payment policies described in 

section VII. of this Appendix . These 

estimates added to our FY 2011 operating 

estimate of ¥$929 million results in a 

decrease of $800 million for FY 2011. We 

estimate that capital payments will 


jlentini on DSKJ8SOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 105 / Wednesday, June 2, 2010 / Proposed Rules 31117 

experience ¥0.2 percent change in payments 

per case, as shown in Table III of section VIII. 

of this Appendix. We project that there will 

be a $20 million decrease in capital payments 

in FY 2011 compared to FY 2010. The 

proposed cumulative operating and capital 

payments should result in a net decrease of 

$820 million to IPPS providers. The 

discussions presented in the previous pages, 

in combination with the rest of this proposed 

rule and the May 10, 2010 FY 2011 IPPS/ 

LTCH PPS proposed rule, constitute a 

regulatory impact analysis. 

B. LTCHs 

Overall, LTCHs are projected to experience 

an increase in estimated payments per 

discharge in FY 2011. In the impact analysis, 

we are using the proposed rates, factors, and 

policies presented in this supplemental 

proposed rule, including proposed updated 

wage index values and relative weights, and 

the best available claims and CCR data to 

estimate the change in payments under the 

LTCH PPS for FY 2011. Accordingly, based 

on the best available data for the 421 LTCHs 

in our database, we estimate that FY 2011 

LTCH PPS payments will increase 

approximately $13 million (or about 0.3 

percent). 

XII. Accounting Statements 

A. Acute Care Hospitals 

As required by OMB Circular A–4 

(available at http://www.whitehousegov/omb/ 

circulars/a004/a-4.pdf), in Table V below, we 

have prepared an accounting statement 

showing the classification of the 

expenditures associated with the provisions 

of this proposed rule as they relate to acute 

care hospitals. This table provides our best 

estimate of the change in Medicare payments 

to providers as a result of the proposed 

changes to the IPPS presented in this 

supplemental proposed rule and the May 10, 

2010 FY 2011 IPPS/LTCH PPS proposed rule. 

All expenditures are classified as transfers to 

Medicare providers. 

TABLE V—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES UNDER THE IPPS FROM FY 2010 

TO FY 2011 

Category Transfers 

Annualized Monetized Transfers .............................................................. ¥$820 million. 

From Whom to Whom .............................................................................. Federal Government to IPPS Medicare Providers. 

Total ................................................................................................... ¥$820 million. 

B. LTCHs 

As discussed in section IX. of this 

Appendix, the impact analysis for the 

proposed changes under the LTCH PPS for 

this proposed rule projects an increase in 

estimated aggregate payments of 

approximately $13 million (or about 0.3 

percent) for the 421 LTCHs in our database 

that are subject to payment under the LTCH 

PPS. Therefore, as required by OMB Circular 

A–4 (available at http://www.whitehouse.gov/ 

omb/circulars/a004/a-4.pdf), in Table VI 

below, we have prepared an accounting 

statement showing the classification of the 

expenditures associated with the provisions 

of this supplemental proposed rule and the 

May 10, 2010 FY 2011 IPPS/LTCH PPS 

proposed rule as they relate to changes to the 

LTCH PPS. Table VI provides our best 

estimate of the proposed increase in 

Medicare payments under the LTCH PPS as 

a result of the proposed provisions presented 

in this proposed rule based on the data for 

the 421 LTCHs in our database. All 

expenditures are classified as transfers to 

Medicare providers (that is, LTCHs). 

TABLE VI—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES FROM THE 2010 LTCH PPS RATE

YEAR TO THE FY 2011 LTCH PPS 

Category Transfers 

Annualized Monetized Transfers .............................................................. Positive transfer—Estimated increase in expenditures: $13 million. 

From Whom to Whom .............................................................................. Federal Government to LTCH PPS Medicare Providers. 

Total ................................................................................................... $13 million. 

XIII. Executive Order 12866 

In accordance with the provisions of 

Executive Order 12866, the Executive Office 

of Management and Budget reviewed this 

proposed rule. 

[FR Doc. 2010–12567 Filed 5–21–10; 4:15 pm] 

BILLING CODE 4120–01–P 


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