26432 Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 412 

[CMS–1346–F] 

RIN 0938–AQ23 

Medicare Program; Inpatient 

Psychiatric Facilities Prospective 

Payment System—Update for Rate 

Year Beginning July 1, 2011 (RY 2012) 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule. 

SUMMARY: This final rule updates the 

prospective payment rates for Medicare 

inpatient hospital services provided by 

inpatient psychiatric facilities (IPFs) for 

discharges occurring during the rate 

year (RY) beginning July 1, 2011 

through September 30, 2012. The final 

rule also changes the IPF prospective 

payment system (PPS) payment rate 

update period to a RY that coincides 

with a fiscal year (FY). In addition, the 

rule implements policy changes 

affecting the IPF PPS teaching 

adjustment. It also rebases and revises 

the Rehabilitation, Psychiatric, and 

Long-Term Care (RPL) market basket, 

and makes some clarifications and 

corrections to terminology and 

regulations text. 

DATES: These regulations are effective 

on July 1, 2011. 

FOR FURTHER INFORMATION CONTACT: 

Dorothy Myrick or Jana Lindquist, (410) 

786–4533 (for general information). 

Mary Carol Barron, (410) 786–7943, or 

Bridget Dickensheets, (410) 786–8670, 

(for information regarding the market 

basket and labor-related share). 

Theresa Bean, (410) 786–2287 (for 

information regarding the regulatory 

impact analysis). 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

To assist readers in referencing 

sections contained in this document, we 

are providing the following table of 

contents. 

I. Background 

A. Annual Requirements for Updating the 

IPF PPS 

B. Overview of the Legislative 

Requirements of the IPF PPS 

C. General Overview of the IPF PPS 

D. Transition Period for Implementation of 

the IPF PPS 

II. Provisions of the Proposed Rule and 

Responses to Public Comments 

III. Changing the IPF PPS Payment Rate 

Update Period From a Rate Year to a 

Fiscal Year 

IV. Rebasing and Revising of the 

Rehabilitation, Psychiatric, and LongTerm Care (RPL) Market Basket for 

Inpatient Psychiatric Facilities 

A. Background 

B. Overview of the FY 2008-Based RPL 

Market Basket 

C. Rebasing and Revising of the RPL 

Market Basket 

1. Development of Cost Categories and 

Weights 

a. Medicare Cost Reports 

b. Other Data Sources 

2. Final Cost Category Computation 

3. Selection of Price Proxies 

a. Wages and Salaries 

b. Employee Benefits 

c. Electricity 

d. Fuel, Oil, and Gasoline 

e. Water and Sewage 

f. Professional Liability Insurance 

g. Pharmaceuticals 

h. Food: Direct Purchases 

i. Food: Contract Services 

j. Chemicals 

k. Medical Instruments 

l. Photographic Supplies 

m. Rubber and Plastics 

n. Paper and Printing Products 

o. Apparel 

p. Machinery and Equipment 

q. Miscellaneous Products 

r. Professional Fees: Labor-Related 

s. Administrative and Business Support 

Services 

t. All Other: Labor-Related Services 

u. Professional Fees: Nonlabor-Related 

v. Financial Services 

w. Telephone Services 

x. Postage 

y. All Other: Nonlabor-Related Services 

4. Methodology for Capital Portion of the 

RPL Market Basket 

5. RY 2012 Market Basket Update 

6. Labor-Related Share 

V. Updates to the IPF PPS for RY Beginning 

July 1, 2011 

A. Determining the Standardized BudgetNeutral Federal Per Diem Base Rate 

1. Standardization of the Federal Per Diem 

Base Rate and Electroconvulsive Therapy 

(ECT) Rate 

2. Calculation of the Budget Neutrality 

Adjustment 

a. Outlier Adjustment 

b. Stop-Loss Provision Adjustment 

c. Behavioral Offset 

B. Update of the Federal Per Diem Base 

Rate and Electroconvulsive Therapy Rate 

VI. Update of the IPF PPS Adjustment 

Factors 

A. Overview of the IPF PPS Adjustment 

Factors 

B. Patient-Level Adjustments 

1. Adjustment for MS–DRG Assignment 

2. Payment for Comorbid Conditions 

3. Patient Age Adjustments 

4. Variable Per Diem Adjustments 

C. Facility-Level Adjustments 

1. Wage Index Adjustment 

a. Background 

b. Wage Index for RY 2012 

c. OMB Bulletins 

2. Adjustment for Rural Location 

3. Teaching Adjustment 

a. Temporary Adjustment to FTE Cap to 

Reflect Residents Affected by Hospital 

Closure 

b. Temporary Adjustment to FTE Cap to 

Reflect Residents Affected By Residency 

Program Closure 

4. Cost of Living Adjustment for IPFs 

Located in Alaska and Hawaii 

5. Adjustment for IPFs with a Qualifying 

Emergency Department (ED) 

D. Other Payment Adjustments and 

Policies 

1. Outlier Payments 

a. Update to the Outlier Fixed Dollar Loss 

Threshold Amount 

b. Statistical Accuracy of Cost-to-Charge 

Ratios 

2. Expiration of the Stop-Loss Provision 

3. Future Refinements 

VII. Regulations Text Corrections 

VIII. Collection of Information Requirements 

IX. Regulatory Impact Analysis 

Regulations Text 

Addenda 

Acronyms 

Because of the many terms to which 

we refer by acronym in this final rule, 

we are listing the acronyms used and 

their corresponding meanings in 

alphabetical order below: 

BBRA Medicare, Medicaid and SCHIP 

[State Children’s Health Insurance 

Program] Balanced Budget Refinement Act 

of 1999, (Pub. L. 106–113) 

CBSA Core-Based Statistical Area 

CCR Cost-to-charge ratio 

CAH Critical access hospital 

DSM–IV–TR Diagnostic and Statistical 

Manual of Mental Disorders Fourth 

Edition—Text Revision 

DRGs Diagnosis-related groups 

FY Federal fiscal year (October 1 through 

September 30) 

ICD–9–CM International Classification of 

Diseases, 9th Revision, Clinical 

Modification 

IPFs Inpatient psychiatric facilities 

IRFs Inpatient rehabilitation facilities 

LTCHs Long-term care hospitals 

MedPAR Medicare provider analysis and 

review file 

RPL Rehabilitation, Psychiatric, and LongTerm Care 

RY Rate Year (July 1 through June 30) 

TEFRA Tax Equity and Fiscal 

Responsibility Act of 1982, (Pub. L. 97– 

248) 

I. Background 

A. Annual Requirements for Updating 

the IPF PPS 

In November 2004, we implemented 

the inpatient psychiatric facilities (IPF) 

prospective payment system (PPS) in a 

final rule that appeared in the 

November 15, 2004 Federal Register (69 

FR 66922). In developing the IPF PPS, 

in order to ensure that the IPF PPS is 

able to account adequately for each 

IPF’s case-mix, we performed an 


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extensive regression analysis of the 

relationship between the per diem costs 

and certain patient and facility 

characteristics to determine those 

characteristics associated with 

statistically significant cost differences 

on a per diem basis. For characteristics 

with statistically significant cost 

differences, we used the regression 

coefficients of those variables to 

determine the size of the corresponding 

payment adjustments. 

In that final rule, we explained that 

we believe it is important to delay 

updating the adjustment factors derived 

from the regression analysis until we 

have IPF PPS data that includes as 

much information as possible regarding 

the patient-level characteristics of the 

population that each IPF serves. 

Therefore, we indicated that we did not 

intend to update the regression analysis 

and recalculate the Federal per diem 

base rate and the patient- and facilitylevel adjustments until we complete 

that analysis. Until that analysis is 

complete, we stated our intention to 

publish a notice in the Federal Register 

each spring to update the IPF PPS (71 

FR 27041). However, in this final rule, 

we are changing the payment rate 

update period to a rate year (RY) that 

coincides with a fiscal year (FY) update. 

Therefore, future update notices will be 

published in the Federal Register in the 

summer. We discuss this change in 

more detail in section III of this final 

rule. 

Updates to the IPF PPS as specified in 

42 CFR § 412.428 include the following: 

• A description of the methodology 

and data used to calculate the updated 

Federal per diem base payment amount. 

• The rate of increase factor as 

described in § 412.424(a)(2)(iii), which 

is based on the Excluded Hospital With 

Capital market basket under the update 

methodology of section 1886(b)(3)(B)(ii) 

of the Social Security Act (the Act) for 

each year (effective from the 

implementation period until June 30, 

2006). 

• For discharges occurring on or after 

July 1, 2006, the rate of increase factor 

for the Federal portion of the IPF’s 

payment, which is based on the 

Rehabilitation, Psychiatric, and LongTerm Care (RPL) market basket. 

• The best available hospital wage 

index and information regarding 

whether an adjustment to the Federal 

per diem base rate is needed to maintain 

budget neutrality. 

• Updates to the fixed dollar loss 

threshold amount in order to maintain 

the appropriate outlier percentage. 

• Description of the International 

Classification of Diseases, 9th Revision, 

Clinical Modification (ICD–9–CM) 

coding and diagnosis-related groups 

(DRGs) classification changes discussed 

in the annual update to the hospital 

inpatient prospective payment system 

(IPPS) regulations. 

• Update to the electroconvulsive 

therapy (ECT) payment by a factor 

specified by CMS. 

• Update to the national urban and 

rural cost-to-charge ratio medians and 

ceilings. 

• Update to the cost of living 

adjustment factors for IPFs located in 

Alaska and Hawaii, if appropriate. 

Our most recent IPF PPS annual 

update occurred in the April 30, 2010 

Federal Register notice (75 FR 23106) 

(hereinafter referred to as the April 2010 

IPF PPS notice) that set forth updates to 

the IPF PPS payment rates for RY 2011. 

This notice updated the IPF PPS per 

diem payment rates that were published 

in the May 2009 IPF PPS notice in 

accordance with our established 

policies. 

Since implementation of the IPF PPS, 

we have explained that we believe it is 

important to delay updating the 

adjustment factors derived from the 

regression analysis until we have IPF 

PPS data that include as much 

information as possible regarding the 

patient-level characteristics of the 

population that each IPF serves. Since 

we are now approximately 5 years into 

the system, we believe that we have 

enough data to begin that process. 

Therefore, we have begun the necessary 

analysis in order to make future 

refinements. While we did not propose 

to make refinements in this rulemaking, 

as explained in section V.D.3 below, we 

believe that in the next rulemaking, for 

FY 2013, we will be ready to propose 

potential refinements. 

B. Overview of the Legislative 

Requirements of the IPF PPS 

Section 124 of the Medicare, 

Medicaid, and SCHIP (State Children’s 

Health Insurance Program) Balanced 

Budget Refinement Act of 1999 (BBRA) 

(Pub. L. 106–113) required 

implementation of the IPF PPS. 

Specifically, section 124 of the BBRA 

mandated that the Secretary develop a 

per diem PPS for inpatient hospital 

services furnished in psychiatric 

hospitals and psychiatric units that 

includes an adequate patient 

classification system that reflects the 

differences in patient resource use and 

costs among psychiatric hospitals and 

psychiatric units. 

Section 405(g)(2) of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) extended the IPF PPS to 

distinct part psychiatric units of critical 

access hospitals (CAHs). 

To implement these provisions, we 

published various proposed and final 

rules in the Federal Register. For more 

information regarding these rules, see 

the CMS Web site http:// 

www.cms.hhs.gov/ 

InpatientPsychFacilPPS/. 

Section 3401(f) of the Patient 

Protection and Affordable Care Act 

(Pub. L. 111–148) as amended by 

section 10319(e) of that Act and by 

section 1105(d) of the Health Care and 

Education Reconciliation Act of 2010 

(Pub. L. 111–152) (hereafter referred to 

as ‘‘The Affordable Care Act’’) added 

subsection (s) to section 1886 of the Act. 

Section 1886(s)(1) is titled ‘‘Reference 

to Establishment and Implementation of 

System’’ and it refers to section 124 of 

the Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 

1999, which relates to the establishment 

of the IPF PPS. 

Section 1886(s)(2)(A)(i) of the Act 

requires the application of the 

productivity adjustment described in 

section 1886(b)(3)(B)(xi)(II) of the Act to 

the IPF PPS for the RY beginning in 

2012 and each subsequent RY. Section 

1886(s)(2)(A)(ii) of the Act requires the 

application of an ‘‘other adjustment’’ 

that reduces any update to an IPF PPS 

base rate by percentages specified in 

section 1886(s)(3) of the Act for rate 

years beginning in 2010 through the RY 

beginning in 2019. For the RY beginning 

in 2011, the reduction is 0.25 percentage 

point. We are implementing that 

provision for RY 2012 in this RY 2012 

IPF PPS final rule. 

Section 1886(s)(4) of the Act requires 

the establishment of a quality data 

reporting program for the IPF PPS 

beginning in RY 2014. 

C. General Overview of the IPF PPS 

The November 2004 IPF PPS final 

rule (69 FR 66922) established the IPF 

PPS, as authorized under section 124 of 

the BBRA and codified at subpart N of 

part 412 of the Medicare regulations. 

The November 2004 IPF PPS final rule 

set forth the per diem Federal rates for 

the implementation year (the 18-month 

period from January 1, 2005 through 

June 30, 2006), and it provided payment 

for the inpatient operating and capital 

costs to IPFs for covered psychiatric 

services they furnish (that is, routine, 

ancillary, and capital costs, but not costs 

of approved educational activities, bad 

debts, and other services or items that 

are outside the scope of the IPF PPS). 

Covered psychiatric services include 

services for which benefits are provided 

under the fee-for-service Part A 


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(Hospital Insurance Program) Medicare 

program. 

The IPF PPS established the Federal 

per diem base rate for each patient day 

in an IPF derived from the national 

average daily routine operating, 

ancillary, and capital costs in IPFs in FY 

2002. The average per diem cost was 

updated to the midpoint of the first year 

under the IPF PPS, standardized to 

account for the overall positive effects of 

the IPF PPS payment adjustments, and 

adjusted for budget neutrality. 

The Federal per diem payment under 

the IPF PPS is comprised of the Federal 

per diem base rate described above and 

certain patient- and facility-level 

payment adjustments that were found in 

the regression analysis to be associated 

with statistically significant per diem 

cost differences. 

The patient-level adjustments include 

age, DRG assignment, comorbidities, 

and variable per diem adjustments to 

reflect higher per diem costs in the early 

days of an IPF stay. Facility-level 

adjustments include adjustments for the 

IPF’s wage index, rural location, 

teaching status, a cost of living 

adjustment for IPFs located in Alaska 

and Hawaii, and presence of a 

qualifying emergency department (ED). 

The IPF PPS provides additional 

payment policies for: Outlier cases; 

stop-loss protection (which was 

applicable only during the IPF PPS 

transition period); interrupted stays; and 

a per treatment adjustment for patients 

who undergo ECT. 

A complete discussion of the 

regression analysis appears in the 

November 2004 IPF PPS final rule 

(69 FR 66933 through 66936). 

Section 124 of BBRA does not specify 

an annual update rate strategy for the 

IPF PPS and is broadly written to give 

the Secretary discretion in establishing 

an update methodology. Therefore, in 

the November 2004 IPF PPS final rule, 

we implemented the IPF PPS using the 

following update strategy: 

• Calculate the final Federal per diem 

base rate to be budget neutral for the 

18-month period of January 1, 2005 

through June 30, 2006. 

• Use a July 1 through June 30 annual 

update cycle. 

• Allow the IPF PPS first update to be 

effective for discharges on or after July 

1, 2006 through June 30, 2007. 

D. Transition Period for Implementation 

of the IPF PPS 

In the November 2004 IPF PPS final 

rule, we provided for a 3-year transition 

period. During this 3-year transition 

period, an IPF’s total payment under the 

PPS was based on an increasing 

percentage of the Federal rate with a 

corresponding decreasing percentage of 

the IPF PPS payment that is based on 

reasonable cost concepts. However, 

effective for cost reporting periods 

beginning on or after January 1, 2008, 

IPF PPS payments are based on 100 

percent of the Federal rate. 

II. Provisions of the Proposed Rule and 

Responses to Public Comments 

On January 27, 2011, we published a 

proposed rule that appeared in the 

Federal Register (76 FR 4998) entitled, 

‘‘Inpatient Psychiatric Facilities 

Prospective Payment System—Update 

for Rate Year Beginning July 1, 2011 (RY 

2012).’’ The January 2011 proposed rule 

(hereinafter referred to as the RY 2012 

IPF PPS proposed rule) set forth the 

proposed annual update to the proposed 

PPS for IPFs for discharges occurring 

during the RY beginning July 1, 2011. 

In addition to the annual rate update, 

we proposed to— 

• Switch the annual update period for 

the IPF PPS from a RY that begins on 

July 1 and goes through June 30 to one 

that coincides with a FY, that is, that 

begins on October 1 and goes through 

September 30. For the update period 

that begins in 2012, that is, FY 2013, we 

would refer to the update period as a 

FY. In order to make this switch, we 

proposed that RY 2012 be a 15-month 

period, from July 1, 2011 through 

September 30, 2012. 

• Rebase and revise the FY 2002- 

based RPL market basket to a FY 2008- 

based RPL market basket. Apply a 0.25 

percentage point reduction to the 

market basket update as required by 

section 1886(s)(3) of the Act. 

• Adopt IPF policies similar to such 

IPPS graduate medical education (GME) 

policies providing for temporary 

adjustments to an IPF’s FTE cap to 

reflect residents added due to the 

closure of an IPF or an IPF’s residency 

training program. 

• Update the fixed dollar loss 

threshold amount in order to maintain 

the appropriate outlier percentage. 

• Update the ECT adjustment by a 

factor specified by CMS. 

• Update the national urban and rural 

cost-to-charge ratio medians and 

ceilings. 

• Update the cost of living adjustment 

factors for IPFs located in Alaska and 

Hawaii, if appropriate. 

• Describe the ICD–9–CM and MS– 

DRG classification changes discussed in 

the annual update to the hospital 

inpatient prospective payment system 

regulations. 

• Use the best available hospital wage 

index and information regarding 

whether an adjustment to the Federal 

per diem base rate is needed to maintain 

budget neutrality. 

• Retain the 17 percent adjustment 

for IPFs located in rural areas, the 1.31 

adjustment for IPFs with a qualifying 

ED, the 0.5150 teaching adjustment to 

the Federal per diem rate, and the MS– 

DRG adjustment factor currently being 

paid to IPFs for RY 2011. 

• Update the MS–DRG listing and 

comorbidity categories to reflect the 

ICD–9–CM revisions effective October 1, 

2010. 

In addition, we proposed to make 

clarifying changes to the regulations 

text. We noted that these proposed 

changes would not impact policy. 

We provided for a 60 day comment 

period on the RY 2012 IPF PPS 

proposed rule. We received 12 public 

comments from hospital associations 

and psychiatric hospitals and units. In 

general, many of the commenters 

strongly supported our proposed policy 

changes, including changes to the 

payment rate update cycle and the 

teaching policy. A few commenters 

expressed concern regarding the 

proposed decrease in the labor-related 

share. Several commenters 

recommended that we explore the 

creation of an inpatient rehabilitation 

and psychiatric facilities (RP) market 

basket. Summaries of the public 

comments received and our responses to 

those comments are provided in the 

appropriate sections in the preamble of 

this final rule. 

III. Changing the IPF PPS Payment Rate 

Update Period From a Rate Year to a 

Fiscal Year 

In the RY 2012 IPF PPS proposed 

rule, we proposed to change the current 

period for the annual updates of the IPF 

PPS Federal payment rates. Specifically, 

we proposed to revise the IPF PPS 

payment rate update period by 

switching from a RY that begins on July 

1 and goes through June 30 to a period 

that coincides with a FY, that is, 

October 1 through September 30. We 

proposed to refer to the update period 

as a FY beginning with the update 

period that begins in 2012, that is, FY 

2013. We specified that this change in 

the annual update period would allow 

us to consolidate Medicare publications 

by aligning the IPF PPS update with the 

annual update of the ICD–9–CM codes, 

which are effective on October 1 of each 

year. Currently, in addition to our 

annual proposed and final rulemaking 

documents, we publish a change request 

transmittal every August updating the 

ICD–9–CM codes related to the DRG and 

comorbidity adjustments. By proposing 

to align the IPF PPS with the same 

update period as the ICD–9–CM codes, 


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we aimed to eliminate the need to 

publish a transmittal off-cycle. 

We maintain the same diagnostic 

coding and DRG classification for IPFs 

that are used under the IPPS for 

providing the psychiatric care. When 

the IPF PPS was implemented, we 

adopted the same diagnostic code set 

and DRG patient classification systems 

(that is, the CMS DRGs) that were 

utilized at the time under the hospital 

IPPS. Every year, changes to the ICD–9– 

CM coding system are addressed in the 

IPPS proposed and final rules. These 

changes are effective October 1 of each 

year and must be used by acute care 

hospitals as well as other providers to 

report diagnostic and procedure 

information. The IPF PPS has always 

incorporated ICD–9–CM coding changes 

made in the annual IPPS update. This 

proposed change to the annual payment 

rate update period would allow the 

annual update to the rates and the ICD– 

9–CM coding update to occur on the 

same schedule and appear in the same 

Federal Register document. 

Our intent in making the change in 

the payment rate update schedule is to 

place the IPF PPS on the same update 

cycle as other PPSs, making it 

administratively efficient. In order to 

smoothly transition to a payment update 

period that runs from October 1 through 

September 30, we proposed that the RY 

2012 period run from July 1, 2011 to 

September 30, 2012 such that RY 2012 

would be 15 months. As proposed and 

for this final rule, after RY 2012, the rate 

update period for the IPF PPS payment 

rates and other policy changes will 

begin on October 1 and go through 

September 30. The next update to the 

IPF PPS rates after RY 2012 would be 

the FY 2013 update cycle, which will 

begin on October 1, 2012 and go through 

September 30, 2013. In addition, we 

proposed to make a change to the 

regulations at § 412.402 to add the term 

‘‘IPF Prospective Payment System Rate 

Year’’ which would mean October 1 

through September 30. We proposed 

that the RY would be referred to as a FY. 

For a discussion of the proposed 

15-month market basket update for the 

proposed 2012 RY, we refer readers to 

the RY 2012 IPF PPS proposed rule 

(76 FR 4998). 

Public comments and our responses 

on the switch from a RY to a FY are 

summarized below. 

Comment: A few commenters 

supported moving the payment rate 

update period from a RY to a FY. They 

supported a 15-month update for RY 

2012 in order to transition to a FY 

update period. 

Response: We appreciate the 

commenters’ support to move the IPF 

PPS payment rate update period to a 

period that begins on October 1 and 

goes through the following September, 

with a 15-month update for RY 2012 in 

order to transition to a FY. We are 

adopting as final, without modification, 

the proposal to revise the IPF PPS 

payment period to a FY with a 15- 

month update for RY 2012 in order to 

transition to a FY update period. 

Final Rule Action: In summary, for RY 

2012, we are revising the IPF PPS 

payment rate update period by 

switching the RY period from July 1 

through June 30 to a period that 

coincides with a FY. In order to 

transition to a FY update period, RY 

2012 is a 15-month period. We are also 

making a change to § 412.402 to add the 

term ‘‘IPF Prospective Payment System 

Rate Year’’ which means October 1 

through September 30 will be referred to 

as a Fiscal year. 

IV. Rebasing and Revising of the 

Rehabilitation, Psychiatric, and LongTerm Care (RPL) Market Basket for 

Inpatient Psychiatric Facilities 

A. Background 

The input price index (that is, the 

market basket) that was used to develop 

the IPF PPS was the Excluded Hospital 

with Capital market basket. This market 

basket was based on 1997 Medicare cost 

report data and included data for 

Medicare participating IPFs, inpatient 

rehabilitation facilities (IRFs), long-term 

care hospitals (LTCHs), cancer 

hospitals, and children’s hospitals. 

Although ‘‘market basket’’ technically 

describes the mix of goods and services 

used in providing hospital care, this 

term is also commonly used to denote 

the input price index (that is, cost 

category weights and price proxies 

combined) derived from that market 

basket. Accordingly, the term ‘‘market 

basket’’ as used in this document refers 

to a hospital input price index. 

Beginning with the May 2006 IPF PPS 

final rule (71 FR 27046 through 27054), 

IPF PPS payments were updated using 

a FY 2002-based market basket 

reflecting the operating and capital cost 

structures for IRFs, IPFs, and LTCHs 

(hereafter referred to as the 

Rehabilitation, Psychiatric, and LongTerm Care (RPL) market basket). 

We excluded cancer and children’s 

hospitals from the RPL market basket 

because these hospitals are not 

reimbursed through a PPS; rather, their 

payments are based entirely on 

reasonable costs subject to rate-ofincrease limits established under the 

authority of section 1886(b) of the Act, 

which are implemented in regulations at 

§ 413.40. Moreover, the FY 2002 cost 

structures for cancer and children’s 

hospitals are noticeably different than 

the cost structures of the IRFs, IPFs, and 

LTCHs. A complete discussion of the FY 

2002-based RPL market basket appears 

in the May 2006 IPF PPS final rule (71 

FR 27046 through 27054). 

In the May 1, 2009 IPF PPS notice (74 

FR 20362), we expressed our interest in 

exploring the possibility of creating a 

stand-alone IPF market basket that 

reflects the cost structures of only IPF 

providers. We noted that, of the 

available options, one would be to join 

the Medicare cost report data from 

freestanding IPF providers (presently 

incorporated into the FY 2002-based 

RPL market basket) with data from 

hospital-based IPF providers. We 

indicated that an examination of the 

Medicare cost report data comparing 

freestanding and hospital-based IPFs 

revealed considerable differences 

between the two with respect to cost 

levels and cost structures. At that time, 

we were unable to fully understand the 

differences between these two types of 

IPF providers. As a result, we felt that 

further research was required and we 

solicited public comment for additional 

information that might help us to better 

understand the reasons for the 

variations in costs and cost structures, 

as indicated by the cost report data, 

between freestanding and hospitalbased IPFs (74 FR 20376). 

We summarized the public comments 

we received and our responses in the 

April 2010 IPF PPS notice (75 FR 23111 

through 23113). Despite receiving 

comments from the public on this issue, 

we remain unable to sufficiently 

understand the observed differences in 

costs and cost structures between 

hospital-based and freestanding IPFs, 

and therefore we do not feel it is 

appropriate at this time to incorporate 

data from hospital-based IPFs with 

those of freestanding IPFs to create a 

stand-alone IPF market basket. 

Although we do not feel it would be 

appropriate to propose a stand-alone IPF 

market basket, we are currently 

exploring the viability of creating two 

separate market baskets from the current 

RPL, one of which would include 

freestanding IPFs and freestanding IRFs 

and would be used to update payments 

under both the IPF and IRF payment 

systems. The other would be a standalone LTCH market basket. Depending 

on the outcome of our research, we 

anticipate the possibility of proposing a 

rehabilitation and psychiatric (RP) 

market basket in the next update cycle. 

In the RY 2012 IPF PPS proposed rule, 

we welcomed public comment on the 

possibility of using this type of market 


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basket to update IPF payments in the 

future. 

For this update cycle, we proposed to 

rebase and revise the FY 2002-based 

RPL market basket by creating a 

proposed FY 2008-based RPL market 

basket. For this RY 2012 IPF PPS final 

rule, we are finalizing the FY 2008- 

based RPL market basket as proposed. In 

the following section, we provide an 

overview of the market basket and 

describe the methodologies we 

proposed to use, and are finalizing in 

this final rule, for purposes of 

determining the operating and capital 

portions of the FY 2008-based RPL 

market basket. 

Public comments and our responses 

on the rebasing and revising of the RPL 

market basket for IPFs are summarized 

below. 

Comment: One commenter, while 

generally supporting use of the RPL 

market basket at the time of 

implementation, stated that it has its 

limitations, and recommended that CMS 

explore the creation of an RP market 

basket. Several commenters supported 

CMS’ efforts to determine if a separate 

market basket for inpatient psychiatric 

and rehabilitation facilities is 

appropriate. 

Response: CMS will continue its 

efforts to investigate the viability of an 

alternative market basket to update IPF 

providers. Any possible changes to the 

market basket used to update IPF 

payments would appear in a future 

rulemaking and be subject to public 

comment. 

Comment: Several commenters 

expressed concern regarding a recent 

trend in facility closures of hospitalbased IPFs and stated that hospitalbased IPF facilities are a vital 

component in preserving access to care 

for patients suffering from mental 

illness, particularly those who have 

coexisting physical conditions or 

experience a crisis and enter the 

emergency department for treatment. 

Therefore, the commenters 

recommended that CMS continue 

exploring reasons behind the differences 

in costs and cost structures between 

freestanding and hospital-based 

providers. 

Response: We are continuing to 

analyze the Medicare cost report data in 

order to better understand the 

differences between freestanding and 

hospital-based IPF providers. 

B. Overview of the FY 2008-Based RPL 

Market Basket 

The FY 2008-based RPL market basket 

is a fixed weight, Laspeyres-type price 

index. A Laspeyres price index 

measures the change in price, over time, 

of the same mix of goods and services 

purchased in the base period. Any 

changes in the quantity or mix of goods 

and services (that is, intensity) 

purchased over time are not measured. 

The index itself is constructed in 

three steps. First, a base period is 

selected (in this final rule, the base 

period is FY 2008) and total base period 

expenditures are estimated for a set of 

mutually exclusive and exhaustive 

spending categories with the proportion 

of total costs that each category 

represents being calculated. These 

proportions are called cost or 

expenditure weights. Second, each 

expenditure category is matched to an 

appropriate price or wage variable, 

referred to as a price proxy. In nearly 

every instance, these price proxies are 

derived from publicly available 

statistical series that are published on a 

consistent schedule (preferably at least 

on a quarterly basis). Finally, the 

expenditure weight for each cost 

category is multiplied by the level of its 

respective price proxy. The sum of these 

products (that is, the expenditure 

weights multiplied by their price levels) 

for all cost categories yields the 

composite index level of the market 

basket in a given period. Repeating this 

step for other periods produces a series 

of market basket levels over time. 

Dividing an index level for a given 

period by an index level for an earlier 

period produces a rate of growth in the 

input price index over that timeframe. 

As noted above, the market basket is 

described as a fixed-weight index 

because it represents the change in price 

over time of a constant mix (quantity 

and intensity) of goods and services 

needed to furnish hospital services. The 

effects on total expenditures resulting 

from changes in the mix of goods and 

services purchased subsequent to the 

base period are not measured. For 

example, a hospital hiring more nurses 

to accommodate the needs of patients 

would increase the volume of goods and 

services purchased by the hospital, but 

would not be factored into the price 

change measured by a fixed-weight 

hospital market basket. Only when the 

index is rebased would changes in the 

quantity and intensity be captured, with 

those changes being reflected in the cost 

weights. Therefore, we rebase the 

market basket periodically so the cost 

weights reflect recent changes in the 

mix of goods and services that hospitals 

purchase (hospital inputs) to furnish 

inpatient care between base periods. 

C. Rebasing and Revising of the RPL 

Market Basket 

In the RY 2012 IPF PPS proposed 

rule, we proposed to rebase and revise 

the market basket used to update the IPF 

PPS. We solicited public comments on 

our proposed methodological changes to 

the RPL market basket. We did not 

receive any specific comments on these 

proposed changes. Therefore, we are 

finalizing the methodology for 

calculating the rebased and revised FY 

2008-based market basket as proposed. 

The methodology is described in more 

detail below. 

The terms ‘‘rebasing’’ and ‘‘revising,’’ 

while often used interchangeably, 

actually denote different activities. 

‘‘Rebasing’’ means moving the base year 

for the structure of costs of an input 

price index (for example, in this final 

rule, we are shifting the base year cost 

structure for the RPL market basket from 

FY 2002 to FY 2008). ‘‘Revising’’ means 

changing data sources, price proxies, or 

methods, used to derive the input price 

index. 

1. Development of Cost Categories and 

Weights 

a. Medicare Cost Reports 

As proposed, and in this final rule, 

the FY 2008-based RPL market basket 

consists of several major cost categories 

derived from the FY 2008 Medicare cost 

reports for freestanding IRFs, 

freestanding IPFs, and LTCHs, including 

wages and salaries, pharmaceuticals, 

professional liability insurance, capital, 

and a residual. These FY 2008 cost 

reports include providers whose cost 

reporting periods began on or after 

October 1, 2007 and before October 1, 

2008. We choose to use FY 2008 as the 

base year because we believe that the 

Medicare cost reports for this year 

represent the most recent, complete set 

of Medicare cost report data available 

for IRFs, IPFs, and LTCHs. However, for 

the FY 2008 cost reports, IRFs, IPFs, and 

LTCHs were not required to complete 

the Medicare cost report worksheet for 

benefits and contract labor (Worksheet 

S–3, part II). As a result, less than 30 

percent of providers reported data for 

these categories, and we do not expect 

these FY 2008 data to improve over 

time. Furthermore, the issue of 

incomplete Medicare cost report data for 

benefits and contract labor also existed 

when we finalized the FY 2002-based 

RPL market basket, since, at that time, 

IRFs, IPFs and LTCHs were not required 

to submit data for Worksheet S–3, part 

II in the FY 2002 cost reporting year. 

Due to the incomplete benefits and 

contract labor data for IRFs, IPFs, and 

LTCHs, for these cost weights, rather 

than using IRF/IPF/LTCH cost report 

data, we instead used FY 2008 IPPS 

hospital cost report data (similar to the 

method that was used for the FY 2002- 


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based RPL market basket). Additional 

detail is provided later in this section. 

Since our goal is to measure cost 

shares that are reflective of case mix and 

practice patterns associated with 

providing services to Medicare 

beneficiaries, we limited our selection 

of Medicare cost reports to those from 

hospitals that have a Medicare average 

length of stay (LOS) that is within a 

comparable range of their total facility 

average LOS. We believe this provides 

a more accurate reflection of the 

structure of costs for Medicare covered 

days. We used the cost reports of IRFs 

and LTCHs with Medicare average LOS 

within 15 percent (that is, 15 percent 

higher or lower) of the total facility 

average LOS for the hospital. This is the 

same edit applied to derive the FY 2002- 

based RPL market basket and generally 

includes those LTCHs and IRFs with 

Medicare LOS within approximately 

5 days of the facility average LOS of the 

hospital. 

We used a less stringent measure of 

Medicare LOS for IPFs. For this 

provider-type, and in order to produce 

a robust sample size, we used those 

facilities’ Medicare cost reports whose 

average LOS is within 30 or 50 percent 

(depending on the total facility average 

LOS) of the total facility average LOS. 

This is the same edit applied to derive 

the FY 2002-based RPL market basket. 

We applied these LOS edits to first 

obtain a set of cost reports for facilities 

that have a Medicare LOS within a 

comparable range of their total facility 

LOS. Using this set of Medicare cost 

reports, we then calculated cost weights 

for four cost categories directly from the 

FY 2008 Medicare cost reports for 

freestanding IRFs, freestanding IPFs, 

and LTCHs (found in Table 1 below). 

These Medicare cost report cost weights 

were then supplemented with 

information obtained from other data 

sources (explained in more detail 

below) to derive the final FY 2008-based 

RPL market basket cost weights. 

TABLE 1—MAJOR COST CATEGORIES

AND THEIR RESPECTIVE COST

WEIGHTS AS CALCULATED DIRECTLY

FROM FY 2008 MEDICARE COST

REPORTS

Major cost categories 

FY 2008– 

based 

RPL 

market 

basket 

(percent) 

Wages and salaries ...................... 47.371 

Professional Liability Insurance 

(Malpractice) ............................. 0.764 

Pharmaceuticals ........................... 6.514 

Capital ........................................... 8.392 

TABLE 1—MAJOR COST CATEGORIES

AND THEIR RESPECTIVE COST

WEIGHTS AS CALCULATED DIRECTLY

FROM FY 2008 MEDICARE COST

REPORTS—Continued 

Major cost categories 

FY 2008– 

based 

RPL 

market 

basket 

(percent) 

All other ........................................ 36.959 

b. Other Data Sources 

In addition to the IRF, IPF and LTCH 

Medicare cost reports for freestanding 

IRFs and freestanding IPFs, and LTCHs, 

the other data sources we used to 

develop the FY 2008-based RPL market 

basket cost weights were the FY 2008 

IPPS Medicare cost reports and the 2002 

Benchmark Input-Output (I–O) Tables 

created by the Bureau of Economic 

Analysis (BEA), U.S. Department of 

Commerce. The FY 2008 Medicare cost 

reports include providers whose cost 

reporting periods began on or after 

October 1, 2007 and before October 1, 

2008. 

As noted above, the FY 2008-based 

RPL cost weights for benefits and 

contract labor were derived using FY 

2008-based IPPS Medicare cost reports. 

We used these Medicare cost reports to 

calculate cost weights for Wages and 

Salaries, Benefits, and Contract Labor 

for IPPS hospitals for FY 2008. For the 

Benefits cost weight for the FY 2008- 

based RPL market basket, the ratio of the 

FY 2008 IPPS Benefits cost weight to the 

FY 2008 IPPS Wages and Salaries cost 

weight was applied to the RPL Wages 

and Salaries cost weight. Similarly, the 

ratio of the FY 2008 IPPS Contract Labor 

cost weight to the FY 2008 IPPS Wages 

and Salaries cost weight was applied to 

the RPL Wages and Salaries cost weight 

to derive a Contract Labor cost weight 

for the FY 2008-based RPL market 

basket. 

The All Other cost category is divided 

into other hospital expenditure category 

shares using the 2002 BEA Benchmark 

I–O data following the removal of the 

portions of the All Other cost category 

provided in Table 1 that are attributable 

to Benefits and Contract Labor. The BEA 

Benchmark I–O data are scheduled for 

publication every 5 years. The most 

recent data available are for 2002. BEA 

also produces Annual I–O estimates; 

however, the 2002 Benchmark I–O data 

represent a much more comprehensive 

and complete set of data that are derived 

from the 2002 Economic Census. The 

Annual I–O is simply an update of the 

Benchmark I–O tables. For the FY 2002- 

based RPL market basket, we used the 

1997 Benchmark I–O data. Therefore, 

we used the 2002 Benchmark I–O data 

in the FY 2008-based RPL market 

basket, and instead of using the less 

detailed Annual I–O data, we aged the 

2002 Benchmark I–O data forward to 

2008. The methodology we used to age 

the data forward involves applying the 

annual price changes from the 

respective price proxies to the 

appropriate cost categories. We repeated 

this practice for each year. 

The All Other cost category 

expenditure shares are determined as 

being equal to each category’s 

proportion to total ‘‘all other’’ in the aged 

2002 Benchmark I–O data. For instance, 

if the cost for telephone services 

represented 10 percent of the sum of the 

‘‘all other’’ Benchmark I–O hospital 

expenditures, then telephone services 

would represent 10 percent of the RPL 

market basket’s All Other cost category. 

2. Final Cost Category Computation 

As stated previously, for this rebasing 

we used the FY 2008 Medicare cost 

reports for IRFs, IPFs, and LTCHs to 

derive four major cost categories. The 

FY 2008-based RPL market basket 

includes two additional cost categories 

that were not broken out separately in 

the FY 2002-based RPL market basket: 

‘‘Administrative and Business Support 

Services’’ and ‘‘Financial Services’’. The 

inclusion of these two additional cost 

categories, which are derived using the 

Benchmark I–O data, is consistent with 

the addition of these two cost categories 

to the FY 2006-based IPPS market 

basket (74 FR 43845). We chose to break 

out both categories so we can better 

match their respective expenses with 

more appropriate price proxies. Also, 

the FY 2008-based RPL market basket 

excludes one cost category: Photo 

Supplies. The 2002 Benchmark I–O 

weight for this category is considerably 

smaller than the 1997 Benchmark I–O 

weight, presently accounting for less 

than one-tenth of one percentage point 

of the RPL market basket. Therefore, we 

included the photo supplies costs in the 

Chemical cost category weight with 

other similar chemical products. 

We did not change our definition of 

the labor-related share. However, we 

renamed our aggregate cost categories 

from ‘‘labor-intensive’’ and ‘‘nonlaborintensive’’ services to ‘‘labor-related’’ and 

‘‘nonlabor-related’’ services. This is 

consistent with the FY 2006-based IPPS 

market basket (74 FR 43845). As 

discussed in more detail below and 

similar to the FY 2002-based RPL 

market basket, we classify a cost 

category as labor-related and include it 

in the labor-related share if the cost 


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category is defined as being laborintensive and its cost varies with the 

local labor market. In previous 

regulations, we grouped cost categories 

that met both of these criteria into laborintensive services. We believe the new 

labels more accurately reflect the 

concepts that they are intended to 

convey. Therefore, we did not change 

our definition of the labor-related share 

because we continue to classify a cost 

category as labor-related if the costs are 

labor-intensive and vary with the local 

labor market. 

3. Selection of Price Proxies 

After computing the FY 2008 cost 

weights for the rebased RPL market 

basket, it was necessary to select 

appropriate wage and price proxies to 

reflect the rate of price change for each 

expenditure category. With the 

exception of the proxy for Professional 

Liability Insurance, all of the proxies for 

the operating portion of the FY 2008- 

based RPL market basket are based on 

Bureau of Labor Statistics (BLS) data 

and are grouped into one of the 

following BLS categories: 

Producer Price Indexes—Producer 

Price Indexes (PPIs) measure price 

changes for goods sold in markets other 

than the retail market. PPIs are 

preferable price proxies for goods and 

services that hospitals purchase as 

inputs because these PPIs better reflect 

the actual price changes faced by 

hospitals. For example, we use a special 

PPI for prescription drugs, rather than 

the Consumer Price Index (CPI) for 

prescription drugs, because hospitals 

generally purchase drugs directly from a 

wholesaler. The PPIs that we use 

measure price changes at the final stage 

of production. 

Consumer Price Indexes—Consumer 

Price Indexes (CPIs) measure change in 

the prices of final goods and services 

bought by the typical consumer. 

Because they may not represent the 

price faced by a producer, we used CPIs 

only if an appropriate PPI was not 

available, or if the expenditures were 

more similar to those faced by retail 

consumers in general rather than by 

purchasers of goods at the wholesale 

level. For example, the CPI for food 

purchased away from home is used as 

a proxy for contracted food services. 

Employment Cost Indexes— 

Employment Cost Indexes (ECIs) 

measure the rate of change in employee 

wage rates and employer costs for 

employee benefits per hour worked. 

These indexes are fixed-weight indexes 

and strictly measure the change in wage 

rates and employee benefits per hour. 

Appropriately, they are not affected by 

shifts in employment mix. 

We evaluated the price proxies using 

the criteria of reliability, timeliness, 

availability, and relevance. Reliability 

indicates that the index is based on 

valid statistical methods and has low 

sampling variability. Timeliness implies 

that the proxy is published regularly, 

preferably at least once a quarter. 

Availability means that the proxy is 

publicly available. Finally, relevance 

means that the proxy is applicable and 

representative of the cost category 

weight to which it is applied. The CPIs, 

PPIs, and ECIs selected meet these 

criteria. 

Table 2 sets forth the final FY 2008- 

based RPL market basket including cost 

categories, and their respective weights 

and price proxies. For comparison 

purposes, the corresponding FY 2002- 

based RPL market basket cost weights 

are listed, as well. For example, Wages 

and Salaries are 49.447 percent of total 

costs in the FY 2008-based RPL market 

basket compared to 52.895 percent for 

the FY 2002-based RPL market basket. 

Employee Benefits are 12.831 percent in 

the FY 2008-based RPL market basket 

compared to 12.982 percent for the FY 

2002-based RPL market basket. As a 

result, compensation costs (Wages and 

Salaries plus Employee Benefits) for the 

FY 2008-based RPL market basket are 

62.278 percent of total costs compared 

to 65.877 percent for the FY 2002-based 

RPL market basket. 

Following Table 2 is a summary 

outlining the choice of the proxies used 

for the operating portion of the FY 2008- 

based RPL market basket. The price 

proxies used for the capital portion are 

described in more detail in the capital 

methodology section (see section IV.c.4 

of this final rule). 

We note that the proxies for the 

operating portion of the FY 2008-based 

RPL market basket are the same as those 

used for the FY 2006-based IPPS 

operating market basket. Because these 

proxies meet our criteria of reliability, 

timeliness, availability, and relevance, 

we believe they are the best measures of 

price changes for the cost categories. For 

further discussion on the FY 2006-based 

IPPS market basket, see the IPPS final 

rule published in the Federal Register 

on August 27, 2009 (74 FR 43843). 

TABLE 2—FY 2008-BASED RPL MARKET BASKET COST CATEGORIES, WEIGHTS, AND PRICE PROXIES WITH FY 2002- 

BASED RPL MARKET BASKET COST WEIGHTS INCLUDED FOR COMPARISON

Cost categories 

FY 2002- 

based RPL 

market 

basket 

cost 

weights 

FY 2008- 

based RPL 

market 

basket 

cost 

weights 

FY 2008-based RPL market basket price proxies 

1. Compensation ................................................................. 65.877 62.278 

A. Wages and Salaries 1 .............................................. 52.895 49.447 ECI for Wages and Salaries, Civilian Hospital Workers. 

B. Employee Benefits 1 ................................................ 12.982 12.831 ECI for Benefits, Civilian Hospital Workers. 

2. Utilities ............................................................................. 0.656 1.578 

A. Electricity ................................................................. 0.351 1.125 PPI for Commercial Electric Power. 

B. Fuel, Oil, and Gasoline ........................................... 0.108 0.371 PPI for Petroleum Refineries. 

C. Water and Sewage ................................................. 0.197 0.082 CPI–U for Water & Sewerage Maintenance. 

3. Professional Liability Insurance ...................................... 1.161 0.764 CMS Hospital Professional Liability Insurance Premium 

Index. 

4. All Other Products and Services .................................... 22.158 26.988 

A. All Other Products ................................................... 13.325 15.574 

(1.) Pharmaceuticals ............................................. 5.103 6.514 PPI for Pharmaceutical Preparations for Human 

Use(Prescriptions). 

(2.) Food: Direct Purchases ................................. 0.873 2.959 PPI for Processed Foods & Feeds. 

(3.) Food: Contract Services ................................ 0.620 0.392 CPI–U for Food Away From Home. 

(4.) Chemicals 2 .................................................... 1.100 1.100 Blend of Chemical PPIs. 

(5.) Medical Instruments ....................................... 1.014 1.795 PPI for Medical, Surgical, and Personal Aid Devices.

(6.) Photographic Supplies ................................... 0.096 — 


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TABLE 2—FY 2008-BASED RPL MARKET BASKET COST CATEGORIES, WEIGHTS, AND PRICE PROXIES WITH FY 2002- 

BASED RPL MARKET BASKET COST WEIGHTS INCLUDED FOR COMPARISON—Continued 

Cost categories 

FY 2002- 

based RPL 

market 

basket 

cost 

weights 

FY 2008- 

based RPL 

market 

basket 

cost 

weights 

FY 2008-based RPL market basket price proxies 

(7.) Rubber and Plastics ....................................... 1.052 1.131 PPI for Rubber & Plastic Products. 

(8.) Paper and Printing Products .......................... 1.000 1.021 PPI for Converted Paper & Paperboard Products. 

(9.) Apparel ........................................................... 0.207 0.210 PPI for Apparel. 

(10.) Machinery and Equipment ........................... 0.297 0.106 PPI for Machinery & Equipment. 

(11.) Miscellaneous Products ............................... 1.963 0.346 PPI for Finished Goods less Food and Energy. 

B. All Other Services ................................................... 8.833 11.414 

(1.) Labor-related Services ................................... 5.111 4.681 

(a.) Professional Fees: Labor-related.3 ................ 2.892 2.114 ECI for Compensation for Professional and Related Occupations. 

(b.) Administrative and Business Support Services.4n/a 0.422 ECI for Compensation for Office and Administrative Services. 

(c.) All Other: Labor-Related Services 4 ............... 2.219 2.145 ECI for Compensation for Private Service Occupations. 

(2.) Nonlabor-Related Services ............................ 3.722 6.733 

(a.) Professional Fees: Nonlabor-Related 3 .......... n/a 4.211 ECI for Compensation for Professional and Related Occupations. 

(b.) Financial Services 5 ........................................ n/a 0.853 ECI for Compensation for Financial Activities. 

(c.) Telephone Services ........................................ 0.240 0.416 CPI–U for Telephone Services. 

(d.) Postage .......................................................... 0.682 0.630 CPI–U for Postage. 

(e.) All Other: Nonlabor-Related Services 5 .......... 2.800 0.623 CPI–U for All Items less Food and Energy. 

5. Capital-Related Costs ..................................................... 10.149 8.392 

A. Depreciation ............................................................ 6.187 5.519 

(1.) Fixed Assets ................................................... 4.250 3.286 BEA chained price index for nonresidential construction 

for hospitals and special care facilities—vintage 

weighted (26 years). 

(2.) Movable Equipment ....................................... 1.937 2.233 PPI for Machinery and Equipment—vintage weighted (11 

years). 

B. Interest Costs .......................................................... 2.775 1.954 

(1.) Government/Nonprofit .................................... 2.081 0.653 Average yield on domestic municipal bonds (Bond Buyer 

20 bonds)—vintage-weighted (26 years). 

(2.) For Profit ........................................................ 0.694 1.301 Average yield on Moody’s Aaa bonds—vintage-weighted 

(26 years). 

C. Other Capital-Related Costs ................................... 1.187 0.919 CPI–U for Residential Rent. 

Total ............................................................... 100.000 100.000 

Note: Detail may not add to total due to rounding. 1 Contract Labor is distributed to Wages and Salaries and Employee Benefits based on the share of total compensation that each category 

represents. 2To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gases, the PPI for Other Basic Inorganic 

Chemical Manufacturing, the PPI for Other Basic Organic Chemical Manufacturing, and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this proxy, see section IV.C.3.j. of the preamble of this final rule. 3The Professional Fees: Labor-related and Professional Fees: Nonlabor-related cost categories were included in one cost category called Professional Fees in the FY 2002-based RPL market basket. For more detail about how these new categories were derived, we refer readers to 

sections IV.C.6. of the preamble of this final rule, on the labor-related share. 4The Administrative and Business Support Services cost category was contained within All Other: Labor-intensive Services cost category in 

the FY 2002-based RPL market basket. The All Other: Labor-intensive Services cost category is renamed the All Other: Labor-related Services 

cost category for the FY 2008-based RPL market basket. 5The Financial Services cost category was contained within the All Other: Non-labor Intensive Services cost category in the FY 2002-based 

RPL market basket. The All Other: Non-labor Intensive Services cost category is renamed the All Other: Nonlabor-related Services cost category 

for the FY 2008-based RPL market basket. 

a. Wages and Salaries 

We use the ECI for Wages and Salaries 

for Hospital Workers (All Civilian) (BLS 

series code CIU1026220000000I) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

b. Employee Benefits 

We use the ECI for Employee Benefits 

for Hospital Workers (All Civilian) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

c. Electricity 

We use the PPI for Commercial 

Electric Power (BLS series code 

WPU0542) to measure the price growth 

of this cost category. This same proxy 

was used in the FY 2002-based RPL 

market basket. 

d. Fuel, Oil, and Gasoline 

For the FY 2002-based RPL market 

basket, this category only included 

expenses classified under North 

American Industry Classification 

System (NAICS) 21 (Mining). We 

proxied this category using the PPI for 

Commercial Natural Gas (BLS series 

code WPU0552). For the FY 2008-based 

market basket, we added costs to this 

category that had previously been 

grouped in other categories. The added 

costs include petroleum-related 

expenses under NAICS 324110 

(previously captured in the 

miscellaneous category), as well as 

petrochemical manufacturing classified 

under NAICS 325110 (previously 

captured in the chemicals category). 

These added costs represent 80 percent 


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26440 Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 

of the hospital industry’s fuel, oil, and 

gasoline expenses (or 80 percent of this 

category). Because the majority of the 

industry’s fuel, oil, and gasoline 

expenses originate from petroleum 

refineries (NAICS 324110), we use the 

PPI for Petroleum Refineries (BLS series 

code PCU324110324110) as the proxy 

for this cost category. 

e. Water and Sewage 

We use the CPI for Water and 

Sewerage Maintenance (All Urban 

Consumers) (BLS series code 

CUUR0000SEHG01) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

f. Professional Liability Insurance 

We proxy price changes in hospital 

professional liability insurance 

premiums (PLI) using percentage 

changes as estimated by the CMS 

Hospital Professional Liability Index. To 

generate these estimates, we collect 

commercial insurance premiums for a 

fixed level of coverage while holding 

nonprice factors constant (such as a 

change in the level of coverage). This 

method is also used to proxy PLI price 

changes in the Medicare Economic 

Index (75 FR 73268). This same proxy 

was used in the FY 2002-based RPL 

market basket. 

g. Pharmaceuticals 

We use the PPI for Pharmaceuticals 

for Human Use, Prescription (BLS series 

code WPUSI07003) to measure the price 

growth of this cost category. We note 

that we are not making a change to the 

PPI that is used to proxy this cost 

category. There was a recent change to 

the BLS naming convention for this 

series; however this is the same proxy 

that was used in the FY 2002-based RPL 

market basket. 

h. Food: Direct Purchases 

We use the PPI for Processed Foods 

and Feeds (BLS series code WPU02) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

i. Food: Contract Services 

We use the CPI for Food Away From 

Home (All Urban Consumers) (BLS 

series code CUUR0000SEFV) to measure 

the price growth of this cost category. 

This same proxy was used in the FY 

2002-based RPL market basket. 

j. Chemicals 

We use a blended PPI composed of 

the PPI for Industrial Gas Manufacturing 

(NAICS 325120) (BLS series code 

PCU325120325120P), the PPI for Other 

Basic Inorganic Chemical 

Manufacturing (NAICS 325180) (BLS 

series code PCU32518–32518–), the PPI 

for Other Basic Organic Chemical 

Manufacturing (NAICS 325190) (BLS 

series code PCU32519–32519–), and the 

PPI for Soap and Cleaning Compound 

Manufacturing (NAICS 325610) (BLS 

series code PCU32561–32561–). Using 

the 2002 Benchmark I–O data, we found 

that these NAICS industries accounted 

for approximately 90 percent of the 

hospital industry’s chemical expenses. 

Therefore, we use this blended index 

because we believe its composition 

better reflects the composition of the 

purchasing patterns of hospitals than 

does the PPI for Industrial Chemicals 

(BLS series code WPU061), the proxy 

used in the FY 2002-based RPL market 

basket. Table 3 below shows the weights 

for each of the four PPIs used to create 

the blended PPI, which we determined 

using the 2002 Benchmark I–O data. 

TABLE 3—BLENDED CHEMICAL PPI WEIGHTS

Name Weights 

(in percent) NAICS 

PPI for Industrial Gas Manufacturing ...................................................................................................................... 35 325120 

PPI for Other Basic Inorganic Chemical Manufacturing ......................................................................................... 25 325180 

PPI for Other Basic Organic Chemical Manufacturing ............................................................................................ 30 325190 

PPI for Soap and Cleaning Compound Manufacturing ........................................................................................... 10 325610 

k. Medical Instruments 

We use the PPI for Medical, Surgical, 

and Personal Aid Devices (BLS series 

code WPU156) to measure the price 

growth of this cost category. In the 1997 

Benchmark I–O data, approximately half 

of the expenses classified in this 

category were for surgical and medical 

instruments. Therefore, we used the PPI 

for Surgical and Medical Instruments 

and Equipment (BLS series code 

WPU1562) to proxy this category in the 

FY 2002-based RPL market basket. The 

2002 Benchmark I–O data show that 

surgical and medical instruments now 

represent only 33 percent of these 

expenses and that the largest expense 

category is surgical appliance and 

supplies manufacturing (corresponding 

to BLS series code WPU1563). Due to 

this reallocation of costs over time, we 

use as the price proxy for this cost 

category the more aggregated PPI for 

Medical, Surgical, and Personal Aid 

Devices. 

l. Photographic Supplies 

We eliminated the cost category 

specific to photographic supplies for the 

FY 2008-based RPL market basket. 

These costs are now included in the 

Chemicals cost category because the 

costs are presently reported as all other 

chemical products. Notably, although 

we are eliminating the specific cost 

category, these costs are still accounted 

for within the RPL market basket. 

m. Rubber and Plastics 

We use the PPI for Rubber and Plastic 

Products (BLS series code WPU07) to 

measure price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

n. Paper and Printing Products 

We use the PPI for Converted Paper 

and Paperboard Products (BLS series 

code WPU0915) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

o. Apparel 

We use the PPI for Apparel (BLS 

series code WPU0381) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

p. Machinery and Equipment 

We use the PPI for Machinery and 

Equipment (BLS series code WPU11) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

q. Miscellaneous Products 

We use the PPI for Finished Goods 

Less Food and Energy (BLS series code 

WPUSOP3500) to measure the price 

growth of this cost category. Using this 

index removes the double-counting of 

food and energy prices, which are 

already captured elsewhere in the 

market basket. This same proxy was 

used in the FY 2002-based RPL market 

basket. 


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r. Professional Fees: Labor-Related 

We use the ECI for Compensation for 

Professional and Related Occupations 

(Private Industry) (BLS series code 

CIS2020000120000I) to measure the 

price growth of this category. It includes 

occupations such as legal, accounting, 

and engineering services. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

s. Administrative and Business Support 

Services 

We use the ECI for Compensation for 

Office and Administrative Support 

Services (Private Industry) (BLS series 

code CIU2010000220000I) to measure 

the price growth of this category. 

Previously these costs were included in 

the All Other: Labor-intensive category 

(now renamed the All Other: Laborrelated Services category), and were 

proxied by the ECI for Compensation for 

Service Occupations. We believe that 

this compensation index better reflects 

the changing price of labor associated 

with the provision of administrative 

services and its incorporation represents 

a technical improvement to the market 

basket. 

t. All Other: Labor-Related Services 

We use the ECI for Compensation for 

Service Occupations (Private Industry) 

(BLS series code CIU2010000300000I) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

u. Professional Fees: Nonlabor-Related 

We use the ECI for Compensation for 

Professional and Related Occupations 

(Private Industry) (BLS series code 

CIS2020000120000I) to measure the 

price growth of this category. This is the 

same price proxy that we are using for 

the Professional Fees: Labor-related cost 

category. 

v. Financial Services 

We use the ECI for Compensation for 

Financial Activities (Private Industry) 

(BLS series code CIU201520A000000I) 

to measure the price growth of this cost 

category. Previously these costs were 

included in the All Other: Nonlaborintensive category (now renamed the All 

Other: Nonlabor-related Services 

category), and were proxied by the CPI 

for All Items. We believe that this 

compensation index better reflects the 

changing price of labor associated with 

the provision of financial services and 

its incorporation represents a technical 

improvement to the market basket. 

w. Telephone Services 

We use the CPI for Telephone 

Services (BLS series code 

CUUR0000SEED) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

x. Postage 

We use the CPI for Postage (BLS series 

code CUUR0000SEEC01) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

y. All Other: Nonlabor-Related Services 

We use the CPI for All Items Less 

Food and Energy (BLS series code 

CUUR0000SA0L1E) to measure the 

price growth of this cost category. 

Previously these costs were proxied by 

the CPI for All Items in the FY 2002- 

based RPL market basket. We believe 

that using the CPI for All Items Less 

Food and Energy removes the double 

counting of changes in food and energy 

prices, as they are already captured 

elsewhere in the market basket. 

Consequently, we believe that the 

incorporation of this proxy represents a 

technical improvement to the market 

basket. 

4. Methodology for Capital Portion of 

the RPL Market Basket 

In the FY 2002-based RPL market 

basket, we did not have IRF, IPF, and 

LTCH 2002 Medicare cost report data 

for the capital cost weights, due to a 

change in the 2002 reporting 

requirements. Therefore, we used these 

hospitals’ 2001 expenditure data for the 

capital cost categories of depreciation, 

interest, and other capital expenses, and 

aged the data to a 2002 base year using 

relevant price proxies. 

For the FY 2008-based RPL market 

basket, we calculated weights for the 

RPL market basket capital costs using 

the same set of FY 2008 Medicare cost 

reports used to develop the operating 

share for IRFs, IPFs, and LTCHs. To 

calculate the total capital cost weight, 

we first apply the same LOS edits as 

applied prior to calculating the 

operating cost weights as described 

above in section IV.C.3. The resulting 

capital weight for the FY 2008 base year 

is 8.392 percent. 

Lease expenses are unique in that 

they are not broken out as a separate 

cost category in the RPL market basket, 

but rather are proportionally distributed 

amongst the cost categories of 

Depreciation, Interest, and Other, 

reflecting the assumption that the 

underlying cost structure of leases is 

similar to that of capital costs in general. 

As was done in the FY 2002-based RPL 

market basket, we first assumed 10 

percent of lease expenses represents 

overhead and assigned those costs to the 

Other Capital-Related Costs category 

accordingly. The remaining lease 

expenses were distributed across the 

three cost categories based on the 

respective weights of depreciation, 

interest, and other capital not including 

lease expenses. 

Depreciation contains two 

subcategories: (1) Building & Fixed 

Equipment; and (2) Movable Equipment. 

The apportionment between building & 

fixed equipment and movable 

equipment was determined using the FY 

2008 Medicare cost reports for 

freestanding IRFs, IPFs, and LTCHs. 

This methodology was also used to 

compute the apportionment used in the 

FY 2002-based RPL market basket (70 

FR 47912). 

The total Interest expense cost 

category is split between government/ 

nonprofit interest and for-profit interest. 

The FY 2002-based RPL market basket 

allocated 75 percent of the total Interest 

cost weight to government/nonprofit 

interest and proxied that category by the 

average yield on domestic municipal 

bonds. The remaining 25 percent of the 

Interest cost weight was allocated to forprofit interest and was proxied by the 

average yield on Moody’s Aaa bonds (70 

FR 47912). This was based on the FY 

2002-based IPPS capital input price 

index (70 FR 23406) due to insufficient 

Medicare cost report data for IPFs, IRFs, 

and LTCHs. For the FY 2008-based RPL 

market basket, we derived the split 

using the relative FY 2008 Medicare 

cost report data on interest expenses for 

government/nonprofit and for-profit 

IRFs, IPFs, and LTCHs. Based on these 

data, we calculated a 33/67 split 

between government/nonprofit and forprofit interest. We believe it is 

important that this split reflects the 

latest relative cost structure of interest 

expenses for RPL providers. As stated 

above, we first apply the LOS edits (as 

described in section IV.C.3.) prior to 

calculating this split. Therefore, we are 

using Medicare cost reports that are 

reflective of case mix and practice 

patterns associated with providing 

services to Medicare beneficiaries. 

Using data specific to government/ 

nonprofit and for-profit IRFs, IPFs, and 

LTCHs as well as the application of 

these LOS edits are the primary reasons 

for the difference in this split relative to 

the FY 2002-based RPL market basket. 

Because capital is acquired and paid 

for over time, capital expenses in any 

given year are determined by both past 

and present purchases of physical and 

financial capital. The vintage-weighted 

capital portion of the FY 2008-based 

RPL market basket is intended to 

capture the long-term consumption of 

capital, using vintage weights for 


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depreciation (physical capital) and 

interest (financial capital). These 

vintage weights reflect the proportion of 

capital purchases attributable to each 

year of the expected life of building & 

fixed equipment, movable equipment, 

and interest. We use the vintage weights 

to compute vintage-weighted price 

changes associated with depreciation 

and interest expense. 

Vintage weights are an integral part of 

the FY 2008-based RPL market basket. 

Capital costs are inherently complicated 

and are determined by complex capital 

purchasing decisions, over time, based 

on such factors as interest rates and debt 

financing. In addition, capital is 

depreciated over time instead of being 

consumed in the same period it is 

purchased. The capital portion of the FY 

2008-based RPL market basket would 

reflect the annual price changes 

associated with capital costs, and would 

be a useful simplification of the actual 

capital investment process. By 

accounting for the vintage nature of 

capital, we are able to provide an 

accurate and stable annual measure of 

price changes. Annual nonvintage price 

changes for capital are unstable due to 

the volatility of interest rate changes 

and, therefore, do not reflect the actual 

annual price changes for Medicare 

capital-related costs. The capital 

component of the FY 2008-based RPL 

market basket would reflect the 

underlying stability of the capital 

acquisition process and provides 

hospitals with the ability to plan for 

changes in capital payments. 

To calculate the vintage weights for 

depreciation and interest expenses, we 

needed a time series of capital 

purchases for building & fixed 

equipment and movable equipment. We 

found no single source that provides a 

uniquely best time series of capital 

purchases by hospitals for all of the 

above components of capital purchases. 

The early Medicare cost reports did not 

have sufficient capital data to meet this 

need. Data we obtained from the 

American Hospital Association (AHA) 

do not include annual capital 

purchases. However, AHA does provide 

a consistent database back to 1963. We 

used data from the AHA Panel Survey 

and the AHA Annual Survey to obtain 

a time series of total expenses for 

hospitals. We then used data from the 

AHA Panel Survey supplemented with 

the ratio of depreciation to total hospital 

expenses obtained from the Medicare 

cost reports to derive a trend of annual 

depreciation expenses for 1963 through 

2008. 

In order to estimate capital purchases 

using data on depreciation expenses, the 

expected life for each cost category 

(building & fixed equipment, movable 

equipment, and interest) is needed to 

calculate vintage weights. For the FY 

2002-based RPL market basket, due to 

insufficient Medicare cost report data 

for IRFs, IPFs, and LTCHs, we used 

2001 Medicare Cost Reports for IPPS 

hospitals to determine the expected life 

of building & fixed equipment and 

movable equipment (70 FR 47913). The 

FY 2002-based RPL market basket was 

based on an expected life of building & 

fixed equipment of 23 years. It used 11 

years as the expected life for movable 

equipment. We believed that this data 

source reflected the latest relative cost 

structure of depreciation expenses for 

hospitals at the time and was analogous 

to IRFs, IPFs, and LTCHs. 

The expected life of any piece of 

equipment can be determined by 

dividing the value of the asset 

(excluding fully depreciated assets) by 

its current year depreciation amount. 

This calculation yields the estimated 

useful life of an asset if depreciation 

were to continue at current year levels, 

assuming straight-line depreciation. 

Following a similar method to what was 

applied for the FY 2002-based RPL 

market basket, we use an expected life 

of building & fixed equipment equal to 

26 years, and an expected life of 

movable equipment of 11 years for the 

FY 2008-based RPL market basket. 

These expected lives are calculated 

using FY 2008 Medicare cost reports for 

IPPS hospitals since we are currently 

unable to obtain robust measures of the 

expected lives for building & fixed 

equipment and movable equipment 

using the Medicare cost reports from 

IRFs, IPFs, and LTCHs. 

We used the building & fixed 

equipment and movable equipment 

weights derived from FY 2008 Medicare 

cost reports for IRFs, IPFs, and LTCHs 

to separate the depreciation expenses 

into annual amounts of building & fixed 

equipment depreciation and movable 

equipment depreciation. Year-end asset 

costs for building & fixed equipment 

and movable equipment were 

determined by multiplying the annual 

depreciation amounts by the expected 

life calculations. We then calculated a 

time series, back to 1963, of annual 

capital purchases by subtracting the 

previous year asset costs from the 

current year asset costs. From this 

capital purchase time series, we were 

able to calculate the vintage weights for 

building & fixed equipment and for 

movable equipment. Each of these sets 

of vintage weights is explained in more 

detail below. 

For the building & fixed equipment 

vintage weights, we used the real annual 

capital purchase amounts for building & 

fixed equipment to capture the actual 

amount of the physical acquisition, net 

of the effect of price inflation. This real 

annual purchase amount for building & 

fixed equipment was produced by 

deflating the nominal annual purchase 

amount by the building & fixed 

equipment price proxy, BEA’s chained 

price index for nonresidential 

construction for hospitals and special 

care facilities. Because building & fixed 

equipment have an expected life of 26 

years, the vintage weights for building & 

fixed equipment are deemed to 

represent the average purchase pattern 

of building & fixed equipment over 26- 

year periods. With real building & fixed 

equipment purchase estimates available 

from 2008 back to 1963, we averaged 

twenty 26-year periods to determine the 

average vintage weights for building & 

fixed equipment that are representative 

of average building & fixed equipment 

purchase patterns over time. Vintage 

weights for each 26-year period are 

calculated by dividing the real building 

& fixed capital purchase amount in any 

given year by the total amount of 

purchases in the 26-year period. This 

calculation is done for each year in the 

26-year period, and for each of the 

twenty 26-year periods. We used the 

average of each year across the twenty 

26-year periods to determine the average 

building & fixed equipment vintage 

weights for the FY 2008-based RPL 

market basket. 

For the movable equipment vintage 

weights, the real annual capital 

purchase amounts for movable 

equipment were used to capture the 

actual amount of the physical 

acquisition, net of price inflation. This 

real annual purchase amount for 

movable equipment was calculated by 

deflating the nominal annual purchase 

amounts by the movable equipment 

price proxy, the PPI for Machinery and 

Equipment. This is the same proxy used 

for the FY 2002-based RPL market 

basket. Based on our determination that 

movable equipment has an expected life 

of 11 years, the vintage weights for 

movable equipment represent the 

average expenditure for movable 

equipment over an 11-year period. With 

real movable equipment purchase 

estimates available from 2008 back to 

1963, thirty-five 11-year periods were 

averaged to determine the average 

vintage weights for movable equipment 

that are representative of average 

movable equipment purchase patterns 

over time. Vintage weights for each 

11-year period are calculated by 

dividing the real movable capital 

purchase amount for any given year by 

the total amount of purchases in the 11- 


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year period. This calculation was done 

for each year in the 11-year period and 

for each of the thirty-five 11-year 

periods. We used the average of each 

year across the thirty-five 11-year 

periods to determine the average 

movable equipment vintage weights for 

the FY 2008-based RPL market basket. 

For the interest vintage weights, the 

nominal annual capital purchase 

amounts for total equipment (building & 

fixed, and movable) were used to 

capture the value of the debt 

instrument. Because we have 

determined that hospital debt 

instruments have an expected life of 26 

years, the vintage weights for interest 

are deemed to represent the average 

purchase pattern of total equipment 

over 26-year periods. With nominal total 

equipment purchase estimates available 

from 2008 back to 1963, twenty 26-year 

periods were averaged to determine the 

average vintage weights for interest that 

are representative of average capital 

purchase patterns over time. Vintage 

weights for each 26-year period are 

calculated by dividing the nominal total 

capital purchase amount for any given 

year by the total amount of purchases in 

the 26-year period. This calculation is 

done for each year in the 26-year period 

and for each of the twenty 26-year 

periods. We used the average of each 

year across the twenty 26-year periods 

to determine the average interest vintage 

weights for the FY 2008-based RPL 

market basket. The vintage weights for 

the capital portion of the FY 2002-based 

RPL market basket and the FY 2008- 

based RPL market basket are presented 

in Table 4. 

TABLE 4—FY 2002 AND FY 2008 VINTAGE WEIGHTS FOR CAPITAL-RELATED PRICE PROXIES

Year 

Building & fixed 

equipment 

Movable equipment Interest 

FY 2002 

23 years 

FY 2008 

26 years 

FY 2002 

11 years 

FY 2008 

11 years 

FY 2002 

23 years 

FY 2008 

26 years 

1 ............................................................................................................... 0.021 0.021 0.065 0.071 0.010 0.010 

2 ............................................................................................................... 0.022 0.023 0.071 0.075 0.012 0.012 

3 ............................................................................................................... 0.025 0.025 0.077 0.080 0.014 0.014 

4 ............................................................................................................... 0.027 0.027 0.082 0.083 0.016 0.016 

5 ............................................................................................................... 0.029 0.028 0.086 0.085 0.019 0.018 

6 ............................................................................................................... 0.031 0.030 0.091 0.089 0.023 0.020 

7 ............................................................................................................... 0.033 0.031 0.095 0.092 0.026 0.021 

8 ............................................................................................................... 0.035 0.033 0.100 0.098 0.029 0.024 

9 ............................................................................................................... 0.038 0.035 0.106 0.103 0.033 0.026 

10 ............................................................................................................. 0.040 0.037 0.112 0.109 0.036 0.029 

11 ............................................................................................................. 0.042 0.039 0.117 0.116 0.039 0.033 

12 ............................................................................................................. 0.045 0.041 ................ ................ 0.043 0.035 

13 ............................................................................................................. 0.047 0.042 ................ ................ 0.048 0.038 

14 ............................................................................................................. 0.049 0.043 ................ ................ 0.053 0.041 

15 ............................................................................................................. 0.051 0.044 ................ ................ 0.056 0.043 

16 ............................................................................................................. 0.053 0.045 ................ ................ 0.059 0.046 

17 ............................................................................................................. 0.056 0.046 ................ ................ 0.062 0.049 

18 ............................................................................................................. 0.057 0.047 ................ ................ 0.064 0.052 

19 ............................................................................................................. 0.058 0.047 ................ ................ 0.066 0.053 

20 ............................................................................................................. 0.060 0.045 ................ ................ 0.070 0.053 

21 ............................................................................................................. 0.060 0.045 ................ ................ 0.071 0.055 

22 ............................................................................................................. 0.061 0.045 ................ ................ 0.074 0.056 

23 ............................................................................................................. 0.061 0.046 ................ ................ 0.076 0.060 

24 ............................................................................................................. ................ 0.046 ................ ................ ................ 0.063 

25 ............................................................................................................. ................ 0.045 ................ ................ ................ 0.064 

26 ............................................................................................................. ................ 0.046 ................ ................ ................ 0.068 

Total .................................................................................................. 1.000 1.000 1.000 1.000 1.000 1.000 

Note: Numbers may not add to total due to rounding. 

After the capital cost category weights 

were computed, it was necessary to 

select appropriate price proxies to 

reflect the rate-of-increase for each 

expenditure category. As proposed, and 

in this final rule, we use the same price 

proxies for the capital portion of the FY 

2008-based RPL market basket that were 

used in the FY 2002-based RPL market 

basket, with the exception of the Boeckh 

Construction Index. We replaced the 

Boeckh Construction Index with BEA’s 

chained price index for nonresidential 

construction for hospitals and special 

care facilities. The BEA index represents 

construction of facilities such as 

hospitals, nursing homes, hospices, and 

rehabilitation centers. Although these 

price indices move similarly over time, 

we believe that it is more technically 

appropriate to use an index that is more 

specific to the hospital industry. We 

believe these are the most appropriate 

proxies for hospital capital costs that 

meet our selection criteria of relevance, 

timeliness, availability, and reliability. 

The price proxies (prior to any vintage 

weighting) for each of the capital cost 

categories are the same as those used for 

the FY 2006-based Capital Input Price 

Index as described in the IPPS FY 2010 

final rule (74 FR at 43857). 

5. RY 2012 Market Basket Update 

As proposed, and in this final rule, for 

RY 2012 (that is, beginning July 1, 2011 

through September 30, 2012), we 

derived a 15-month estimate of the FY 

2008-based RPL market basket based on 

the best available data. To determine a 

15-month market basket update for RY 

2012, we calculate the 5-quarter moving 

average index level for July 1, 2011 

through September 30, 2012 and the 4- 

quarter moving average index level for 

July 1, 2010 through June 30, 2011. The 

percent change in these two values 

represents the 15-month market basket 

update. 

Consistent with historical practice, we 

estimate the RPL market basket update 

for the IPF PPS based on IHS Global 

Insight’s forecast using the most recent 

available data. IHS Global Insight, Inc. 


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26444 Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 

is a nationally recognized economic and 

financial forecasting firm that contracts 

with CMS to forecast the components of 

the market baskets. In the RY 2012 IPF 

PPS proposed rule, we proposed a 

market basket update based on the 4th 

quarter 2010 forecast with history 

through the 3rd quarter of 2010. We also 

proposed that if more recent data 

subsequently became available (for 

example, a more recent estimate of the 

market basket) we would use such data, 

if appropriate, to determine the RY 2012 

update in the final rule. Based on IHS 

Global Insight’s 1st quarter 2011 forecast 

with history through the 4th quarter of 

2010, the projected 15-month market 

basket update for the 15-month RY 2012 

(July 1, 2011 through September 30, 

2012) is 3.2 percent. 

The most recent estimate of the FY 

2008-based RPL market basket update 

for July 1, 2011 through June 30, 2012, 

based on IHS Global Insight’s 1st quarter 

2011 forecast with history through the 

4th quarter of 2010, is 2.8 percent. We 

determined this 12-month market basket 

update by calculating the 4-quarter 

moving average index level for July 1, 

2011 through June 30, 2012 and the 4- 

quarter moving average index level for 

July 1, 2010 through June 30, 2011. The 

percent change in these two values 

represents the 12-month market basket 

update. Consistent with our historical 

practice of using market basket 

estimates based on the most recent 

available data, if we were not extending 

the 2012 IPF PPS RY by 3 months, the 

market basket update for a 12-month RY 

2012 would be 2.8 percent, based on the 

most recent estimate of the 12-month 

RPL market basket update for July 1, 

2011 through June 30, 2012. 

Using the FY 2002-based RPL market 

basket and IHS Global Insight’s 1st 

quarter 2011 forecast for the market 

basket components, the 15-month RY 

2012 update would be 3.3 percent. The 

12-month RY 2012 update would be 2.9 

percent. 

As proposed, for this RY 2012 IPF 

PPS final rule we have determined the 

RY 2012 update based on the most 

recent market basket estimate for the 15- 

month period. The current estimates of 

the FY 2002-based and FY 2008-based 

RPL market baskets are based on IHS 

Global Insight’s first quarter 2011 

forecast with historical data through 

fourth quarter 2010. Table 5 below 

compares the FY 2008-based RPL 

market basket and the FY 2002-based 

RPL market basket percent changes. 

TABLE 5—FY 2002-BASED AND FY 2008-BASED RPL MARKET BASKET PERCENT CHANGES, RY 2006 THROUGH FY 

2014 

Rate year (RY) or fiscal year (FY) 

FY 2002-based 

RPL market basket 

index percent 

change 

FY 2008-based 

RPL market basket 

index percent 

change 

Historical data: 

RY 2006 1 ......................................................................................................................................... 3.8 3.7 

RY 2007 1 ......................................................................................................................................... 3.5 3.5 

RY 2008 1 ......................................................................................................................................... 3.5 3.6 

RY 2009 1 ......................................................................................................................................... 3.1 3.3 

RY 2010 1 ......................................................................................................................................... 2.2 2.1 

Average 2006–2010 .................................................................................................................. 3.2 3.2 

Forecast: 

RY 2011 1 ......................................................................................................................................... 2.4 2.5 

RY 2012 2 ......................................................................................................................................... 3.3 3.2 

FY 2013 3 .......................................................................................................................................... 2.9 2.9 

FY 2014 3 .......................................................................................................................................... 3.0 3.0 

Average 2011–2014 .................................................................................................................. 2.9 2.9 

1 RY 2006 through RY 2011 represent 12-month updates, which include July 1 through June 30. 

2 RY 2012 represents a 15-month update, which includes July 1, 2011 through September 30, 2012. 

3FY 2013 through FY 2014 represent 12-month updates, which include October 1 through September 30. 

Note that these market basket percent changes do not include any further adjustments as may be statutorily required. 

Source: IHS Global Insight, Inc. 1st quarter 2011 forecast. 

The 15-month RY 2012 market basket 

update using the FY 2008-based RPL 

market basket is 0.1 percentage point 

lower than the market basket update 

using the FY 2002-based RPL market 

basket. This is due to slightly offsetting 

factors. The lower total compensation 

weight in the FY 2008-based RPL 

market basket (62.278 percent) relative 

to the FY 2002-based RPL market basket 

(65.877 percent), absent other factors, 

would have resulted in a slightly lower 

market basket update using the FY 

2008-based RPL market basket. This 

impact, however, is partially offset by 

the larger weight associated with the 

Professional Fees category. In both 

market baskets, these expenditures are 

proxied by the ECI for Compensation for 

Professional and Related Services. The 

weight for Professional Fees in the FY 

2002-based RPL market basket is 2.892 

percent compared to 6.325 percent in 

the FY 2008-based RPL market basket. 

We did not receive any public 

comments on the market basket updates 

in the RY 2012 IPF PPS proposed rule. 

6. Labor-Related Share 

As described in section VI.C.1. of this 

final rule, due to the variations in costs 

and geographic wage levels, we 

proposed that payment rates under the 

IPF PPS continue to be adjusted by a 

geographic wage index. This wage index 

would apply to the labor-related portion 

of the Federal per diem base rate, 

hereafter referred to as the labor-related 

share. 

The labor-related share is determined 

by identifying the national average 

proportion of total costs that are related 

to, influenced by, or vary with the local 

labor market. As proposed, and for this 

final rule, we continue to classify a cost 

category as labor-related if the costs are 

labor-intensive and vary with the local 

labor market. Given this, based on our 

definition of the labor-related share, we 

proposed to include in the labor-related 

share the sum of the relative importance 

of Wages and Salaries, Employee 

Benefits, Professional Fees: Laborrelated, Administrative and Business 

Support Services, All Other: LaborVerDate Mar<15>2010 17:47 May 05, 2011 Jkt 223001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\06MYR2.SGM 06MYR2

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Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 26445 

related Services (previously referred to 

in the FY 2002-based RPL market basket 

as labor-intensive), and a portion of the 

Capital-Related cost weight. 

Consistent with previous rebasings, 

the All Other: Labor-related Services 

cost category is mostly comprised of 

building maintenance and security 

services (including, but not limited to, 

commercial and industrial machinery 

and equipment repair, nonresidential 

maintenance and repair, and 

investigation and security services). 

Because these services tend to be laborintensive and are mostly performed at 

the hospital facility (and, therefore, 

unlikely to be purchased in the national 

market), we believe that they meet our 

definition of labor-related services. 

As stated in the April 2010 IPF PPS 

notice (75 FR 23110), the labor-related 

share was defined as the sum of the 

relative importance of Wages and 

Salaries, Fringe Benefits, Professional 

Fees, Labor-intensive Services, and a 

portion of the capital share from an 

appropriate market basket. Therefore, to 

determine the labor-related share for the 

IPF PPS for RY 2011, we used the FY 

2002-based RPL market basket cost 

weights relative importance to 

determine the labor-related share for the 

IPF PPS. 

For the proposed FY 2008-based RPL 

market basket rebasing, the proposed 

inclusion of the Administrative and 

Business Support Services cost category 

into the labor-related share remained 

consistent with the current labor-related 

share because this cost category was 

previously included in the Laborintensive cost category. As previously 

stated, we established a separate 

Administrative and Business Support 

Service cost category so that we can use 

the ECI for Compensation for Office and 

Administrative Support Services to 

more precisely proxy these specific 

expenses. 

For the FY 2002-based RPL market 

basket, we assumed that all nonmedical 

professional services (including 

accounting and auditing services, 

engineering services, legal services, and 

management and consulting services) 

were purchased in the local labor 

market and, therefore, all of their 

associated fees varied with the local 

labor market. As a result, we previously 

included 100 percent of these costs in 

the labor-related share. In an effort to 

more accurately determine the share of 

professional fees that should be 

included in the labor-related share, we 

surveyed hospitals regarding the 

proportion of those fees that go to 

companies that are located beyond their 

own local labor market (the results are 

discussed below). 

We continue to look for ways to refine 

our market basket approach to more 

accurately account for the proportion of 

costs influenced by the local labor 

market. To that end, we conducted a 

survey of hospitals to empirically 

determine the proportion of contracted 

professional services purchased by the 

industry that are attributable to local 

firms and the proportion that are 

purchased from national firms. We 

notified the public of our intent to 

conduct this survey on December 9, 

2005 (70 FR 73250) and received no 

comments (71 FR 8588). 

With approval from the Office of 

Management and Budget (OMB), we 

contacted a sample of IPPS hospitals 

and received responses to our survey 

from 108 hospitals. We believe that 

these data serve as an appropriate proxy 

for the purchasing patterns of 

professional services for IPFs as they are 

also institutional providers of health 

care services. Using data on FTEs to 

allocate responding hospitals across 

strata (region of the country and urban/ 

rural status), we calculated 

poststratification weights. Based on 

these weighted results, we determined 

that hospitals purchase, on average, the 

following portions of contracted 

professional services outside of their 

local labor market: 

• 34 percent of accounting and 

auditing services. 

• 30 percent of engineering services. 

• 33 percent of legal services. 

• 42 percent of management 

consulting services. 

We applied each of these percentages 

to its respective Benchmark I–O cost 

category underlying the professional 

fees cost category. This is the 

methodology that we used to separate 

the FY 2008-based RPL market basket 

professional fees category into 

Professional Fees: Labor-related and 

Professional Fees: Nonlabor-related cost 

categories. In addition to the 

professional services listed above, we 

also classified expenses under NAICS 

55, Management of Companies and 

Enterprises, into the Professional Fees 

cost category as was done in previous 

rebasings. The NAICS 55 data are 

mostly comprised of corporate, 

subsidiary, and regional managing 

offices, or otherwise referred to as home 

offices. Formerly, all of the expenses 

within this category were considered to 

vary with, or be influenced by, the local 

labor market and were thus included in 

the labor-related share. Because many 

hospitals are not located in the same 

geographic area as their home office, we 

analyzed data from a variety of sources 

in order to determine what proportion 

of these costs should be appropriately 

included in the labor-related share. 

Using data primarily from the 

Medicare cost reports and a CMS 

database of Home Office Medicare 

Records (HOMER) (a database that 

provides city and state information 

(addresses) for home offices), we were 

able to determine that 19 percent of the 

total number of freestanding IRFs, 

freestanding IPFs, and LTCHs that had 

home offices had those home offices 

located in their respective local labor 

markets—defined as being in the same 

Metropolitan Statistical Area (MSA). 

The Medicare cost report requires 

hospitals to report their home office 

provider numbers. Using the HOMER 

database to determine the home office 

location for each home office provider 

number, we compared the location of 

the provider with the location of the 

hospital’s home office. We then placed 

providers into one of the following three 

groups: 

• Group 1—Provider and home office 

are located in different States. 

• Group 2—Provider and home office 

are located in the same State and same 

city. 

• Group 3—Provider and home office 

are located in the same State and 

different city. 

We found that 63 percent of the 

providers with home offices were 

classified into Group 1 (that is, different 

State) and, thus, these providers were 

determined to not be located in the 

same local labor market as their home 

office. Although there were a very 

limited number of exceptions (that is, 

providers located in different States but 

the same MSA as their home office), the 

63 percent estimate was unchanged. 

We found that 9 percent of all 

providers with home offices were 

classified into Group 2 (that is, same 

State and same city and, therefore, the 

same MSA). Consequently, these 

providers were determined to be located 

in the same local labor market as their 

home offices. 

We found that 27 percent of all 

providers with home offices were 

classified into Group 3 (that is, same 

State and different city). Using data 

from the Census Bureau to determine 

the specific MSA for both the provider 

and its home office, we found that 10 

percent of all providers with home 

offices were identified as being in the 

same State, a different city, but the same 

MSA. 

Pooling these results, we were able to 

determine that approximately 19 

percent of providers with home offices 

had home offices located within their 

local labor market (that is, 9 percent of 

providers with home offices had their 


jlentini on DSKJ8SOYB1PROD with RULES2
26446 Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 

home offices in the same State and city 

(and, thus, the same MSA), and 10 

percent of providers with home offices 

had their home offices in the same State, 

a different city, but the same MSA). We 

proposed to apportion the NAICS 55 

expense data by this percentage. Thus, 

we proposed to classify 19 percent of 

these costs into the Professional Fees: 

Labor-related cost category and the 

remaining 81 percent into the 

Professional Fees: Nonlabor-related 

Services cost category. 

We received several comments on our 

proposal to revise the labor-related 

share. These comments and our 

responses are provided below. 

Comment: One commenter 

recommended that CMS move forward 

with this proposal, and stated a belief 

that the labor-related share has been 

overstated in the past, resulting in 

reduced payments to facilities in areas 

with low wage indices. 

Response: We thank the commenter 

for this comment. We believe comments 

on prior years’ labor-related shares 

would have been addressed in those 

rulemakings. 

Comment: Several commenters 

objected to the proposed change in the 

treatment of professional fees in the 

calculation of the labor-related share, 

and recommended maintaining the 

current methodology. One commenter 

questioned the sample size (108 

hospitals) for estimating the allocation 

of professional fees. Several commenters 

believed that professional services, 

whether purchased within or outside 

the local labor market, are substitutes 

for hospital-employed staff and should 

be included as labor costs. 

Response: We disagree with the 

request to reject the proposed change in 

the calculation of the labor-related 

share. A method that distributes 

professional fees based on empirical 

research and data represents a technical 

improvement to the construction of the 

market basket, where previously all 

professional fees were assumed to vary 

with the local labor market. In response 

to the concern about the sample of 108 

hospitals, we provided more detail on 

that survey conducted below. We note 

that these same survey results were used 

in the IPPS market basket rebasing for 

the FY 2010 IPPS final rule (74 FR 

43853). 

The survey’s methods unfolded in the 

following manner: Through an 

independent contractor, a small sample 

of 12 hospitals were initially pre-tested 

in order to ensure the understandability 

of the survey questions. The survey 

prompted sample institutions to select 

from multiple choice answers the 

proportions of their professional fees 

that are purchased from firms located 

outside of their respective local labor 

market. The multiple choice answers for 

each type of professional service 

included the following options: 0 

percent of fees; 1–20 percent of fees; 21– 

40 percent of fees; 41–60 percent of fees; 

61–80 percent of fees; 81–99 percent of 

fees; and 100 percent of fees. All 

respondents were assured that the 

information they provided would be 

kept strictly confidential. 

Understanding that larger, urbanbased hospitals (and those located in 

areas with area wage indexes greater 

than 1.0) are most likely to be impacted 

by the survey’s results, we used data on 

full-time equivalents (FTEs) to represent 

the sizes of hospitals and selected 

hospitals with probability proportional 

to their sizes across strata when drawing 

the full sample. Strata were formed by 

Census Region and Urban/Rural Status. 

The distributions of the hospital 

population, as well as weighted 

distributions for the responders, by 

Urban/Rural Status (including data on 

hospital size) and Census Region were 

as follows: 

All hospitals 

percent 

distribution & 

average FTE size 

Responding 

hospitals percent 

distribution & 

average FTE size 

Total ......................................................................................................................................................... 100%/994 100%/1,156 

Total Rurals ............................................................................................................................................. 30%/388 25%/449 

Total Urbans ............................................................................................................................................ 70%/1,255 75%/1,460 

Total Northeast Region ............................................................................................................................ 15%/1,442 20%/1,078 

Total Mid-West Region ............................................................................................................................ 23%/1,062 24%/1,656 

Total South Region .................................................................................................................................. 42%/843 37%/944 

Total West Region ................................................................................................................................... 20%/899 19%/1,081 

Sample weights were calculated as 

the inverse of the selection probability 

and were subsequently adjusted for 

nonresponse bias by strata and poststratified to derive final weights. This 

type of application represents a 

common survey approach and is based 

on valid and widely-accepted statistical 

techniques. 

For the estimates of the nationwide 

proportion of nonmedical professional 

services fees purchased outside of the 

local labor market, we first examined 

the data on multiple levels. First, we 

found that fewer than 30 percent of the 

responding hospitals paid 100 percent 

of their professional fees to vendors 

located within their local labor market. 

Conversely, we found that roughly 20 

percent of responding hospitals reported 

81 percent or more of their professional 

services fees are paid to vendors located 

outside of their local labor market. 

In determining the specific and 

appropriate proportions of professional 

fees to consider labor-related and 

nonlabor-related, we generated 

weighted averages from the data in the 

following manner: 

• For any multiple choice answer 

where the standard error associated 

with the weighted counts for that 

answer was less than 30 percent, we 

multiplied the weighted counts 

associated with that answer by the 

midpoint of the range within that 

answer. For example, for Accounting 

and Auditing services, if a weighted 

count of 500 hospitals responded that 

they pay ‘‘1 to 20 percent’’ of their 

professional fees for these services to 

firms located outside of their local labor 

market, we would multiply 500 times 10 

percent. We repeat this for each possible 

multiple choice answer. 

• For any multiple choice answer 

where the standard error associated 

with the weighted counts for that 

answer exceeded 30 percent, we 

multiplied the weighted hospital counts 

by the low point of the range. Using a 

similar example as above, if a weighted 

count of 300 hospitals responded that 

they pay ‘‘1 to 20 percent’’ of their 

professional fees for these services to 

firms located outside of their local labor 

market, and the standard error on that 

estimate was greater than 30 percent, we 

would multiply 300 times 1 percent. 

• After applying one of these two 

techniques to each answer, dependent 

on its associated standard error, we took 

a weighted average of the results to 

determine the final proportion to be 

excluded from the labor-related share 


jlentini on DSKJ8SOYB1PROD with RULES2
Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 26447 

for each of the four types of professional 

services surveyed. 

Given the information provided 

above, we believe that the estimates 

based on this survey are valid. In 

response to the commenters’ statement 

that professional services should be 

included as labor-related costs no matter 

where they are purchased, we again 

note that the purpose of the laborrelated share is to determine the 

national average proportion of total 

costs that are related to, influenced by, 

or vary with the local labor market. We 

define the labor-related share as not 

only those expenses that are laborintensive but those that also vary with, 

or are influenced by, the local labor 

market. By application of this 

definition, it is relevant where these 

professional services are purchased. To 

the extent these services are not 

purchased in the local labor market, 

they are not included in the laborrelated share. 

After consideration of the public 

comments received, in this final rule we 

are finalizing our methodology for 

calculating the labor-related share for 

RY 2012. Using the same methodology 

that was proposed in the RY 2012 IPF 

PPS proposed rule, we calculated a 

labor-related share for RY 2012 using 

the most recent data available at the 

time of this final rule. This estimate of 

the RY 2012 labor-related share is based 

on IHS Global Insight Inc.’s first quarter 

2011 forecast, which is the same 

forecast used to derive the RY 2012 

market basket update. 

Table 6 below shows the RY 2012 

relative importance labor-related share 

using the FY 2008-based RPL market 

basket and the FY 2002-based RPL 

market basket. 

TABLE 6—COMPARISON OF THE RY 2011 (12-MONTH) RELATIVE IMPORTANCE LABOR-RELATED SHARE BASED ON THE

FY 2002-BASED RPL MARKET BASKET AND THE RY 2012 (15-MONTH) RELATIVE IMPORTANCE LABOR-RELATED

SHARE BASED ON THE FY 2008-BASED RPL MARKET BASKET

RY 2011 relative 

importance laborrelated share 1

Final RY 2012 

relative importance 

labor-related 

share 2

Wages and Salaries ................................................................................................................................ 52.600 49.049 

Employee Benefits ................................................................................................................................... 13.935 13.036 

Professional Fees: Labor-Related ........................................................................................................... 2.853 2.073 

Administrative and Business Support Services ....................................................................................... ................................ 0.416 

All Other: Labor-Related Services ........................................................................................................... 2.118 2.094 

Subtotal ............................................................................................................................................. 71.506 66.668 

Labor-Related Portion of Capital Costs (46%) ........................................................................................ 3.894 3.649 

Total Labor-Related Share ............................................................................................................... 75.400 70.317 

1Published in the RY 2011 IPF PPS notice (75FR 23110–23111) and based on the IHS Global Insight, Inc. first quarter 2010 forecast of the 

2002-based RPL market basket. 2Based on IHS Global Insight, Inc. first quarter 2011 forecast of the 2008-based RPL market basket. 

The labor-related share for RY 2012 is 

the sum of the RY 2012 relative 

importance of each labor-related cost 

category, and would reflect the different 

rates of price change for these cost 

categories between the base year (FY 

2008) and RY 2012. The sum of the 

relative importance for RY 2012 for 

operating costs (Wages and Salaries, 

Employee Benefits, Professional Fees: 

Labor-Related, Administrative and 

Business Support Services, and All 

Other: Labor-related Services) is 66.668 

percent, as shown in Table 6 above. The 

portion of Capital that is influenced by 

the local labor market is estimated to be 

46 percent, which is the same 

percentage applied to the FY 2002-based 

RPL market basket. Since the relative 

importance for Capital-Related Costs is 

7.932 percent of the FY 2008-based RPL 

market basket in RY 2012, we take 46 

percent of 7.932 percent to determine 

the labor-related share of Capital for RY 

2012. The result is 3.649 percent, which 

we add to 66.668 percent for the 

operating cost amount to determine the 

total labor-related share for RY 2012. 

Therefore, the labor-related share for the 

IPF PPS in RY 2012 is 70.317 percent. 

This labor-related share is determined 

using the same methodology as 

employed in calculating all previous IPF 

labor-related shares (69 FR 66952). The 

wage index and the labor-related share 

are reflected in budget neutrality 

adjustments. 

V. Updates to the IPF PPS for RY 

Beginning July 1, 2011 

The IPF PPS is based on a 

standardized Federal per diem base rate 

calculated from IPF average per diem 

costs and adjusted for budget-neutrality 

in the implementation year. The Federal 

per diem base rate is used as the 

standard payment per day under the IPF 

PPS and is adjusted by the patient- and 

facility-level adjustments that are 

applicable to the IPF stay. A detailed 

explanation of how we calculated the 

average per diem cost appears in the 

November 2004 IPF PPS final rule (69 

FR 66926). 

A. Determining the Standardized 

Budget-Neutral Federal Per Diem Base 

Rate 

Section 124(a)(1) of the BBRA 

requires that we implement the IPF PPS 

in a budget neutral manner. In other 

words, the amount of total payments 

under the IPF PPS, including any 

payment adjustments, must be projected 

to be equal to the amount of total 

payments that would have been made if 

the IPF PPS were not implemented. 

Therefore, we calculated the budgetneutrality factor by setting the total 

estimated IPF PPS payments to be equal 

to the total estimated payments that 

would have been made under the Tax 

Equity and Fiscal Responsibility Act of 

1982 (TEFRA) (Pub. L. 97–248) 

methodology had the IPF PPS not been 

implemented. 

Under the IPF PPS methodology, we 

calculated the final Federal per diem 

base rate to be budget neutral during the 

IPF PPS implementation period (that is, 

the 18-month period from January 1, 

2005 through June 30, 2006) using a July 

1 update cycle. We updated the average 

cost per day to the midpoint of the IPF 

PPS implementation period (that is, 

October 1, 2005), and this amount was 

used in the payment model to establish 

the budget-neutrality adjustment. 

A step-by-step description of the 

methodology used to estimate payments 

under the TEFRA payment system 


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26448 Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 

appears in the November 2004 IPF PPS 

final rule (69 FR 66926). 

1. Standardization of the Federal Per 

Diem Base Rate and Electroconvulsive 

Therapy (ECT) Rate 

In the November 2004 IPF PPS final 

rule, we describe how we standardized 

the IPF PPS Federal per diem base rate 

in order to account for the overall 

positive effects of the IPF PPS payment 

adjustment factors. To standardize the 

IPF PPS payments, we compared the IPF 

PPS payment amounts calculated from 

the FY 2002 Medicare Provider Analysis 

and Review (MedPAR) file to the 

projected TEFRA payments from the FY 

2002 cost report file updated to the 

midpoint of the IPF PPS 

implementation period (that is, October 

2005). The standardization factor was 

calculated by dividing total estimated 

payments under the TEFRA payment 

system by estimated payments under 

the IPF PPS. The standardization factor 

was calculated to be 0.8367. 

As described in detail in the May 

2006 IPF PPS final rule (71 FR 27045), 

in reviewing the methodology used to 

simulate the IPF PPS payments used for 

the November 2004 IPF PPS final rule, 

we discovered that due to a computer 

code error, total IPF PPS payments were 

underestimated by about 1.36 percent. 

Since the IPF PPS payment total should 

have been larger than the estimated 

figure, the standardization factor should 

have been smaller (0.8254 vs. 0.8367). In 

turn, the Federal per diem base rate and 

the ECT rate should have been reduced 

by 0.8254 instead of 0.8367. 

To resolve this issue, in RY 2007, we 

amended the Federal per diem base rate 

and the ECT payment rate 

prospectively. Using the standardization 

factor of 0.8254, the average cost per day 

was effectively reduced by 17.46 

percent (100 percent minus 82.54 

percent = 17.46 percent). 

2. Calculation of the Budget Neutrality 

Adjustment 

To compute the budget neutrality 

adjustment for the IPF PPS, we 

separately identified each component of 

the adjustment, that is, the outlier 

adjustment, stop-loss adjustment, and 

behavioral offset. 

A complete discussion of how we 

calculate each component of the budget 

neutrality adjustment appears in the 

November 2004 IPF PPS final rule (69 

FR 66932 through 66933) and in the 

May 2006 IPF PPS final rule (71 FR 

27044 through 27046). 

a. Outlier Adjustment 

Since the IPF PPS payment amount 

for each IPF includes applicable outlier 

amounts, we reduced the standardized 

Federal per diem base rate to account 

for aggregate IPF PPS payments 

estimated to be made as outlier 

payments. The outlier adjustment was 

calculated to be 2 percent. As a result, 

the standardized Federal per diem base 

rate was reduced by 2 percent to 

account for projected outlier payments. 

b. Stop-Loss Provision Adjustment 

As explained in the November 2004 

IPF PPS final rule, we provided a stoploss payment during the transition from 

cost-based reimbursement to the per 

diem payment system to ensure that an 

IPF’s total PPS payments were no less 

than a minimum percentage of their 

TEFRA payment, had the IPF PPS not 

been implemented. We reduced the 

standardized Federal per diem base rate 

by the percentage of aggregate IPF PPS 

payments estimated to be made for stoploss payments. As a result, the 

standardized Federal per diem base rate 

was reduced by 0.39 percent to account 

for stop-loss payments. Since the 

transition was completed in RY 2009, 

the stop-loss provision is no longer 

applicable, and for cost reporting 

periods beginning on or after January 1, 

2008, IPFs were paid 100 percent PPS. 

c. Behavioral Offset 

As explained in the November 2004 

IPF PPS final rule, implementation of 

the IPF PPS may result in certain 

changes in IPF practices, especially with 

respect to coding for comorbid medical 

conditions. As a result, Medicare may 

make higher payments than assumed in 

our calculations. Accounting for these 

effects through an adjustment is 

commonly known as a behavioral offset. 

Based on accepted actuarial practices 

and consistent with the assumptions 

made in other PPSs, we assumed in 

determining the behavioral offset that 

IPFs would regain 15 percent of 

potential ‘‘losses’’ and augment payment 

increases by 5 percent. We applied this 

actuarial assumption, which is based on 

our historical experience with new 

payment systems, to the estimated 

‘‘losses’’ and ‘‘gains’’ among the IPFs. The 

behavioral offset for the IPF PPS was 

calculated to be 2.66 percent. As a 

result, we reduced the standardized 

Federal per diem base rate by 2.66 

percent to account for behavioral 

changes. As indicated in the November 

2004 IPF PPS final rule, we do not plan 

to change adjustment factors or 

projections until we analyze IPF PPS 

data. 

If we find that an adjustment is 

warranted, the percent difference may 

be applied prospectively to the 

established PPS rates to ensure the rates 

accurately reflect the payment level 

intended by the statute. In conducting 

this analysis, we will be interested in 

the extent to which improved coding of 

patients’ principal and other diagnoses, 

which may not reflect real increases in 

underlying resource demands, has 

occurred under the PPS. 

B. Update of the Federal Per Diem Base 

Rate and Electroconvulsive Therapy 

Rate 

As described in the November 2004 

IPF PPS final rule (69 FR 66931), the 

average per diem cost was updated to 

the midpoint of the implementation 

year. This updated average per diem 

cost of $724.43 was reduced by 17.46 

percent to account for standardization to 

projected TEFRA payments for the 

implementation period, by 2 percent to 

account for outlier payments, by 0.39 

percent to account for stop-loss 

payments, and by 2.66 percent to 

account for the behavioral offset. The 

Federal per diem base rate in the 

implementation year was $575.95. The 

increase in the per diem base rate for RY 

2009 included the 0.39 percent increase 

due to the removal of the stop-loss 

provision. We indicated in the 

November 2004 IPF PPS final rule (69 

FR 66932) that we would remove this 

0.39 percent reduction to the Federal 

per diem base rate after the transition. 

As discussed in section IV.D.2. of the 

May 2008 IPF PPS notice, we increased 

the Federal per diem base rate and the 

ECT base rate by 0.39 percent in RY 

2009. Therefore for RY 2009 and 

beyond, the stop-loss provision has 

ended and is no longer a part of budget 

neutrality. 

In accordance with section 

1886(s)(2)(A)(ii) of the Act, which 

requires the application of an ‘‘other 

adjustment,’’ described in section 

1886(s)(3) of the Act (specifically, 

section 1886(s)(3)(A) for RYs 2011 and 

2012) that reduces the update to the IPF 

PPS base rate for the RY beginning in 

Calendar Year (CY) 2011, we are 

adjusting the IPF PPS update by a 0.25 

percentage point reduction for RY 2012. 

For this final rule, we are applying the 

15-month 2008-based RPL market basket 

increase for RY 2012 of 3.2 percent, as 

adjusted by the ‘‘other adjustment’’ of 

¥0.25 percentage point, and the wage 

index budget neutrality factor of 0.9995 

to the RY 2011 Federal per diem base 

rate of $665.71 yielding a Federal per 

diem base rate of $685.01 for RY 2012. 

Similarly, we are applying the market 

basket increase, as adjusted by the 

‘‘other adjustment’’, and the wage index 

budget neutrality factor to the RY 2011 

ECT base rate, yielding an ECT base rate 

of $294.91 for RY 2012. 


jlentini on DSKJ8SOYB1PROD with RULES2
Federal Register / Vol. 76, No. 88 / Friday, May 6, 2011 / Rules and Regulations 26449 

Final Rule Action: In summary, for 

the RY 2012, we received no public 

comments concerning the ‘‘other 

adjustment’’; therefore, we will apply 

the 15-month FY 2008-based RPL 

market basket increase of 3.2 percent 

with the ‘‘other adjustment’’ of ¥0.25 

percent and the wage index budget 

neutrality factor to the RY 2011 ECT and 

Federal per diem base rates to yield the 

RY 2012 ECT base rate of $294.91 and 

Federal per diem base rate of $685.01. 

VI. Update of the IPF PPS Adjustment 

Factors 

A. Overview of the IPF PPS Adjustment 

Factors 

The IPF PPS payment adjustments 

were derived from a regression analysis 

of 100 percent of the FY 2002 MedPAR 

data file, which contained 483,038 

cases. For the proposed rule, we used 

the same results of the regression 

analysis used to implement the 

November 2004 IPF PPS final rule. For 

a more detailed description of the data 

file used for the regression analysis, see 

the November 2004 IPF PPS final rule 

(69 FR 66935 through 66936). While we 

have since used more recent claims data 

to set the fixed dollar loss threshold 

amount, we used the same results of this 

regression analysis to update the IPF 

PPS for RY 2011 and we proposed to 

use these same results for RY 2012. Now 

that we are approximately 5 years into 

the IPF PPS, we believe that we have 

enough data to begin looking at the 

process of refining the IPF PPS as 

appropriate. We believe that in the next 

rulemaking, for FY 2013, we will be 

ready to propose potential refinements 

to the system. 

As we stated previously, we do not 

plan to update the regression analysis 

until we are able to analyze IPF PPS 

claims and cost report data. However, 

we continue to monitor claims and 

payment data independently from cost 

report data to assess issues, to determine 

whether changes in case-mix or 

payment shifts have occurred among 

freestanding governmental, non-profit 

and private psychiatric hospitals, and 

psychiatric units of general hospitals, 

and CAHs and other issues of 

importance to IPFs. 

B. Patient-Level Adjustments 

In the April 2010 IPF PPS notice (75 

FR 23113 through 23117), we 

announced payment adjustments for the 

following patient-level characteristics: 

Medicare Severity diagnosis related 

groups (MS–DRGs) assignment of the 

patient’s principal diagnosis, selected 

comorbidities, patient age, and the 

variable per diem adjustments. 

1. Adjustment for MS–DRG Assignment 

The IPF PPS includes payment 

adjustments for the psychiatric DRG 

assigned to the claim based on each 

patient’s principal diagnosis. The IPF 

PPS recognizes the MS–DRGs. The DRG 

adjustment factors were expressed 

relative to the most frequently reported 

psychiatric DRG in FY 2002, that is, 

DRG 430 (psychoses). The coefficient 

values and adjustment factors were 

derived from the regression analysis. 

In accordance with § 412.27(a), 

payment under the IPF PPS is 

conditioned on IPFs admitting ‘‘only 

patients whose admission to the unit is 

required for active treatment, of an 

intensity that can be provided 

appropriately only in an inpatient 

hospital setting, of a psychiatric 

principal diagnosis that is listed in 

Chapter Five (‘‘Mental Disorders’’) of the 

International Classification of Diseases, 

Ninth Revision, Clinical Modification 

(ICD–9–CM)’’ or in the Fourth Edition, 

Text Revision of the American 

Psychiatric Association’s Diagnostic and 

Statistical Manual, (DSM–IV–TR). IPF 

claims with a principal diagnosis 

included in Chapter Five of the ICD–9– 

CM or the DSM–IV–TR are paid the 

Federal per diem base rate under the IPF 

PPS and all other applicable 

adjustments, including any applicable 

DRG adjustment. Psychiatric principal 

diagnoses that do not group to one of 

the designated DRGs still receive the 

Federal per diem base rate and all other 

applicable adjustments, but the payment 

would not include a DRG adjustment. 

The Standards for Electronic 

Transaction final rule published in the 

Federal Register on August 17, 2000 (65 

FR 50312), adopted the ICD–9–CM as 

the designated code set for reporting 

diseases, injuries, impairments, other 

health related problems, their 

manifestations, and causes of injury, 

disease, impairment, or other health 

related problems. Therefore, we use the 

ICD–9–CM as the designated code set 

for the IPF PPS. 

We believe that it is important to 

maintain the same diagnostic coding 

and DRG classification for IPFs that are 

used under the IPPS for providing 

psychiatric care. Therefore, when the 

IPF PPS was implemented for cost 

reporting periods beginning on or after 

January 1, 2005, we adopted the same 

diagnostic code set and DRG patient 

classification system (that is, the CMS 

DRGs) that were utilized at the time 

under the hospital inpatient prospective 

payment system (IPPS). Since the 

inception of the IPF PPS, the DRGs used 

as the patient classification system 

under the IPF PPS have corresponded 

exactly with the CMS DRGs applicable 

under the IPPS for acute care hospitals. 

Every year, changes to the ICD–9–CM 

coding system are addressed in the IPPS 

proposed and final rules. The changes to 

the codes are effective October 1 of each 

year and must be used by acute care 

hospitals as well as other providers to 

report diagnostic and procedure 

information. The IPF PPS has always 

incorporated ICD–9–CM coding changes 

made in the annual IPPS update. We 

publish coding changes in a 

Transmittal/Change Request, similar to 

how coding changes are announced by 

the IPPS and LTCH PPS. Those ICD–9– 

CM coding changes are also published 

in the following IPF PPS RY update, in 

either the IPF PPS proposed and final 

rules, or in an IPF PPS update notice. 

In the May 2008 IPF PPS notice (73 

FR 25709), we discussed CMS’ effort to 

better recognize resource use and the 

severity of illness among patients. CMS 

adopted the new MS–DRGs for the IPPS 

in the FY 2008 IPPS final rule with 

comment period (72 FR 47130). We 

believe by better accounting for patients’ 

severity of illness in Medicare payment 

rates, the MS–DRGs encourage hospitals 

to improve their coding and 

documentation of patient diagnoses. 

The MS–DRGs, which are based on the 

CMS DRGs, represent a significant 

increase in the number of DRGs (from 

538 to 745, an increase of 207). For a 

full description of the development and 

implementation of the MS–DRGs, see 

the FY 2008 IPPS final rule with 

comment period (72 FR 47141 through 

47175). 

In the May 2008 IPF PPS notice, the 

IPF PPS recognized the MS–DRGs. A 

crosswalk, to reflect changes that were 

made to the DRGs under the IPF PPS to 

the new MS–DRGs was provided (73 FR 

25716). Since then, we have referred to 

the IPF PPS DRGs as MS–DRGs. In the 

RY 2012 IPF PPS proposed rule, we 

proposed that all references to the MS– 

DRGs used for the IPF PPS would be to 

MS–IPF–DRGs. This would only be a 

change in terminology. We proposed to 

revise § 412.402 to add the definition of 

MS–IPF–DRG. 

Comment: One Commenter suggested 

for consistency sake, that the DRG name 

of MS–DRG should remain the same in 

this rule as it is in the IPPS rule. The 

commenter believes that the name 

change to MS–IPF–DRGs suggest that 

there are two separate and distinct DRG 

classification systems. 

Response: We understand the 

commenter’s concern that the name 

change from MS–DRG to MS–IPF–DRG 

could suggest that there are two separate 

DRG classification systems. Although 

we proposed to simply change the 


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terminology only and this change does 

not mean two separate and distinct DRG 

classification systems, we will retain the 

MS–DRG name for consistency sake and 

to avoid confusion. Therefore, we will 

not finalize the revision of § 412.402 to 

add the definition of MS–IPF–DRG. All 

references to the DRG name of MS– 

DRGs for the IPF PPS will remain the 

same. 

All of the ICD–9–CM coding changes 

are reflected in the FY 2011 GROUPER, 

Version 28.0, effective for IPPS 

discharges occurring on or after October 

1, 2010 through September 30, 2011. 

The GROUPER Version 28.0 software 

package assigns each case to an MS– 

DRG on the basis of the diagnosis and 

procedure codes and demographic 

information (that is, age, sex, and 

discharge status). The Medicare Code 

Editor (MCE) 27.0 uses the new ICD–9– 

CM codes to validate coding for IPPS 

discharges on or after October 1, 2010. 

For additional information on the 

GROUPER Version 28.0 and MCE 27.0, 

see Transmittal 2060 (Change Request 

7134), dated October 1, 2010. The IPF 

PPS has always used the same 

GROUPER and Code Editor as the IPPS. 

Therefore, the ICD–9–CM changes, 

which were reflected in the GROUPER 

Version 28.0 and MCE 27.0 on October 

1, 2010, also became effective for the 

IPF PPS for discharges occurring on or 

after October 1, 2010. 

The impact of the new MS–DRGs on 

the IPF PPS was negligible. Mapping to 

the MS–DRGs resulted in the current 17 

MS–DRGs, instead of the original 15, for 

which the IPF PPS provides an 

adjustment. Although the code set is 

updated, the same associated 

adjustment factors apply now that have 

been in place since implementation of 

the IPF PPS, with one exception that is 

unrelated to the update to the codes. 

When DRGs 521 and 522 were 

consolidated into MS–DRG 895, we 

carried over the adjustment factor of 

1.02 from DRG 521 to the newly 

consolidated MS–DRG. This was done 

to reflect the higher claims volume 

under DRG 521, with more than eight 

times the number of claims than billed 

under DRG 522. The updates are 

reflected in Tables 7 and 8. For a 

detailed description of the mapping 

changes from the original DRG 

adjustment categories to the current 

MS–DRG adjustment categories we refer 

readers to the May 2008 IPF PPS notice 

(73 FR 25714). 

The official version of the ICD–9–CM 

is available on CD–ROM from the U.S. 

Government Printing Office. The FY 

2009 version can be ordered by 

contacting the Superintendent of 

Documents, U.S. Government Printing 

Office, Department 50, Washington, DC 

20402–9329, telephone number (202) 

512–1800. Questions concerning the 

ICD–9–CM should be directed to 

Patricia E. Brooks, Co-Chairperson, ICD– 

9–CM Coordination and Maintenance 

Committee, CMS, Center for Medicare 

Management, Hospital and Ambulatory 

Policy Group, Division of Acute Care, 

Mailstop C4–08–06, 7500 Security 

Boulevard, Baltimore, Maryland 21244– 

1850. 

Further information concerning the 

official version of the ICD–9–CM can be 

found in the IPPS final rule with 

comment period, ‘‘Changes to Hospital 

Inpatient Prospective Payment System 

and Fiscal Year 2011 Rates’’ in the 

August 16, 2010 Federal Register (75 FR 

50042) and at Tables 7 and 8 below list 

the FY 2011 new and revised ICD–9–CM 

diagnosis codes that group to one of the 

17 MS–DRGs for which the IPF PPS 

provides an adjustment. These tables are 

only a listing of FY 2011 changes and 

do not reflect all of the currently valid 

and applicable ICD–9–CM codes 

classified in the MS–DRGs. When coded 

as a principal code or diagnosis, these 

codes receive the correlating MS–DRG 

adjustment. 

TABLE 7—FY 2011 NEW DIAGNOSIS CODES

Diagnosis code MS–DRG descriptions MS–DRG 

799.51 ................................................... Attention or concentration deficit .......................................................................................... 886 

799.52 ................................................... Cognitive communication deficit ........................................................................................... 884 

799.54 ................................................... Psychomotor deficit .............................................................................................................. 884 

799.55 ................................................... Frontal lobe and executive function deficit ........................................................................... 884 

799.59 ................................................... Other signs and symptoms involving cognition .................................................................... 884 

TABLE 8—FY 2011 REVISED DIAGNOSIS CODE

Diagnosis code MS–DRG description MS–DRG 

307.0 ..................................................... Adult onset fluency disorder ................................................................................................. 887 

Because we do not plan to update the 

regression analysis until we are able to 

analyze IPF PPS data, we proposed that 

the MS–IPF–DRG adjustment factors (as 

shown in Table 9) would continue to be 

paid for discharges occurring in RY 

2012. 

TABLE 9—RY 2012 CURRENT MS–IPF–DRGS APPLICABLE FOR THE PRINCIPAL DIAGNOSIS ADJUSTMENT

MS–DRG MS–DRG descriptions Adjustment 

factor 

056 ........................................................ Degenerative nervous system disorders w/MCC ................................................................. 1.05 

057 ........................................................ Degenerative nervous system disorders w/o MCC .............................................................. 1.05 

080 ........................................................ Nontraumatic stupor & coma w/MCC ................................................................................... 1.07 

081 ........................................................ Nontraumatic stupor & coma w/o MCC ............................................................................... 1.07 

876 ........................................................ O.R. procedure w/principal diagnoses of mental illness ...................................................... 1.22 

880 ........................................................ Acute adjustment reaction & psychosocial dysfunction ....................................................... 1.05 

881 ........................................................ Depressive neuroses ............................................................................................................ 0.99 

882 ........................................................ Neuroses except depressive ................................................................................................ 1.02 

883 ........................................................ Disorders of personality & impulse control .......................................................................... 1.02 


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TABLE 9—RY 2012 CURRENT MS–IPF–DRGS APPLICABLE FOR THE PRINCIPAL DIAGNOSIS ADJUSTMENT—Continued 

MS–DRG MS–DRG descriptions Adjustment 

factor 

884 ........................................................ Organic disturbances & mental retardation .......................................................................... 1.03 

885 ........................................................ Psychoses ............................................................................................................................ 1.00 

886 ........................................................ Behavioral & developmental disorders ................................................................................. 0.99 

887 ........................................................ Other mental disorder diagnoses ......................................................................................... 0.92 

894 ........................................................ Alcohol/drug abuse or dependence, left AMA ..................................................................... 0.97 

895 ........................................................ Alcohol/drug abuse or dependence w/rehabilitation therapy ............................................... 1.02 

896 ........................................................ Alcohol/drug abuse or dependence w/o rehabilitation therapy w/MCC ............................... 0.88 

897 ........................................................ Alcohol/drug abuse or dependence w/o rehabilitation therapy w/o MCC ............................ 0.88 

Final Rule Action: In summary, we 

received one public comment objecting 

to our proposed change to § 412.402 to 

change the terminology from MS–DRG 

to MS–IPF–DRG. Therefore, we will not 

revise § 412.402 to add the definition of 

MS–IPF–DRG. Instead, we will retain 

the MS–DRG name for consistency sake 

and in order to avoid confusion. All 

references to the DRG name of MS–DRG 

for the IPF PPS will remain the same. In 

addition, we are adopting the MS–DRG 

adjustments currently in effect and as 

shown in Table 9. 

2. Payment for Comorbid Conditions 

The intent of the comorbidity 

adjustments is to recognize the 

increased costs associated with 

comorbid conditions by providing 

additional payments for certain 

concurrent medical or psychiatric 

conditions that are expensive to treat. In 

the April 2010 IPF PPS notice (75 FR 

23114), we explained that the IPF PPS 

includes 17 comorbidity categories and 

identified the new, revised, and deleted 

ICD–9–CM diagnosis codes that generate 

a comorbid condition payment 

adjustment under the IPF PPS for RY 

2011 (75 FR 23115). 

Comorbidities are specific patient 

conditions that are secondary to the 

patient’s principal diagnosis and that 

require treatment during the stay. 

Diagnoses that relate to an earlier 

episode of care and have no bearing on 

the current hospital stay are excluded 

and must not be reported on IPF claims. 

Comorbid conditions must exist at the 

time of admission or develop 

subsequently, and affect the treatment 

received, length of stay (LOS), or both 

treatment and LOS. 

For each claim, an IPF may receive 

only one comorbidity adjustment per 

comorbidity category, but it may receive 

an adjustment for more than one 

comorbidity category. Billing 

instructions require that IPFs must enter 

the full ICD–9–CM codes for up to 8 

additional diagnoses if they co-exist at 

the time of admission or develop 

subsequently and impact the treatment 

provided. 

The comorbidity adjustments were 

determined based on the regression 

analysis using the diagnoses reported by 

IPFs in FY 2002. The principal 

diagnoses were used to establish the 

DRG adjustments and were not 

accounted for in establishing the 

comorbidity category adjustments, 

except where ICD–9–CM ‘‘code first’’ 

instructions apply. As we explained in 

the April 2010 IPF PPS notice (75 FR 

23115), the code first rule applies when 

a condition has both an underlying 

etiology and a manifestation due to the 

underlying etiology. For these 

conditions, the ICD–9–CM has a coding 

convention that requires the underlying 

conditions to be sequenced first 

followed by the manifestation. 

Whenever a combination exists, there is 

a ‘‘use additional code’’ note at the 

etiology code and a code first note at the 

manifestation code. 

As discussed in the MS–DRG section, 

where we proposed that all references to 

MS–DRGs used for the IPF PPS be to 

MS–IPF–DRGs (as previously stated, we 

are not finalizing that proposal), it is our 

policy to maintain the same diagnostic 

coding set for IPFs that is used under 

the IPPS for providing the same 

psychiatric care. Although the ICD–9– 

CM code set has been updated, the same 

adjustment factors have been in place 

since the implementation of the IPF 

PPS. 

Table 10 below lists the FY 2011 new 

ICD diagnosis codes that impact the 

comorbidity adjustments under the IPF 

PPS. Table 10 is not a list of all 

currently valid ICD codes applicable for 

the IPF PPS comorbidity adjustments. 

TABLE 10—FY 2011 NEW ICD CODES APPLICABLE FOR THE COMORBIDITY ADJUSTMENT

Diagnosis 

code Description 

Comorbidity 

category 

237.73 ................................................... Schwannomatosis .................................................................................................................. Oncology. 

237.79 ................................................... Other neurofibromatosis ......................................................................................................... Oncology. 

For RY 2012, we are applying the 

seventeen comorbidity categories for 

which we are providing an adjustment, 

their respective codes, including the 

new FY 2011 ICD–9–CM codes, and 

their respective adjustment factors in 

Table 11 below. 

TABLE 11—RY 2012 DIAGNOSIS CODES AND ADJUSTMENT FACTORS FOR COMORBIDITY CATEGORIES

Description of comorbidity Diagnoses codes Adjustment 

factor 

Developmental Disabilities ................... 317, 3180, 3181, 3182, and 319 .......................................................................................... 1.04 

Coagulation Factor Deficits .................. 2860 through 2864. .............................................................................................................. 1.13 

Tracheostomy ....................................... 51900 through 51909 and V440 .......................................................................................... 1.06 


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TABLE 11—RY 2012 DIAGNOSIS CODES AND ADJUSTMENT FACTORS FOR COMORBIDITY CATEGORIES—Continued 

Description of comorbidity Diagnoses codes Adjustment 

factor 

Renal Failure, Acute ............................. 5845 through 5849, 63630, 63631, 63632, 63730, 63731, 63732, 6383, 6393, 66932, 

66934, 9585.

1.11 

Renal Failure, Chronic .......................... 40301, 40311, 40391, 40402, 40412, 40413, 40492, 40493, 5853, 5854, 5855, 5856,

5859,586, V451, V560, V561, and V562.

1.11 

Oncology Treatment ............................. 1400 through 2399 with a radiation therapy code 92.21–92.29 or chemotherapy code

99.25.

1.07 

Uncontrolled Diabetes-Mellitus with or 

without complications.

25002, 25003, 25012, 25013, 25022, 25023, 25032, 25033, 25042, 25043, 25052, 

25053, 25062, 25063, 25072, 25073, 25082, 25083, 25092, and 25093.

1.05 

Severe Protein Calorie Malnutrition ..... 260 through 262 ................................................................................................................... 1.13 

Eating and Conduct Disorders ............. 3071, 30750, 31203, 31233, and 31234 .............................................................................. 1.12 

Infectious Disease ................................ 01000 through 04110, 042, 04500 through 05319, 05440 through 05449, 0550 through 

0770, 0782 through 07889, and 07950 through 07959.

1.07 

Drug and/or Alcohol Induced Mental 

Disorders.

2910, 2920, 29212, 2922, 30300, and 30400 ...................................................................... 1.03 

Cardiac Conditions ............................... 3910, 3911, 3912, 40201, 40403, 4160, 4210, 4211, and 4219 ......................................... 1.11 

Gangrene .............................................. 44024 and 7854. .................................................................................................................. 1.10 

Chronic Obstructive Pulmonary Disease.49121, 4941, 5100, 51883, 51884, V4611 and V4612, V4613 and V4614 ........................ 1.12 

Artificial Openings—Digestive and Urinary.56960 through 56969, 9975, and V441 through V446 ........................................................ 1.08 

Severe Musculoskeletal and Connective Tissue Diseases.6960, 7100, 73000 through 73009, 73010 through 73019, and 73020 through 73029 ...... 1.09 

Poisoning .............................................. 96500 through 96509, 9654, 9670 through 9699, 9770, 9800 through 9809, 9830 

through 9839, 986, 9890 through 9897.

1.11 

Final Rule Action: In summary, we 

are adopting the comorbidity 

adjustments currently in effect and as 

shown in Table 11 above for RY 2012 

beginning on July 1, 2011. 

3. Patient Age Adjustments 

As explained in the November 2004 

IPF PPS final rule (69 FR 66922), we 

analyzed the impact of age on per diem 

cost by examining the age variable (that 

is, the range of ages) for payment 

adjustments. 

In general, we found that the cost per 

day increases with age. The older age 

groups are more costly than the under 

45 age group, the differences in per 

diem cost increase for each successive 

age group, and the differences are 

statistically significant. 

We do not plan to update the 

regression analysis until we are able to 

analyze IPF PPS data. Therefore, for RY 

2012, we proposed to continue to use 

the patient age adjustments currently in 

effect as shown in Table 12 below. 

TABLE 12—AGE GROUPINGS AND

ADJUSTMENT FACTORS

Age Adjustment 

factor 

Under 45 ................................... 1.00 

45 and under 50 ....................... 1.01 

50 and under 55 ....................... 1.02 

55 and under 60 ....................... 1.04 

60 and under 65 ....................... 1.07 

65 and under 70 ....................... 1.10 

70 and under 75 ....................... 1.13 

75 and under 80 ....................... 1.15 

TABLE 12—AGE GROUPINGS AND

ADJUSTMENT FACTORS—Continued 

Age Adjustment 

factor 

80 and over .............................. 1.17 

Final Rule Action: We received no 

comments on the RY 2012 IPF PPS 

proposed rule concerning the age 

adjustment. We are adopting the age 

adjustment currently in effect and as 

shown in Table 12 above for RY 2012. 

4. Variable Per Diem Adjustments 

We explained in the November 2004 

IPF PPS final rule (69 FR 66946) that the 

regression analysis indicated that per 

diem cost declines as the LOS increases. 

The variable per diem adjustments to 

the Federal per diem base rate account 

for ancillary and administrative costs 

that occur disproportionately in the first 

days after admission to an IPF. 

We used a regression analysis to 

estimate the average differences in per 

diem cost among stays of different 

lengths. As a result of this analysis, we 

established variable per diem 

adjustments that begin on day 1 and 

decline gradually until day 21 of a 

patient’s stay. For day 22 and thereafter, 

the variable per diem adjustment 

remains the same each day for the 

remainder of the stay. However, the 

adjustment applied to day 1 depends 

upon whether the IPF has a qualifying 

ED. If an IPF has a qualifying ED, it 

receives a 1.31 adjustment factor for day 

1 of each stay. If an IPF does not have 

a qualifying ED, it receives a 1.19 

adjustment factor for day 1 of the stay. 

The ED adjustment is explained in more 

detail in section V.C.5 of this final rule. 

For RY 2012, we proposed to continue 

to use the variable per diem adjustment 

factors currently in effect as shown in 

Table 13 below. A complete discussion 

of the variable per diem adjustments 

appears in the November 2004 IPF PPS 

final rule (69 FR 66946). 

TABLE 13—VARIABLE PER DIEM

ADJUSTMENTS

Day-of-stay Adjustment 

factor 

Day 1—IPF Without a Qualifying ED ................................ 1.19 

Day 1—IPF With a Qualifying 

ED ......................................... 1.31 

Day 2 ........................................ 1.12 

Day 3 ........................................ 1.08 

Day 4 ........................................ 1.05 

Day 5 ........................................ 1.04 

Day 6 ........................................ 1.02 

Day 7 ........................................ 1.01 

Day 8 ........................................ 1.01 

Day 9 ........................................ 1.00 

Day 10 ...................................... 1.00 

Day 11 ...................................... 0.99 

Day 12 ...................................... 0.99 

Day 13 ...................................... 0.99 

Day 14 ...................................... 0.99 

Day 15 ...................................... 0.98 

Day 16 ...................................... 0.97 

Day 17 ...................................... 0.97 

Day 18 ...................................... 0.96 

Day 19 ...................................... 0.95 

Day 20 ...................................... 0.95 

Day 21 ...................................... 0.95 


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TABLE 13—VARIABLE PER DIEM

ADJUSTMENTS—Continued 

Day-of-stay Adjustment 

factor 

After Day 21 ............................. 0.92 

Final Rule Action: In response to the 

RY 2012 IPF PPS proposed rule, we 

received no public comments 

concerning the variable per diem 

adjustment. We are adopting the 

variable per diem adjustment currently 

in effect and as shown in Table 13 

above. 

C. Facility-Level Adjustments 

The IPF PPS includes facility-level 

adjustments for the wage index, IPFs 

located in rural areas, teaching IPFs, 

cost of living adjustments for IPFs 

located in Alaska and Hawaii, and IPFs 

with a qualifying ED. 

1. Wage Index Adjustment 

a. Background 

As discussed in the May 2006 IPF PPS 

final rule and in the May 2008 and May 

2009 IPF PPS notices, in providing an 

adjustment for geographic wage levels, 

the labor-related portion of an IPF’s 

payment is adjusted using an 

appropriate wage index. Currently, an 

IPF’s geographic wage index value is 

determined based on the actual location 

of the IPF in an urban or rural area as 

defined in § 412.64(b)(1)(ii)(A) through 

§ 412.64(C). 

b. Wage Index for RY 2012 

Since the inception of the IPF PPS, we 

have used hospital wage data in 

developing a wage index to be applied 

to IPFs. We are continuing that practice 

for RY 2012. We apply the wage index 

adjustment to the labor-related portion 

of the Federal rate, which is 70.317 

percent. This percentage reflects the 

labor-related relative importance of the 

FY 2008-based RPL market basket for 

RY 2012 (see section IV.C.6 of this final 

rule). The IPF PPS uses the pre-floor, 

pre-reclassified hospital wage index. 

Changes to the wage index are made in 

a budget neutral manner so that updates 

do not increase expenditures. 

For RY 2012, we proposed to apply 

the most recent hospital wage index 

(that is, the FY 2011 pre-floor, prereclassified hospital wage index because 

this is the most appropriate index as it 

best reflects the variation in local labor 

costs of IPFs in the various geographic 

areas) using the most recent hospital 

wage data (that is, data from hospital 

cost reports for the cost reporting period 

beginning during FY 2007), and 

applying an adjustment in accordance 

with our budget neutrality policy. This 

policy requires us to estimate the total 

amount of IPF PPS payments in RY 

2011 using the applicable wage index 

value divided by the total estimated IPF 

PPS payments in RY 2012 using the 

most recent wage index. The estimated 

payments are based on FY 2009 IPF 

claims, inflated to the appropriate RY. 

This quotient is the wage index budget 

neutrality factor, and it is applied in the 

update of the Federal per diem base rate 

for RY 2012 in addition to the market 

basket described in section IV.C.5 of this 

final rule. The wage index budget 

neutrality factor for RY 2012 is 0.9995. 

The wage index applicable for RY 

2012 appears in Table 1 and Table 2 in 

Addendum B of this final rule. As 

explained in the May 2006 IPF PPS final 

rule for RY 2007 (71 FR 27061), the IPF 

PPS applies the hospital wage index 

without a hold-harmless policy, and 

without an out-commuting adjustment 

or out-migration adjustment because the 

statutory authority for these policies 

applies only to the IPPS. 

Also in the May 2006 IPF PPS final 

rule for RY 2007 (71 FR 27061), we 

adopted the changes discussed in the 

Office of Management and Budget 

(OMB) Bulletin No. 03–04 (June 6, 

2003), which announced revised 

definitions for Metropolitan Statistical 

Areas (MSAs), and the creation of 

Micropolitan Statistical Areas and 

Combined Statistical Areas. In adopting 

the OMB Core-Based Statistical Area 

(CBSA) geographic designations, since 

the IPF PPS was already in a transition 

period from TEFRA payments to PPS 

payments, we did not provide a separate 

transition for the CBSA-based wage 

index. 

As was the case in RY 2011, for RY 

2012 we proposed to continue to use the 

CBSA-based wage index values as 

presented in Tables 1 and 2 in 

Addendum B of this final rule. A 

complete discussion of the CBSA labor 

market definitions appears in the May 

2006 IPF PPS final rule (71 FR 27061 

through 27067). 

In summary, for RY 2012 we proposed 

to use the FY 2011 wage index data 

(collected from cost reports submitted 

by hospitals for cost reporting periods 

beginning during FY 2007) to adjust IPF 

PPS payments beginning July 1, 2011. 

c. OMB Bulletins 

The Office of Management and Budget 

(OMB) publishes bulletins regarding 

CBSA changes, including changes to 

CBSA numbers and titles. In the May 

2008 IPF PPS notice, we incorporated 

the CBSA nomenclature changes 

published in the most recent OMB 

bulletin that applies to the hospital 

wage data used to determine the current 

IPF PPS wage index (73 FR 25721). We 

will continue to do the same for all such 

OMB CBSA nomenclature changes in 

future IPF PPS rules and notices, as 

necessary. The OMB bulletins may be 

accessed online at http:// 

www.whitehouse.gov/omb/bulletins/ 

index.html. 

Final Rule Action: We are finalizing 

our proposal to use FY 2011 wage index 

data to adjust IPF PPS payments 

beginning July 1, 2011. 

2. Adjustment for Rural Location 

In the November 2004 IPF PPS final 

rule, we provided a 17 percent payment 

adjustment for IPFs located in a rural 

area. This adjustment was based on the 

regression analysis, which indicated 

that the per diem cost of rural facilities 

was 17 percent higher than that of urban 

facilities after accounting for the 

influence of the other variables included 

in the regression. For RY 2012, we 

proposed to apply a 17 percent payment 

adjustment for IPFs located in a rural 

area as defined at § 412.64(b)(1)(ii)(C). 

As stated in the November 2004 IPF PPS 

final rule, we do not intend to update 

the adjustment factors derived from the 

regression analysis until we are able to 

analyze IPF PPS data. A complete 

discussion of the adjustment for rural 

locations appears in the November 2004 

IPF PPS final rule (69 FR 66954). 

Final Rule Action: In summary, we 

are adopting the 17 percent rural 

adjustment in effect for RY 2012. 

3. Teaching Adjustment 

In the November 2004 IPF PPS final 

rule, we implemented regulations at 

§ 412.424(d)(1)(iii) to establish a facilitylevel adjustment for IPFs that are, or are 

part of, teaching hospitals. The teaching 

adjustment accounts for the higher 

indirect operating costs experienced by 

hospitals that participate in GME 

programs. The payment adjustments are 

made based on the number of full-time 

equivalent (FTE) interns and residents 

training in the IPF and the IPF’s average 

daily census. 

Medicare makes direct GME payments 

(for direct costs such as resident and 

teaching physician salaries, and other 

direct teaching costs) to all teaching 

hospitals including those paid under a 

PPS, and those paid under the TEFRA 

rate-of-increase limits. These direct 

GME payments are made separately 

from payments for hospital operating 

costs and are not part of the PPSs. The 

direct GME payments do not address the 

estimated higher indirect operating 

costs teaching hospitals may face. 

For teaching hospitals paid under the 

TEFRA rate-of- increase limits, 


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Medicare does not make separate 

payments for indirect medical education 

costs because payments to these 

hospitals are based on the hospitals’ 

reasonable costs which already include 

these higher indirect costs that may be 

associated with teaching programs. 

The results of the regression analysis 

of FY 2002 IPF data established the 

basis for the payment adjustments 

included in the November 2004 IPF PPS 

final rule. The results showed that the 

indirect teaching cost variable is 

significant in explaining the higher 

costs of IPFs that have teaching 

programs. We calculated the teaching 

adjustment based on the IPF’s ‘‘teaching 

variable,’’ which is one plus the ratio of 

the number of FTE residents training in 

the IPF (subject to limitations described 

below) to the IPF’s average daily census 

(ADC). 

We established the teaching 

adjustment in a manner that limited the 

incentives for IPFs to add FTE residents 

for the purpose of increasing their 

teaching adjustment. We imposed a cap 

on the number of FTE residents that 

may be counted for purposes of 

calculating the teaching adjustment. The 

cap limits the number of FTE residents 

that teaching IPFs may count for the 

purpose of calculating the IPF PPS 

teaching adjustment, not the number of 

residents teaching institutions can hire 

or train. We calculated the number of 

FTE residents that trained in the IPF 

during a ‘‘base year’’ and used that FTE 

resident number as the cap. An IPF’s 

FTE resident cap is ultimately 

determined based on the final 

settlement of the IPF’s most recent cost 

report filed before November 15, 2004 

(that is, the publication date of the IPF 

PPS final rule). 

In the regression analysis, the 

logarithm of the teaching variable had a 

coefficient value of 0.5150. We 

converted this cost effect to a teaching 

payment adjustment by treating the 

regression coefficient as an exponent 

and raising the teaching variable to a 

power equal to the coefficient value. We 

note that the coefficient value of 0.5150 

was based on the regression analysis 

holding all other components of the 

payment system constant. 

As with other adjustment factors 

derived through the regression analysis, 

we do not plan to rerun the regression 

analysis until we analyze IPF PPS data. 

Therefore, in this final rule, for RY 

2012, we are retaining the coefficient 

value of 0.5150 for the teaching 

adjustment to the Federal per diem base 

rate. 

A complete discussion of how the 

teaching adjustment was calculated 

appears in the November 2004 IPF PPS 

final rule (69 FR 66954 through 66957) 

and the May 2008 IPF PPS notice (73 FR 

25721). 

FTE Intern and Resident Cap 

Adjustment 

CMS has been asked to reconsider the 

current IPF teaching policy and permit 

a temporary increase in the FTE resident 

cap when the IPF increases the number 

of FTE residents it trains due to the 

acceptance of displaced residents 

(residents that are training in an IPF or 

a program before the IPF or program 

closed) when another IPF closes or 

closes its medical residency training 

program. 

To help us assess how many IPFs 

have been, or expect to be adversely 

affected by their inability to adjust their 

caps under § 412.424(d)(1) and under 

these situations, we specifically 

requested public comment from IPFs in 

the May 1, 2009 IPF PPS notice (74 FR 

20376 through 20377). A summary of 

the comments and our response can be 

reviewed in the April 30, 2010 IPF PPS 

notice (75 FR 23106, 23117). All of the 

commenters recommended that CMS 

modify the IPF PPS teaching adjustment 

policy, supporting a policy change that 

would permit the IPF PPS residency cap 

to be temporarily adjusted when that 

IPF trains displaced residents due to 

closure of an IPF or closure of an IPF’s 

medical residency training program(s). 

The commenters recommended a 

temporary resident cap adjustment 

policy similar to such policies applied 

in similar contexts for acute care 

hospitals. 

We agree with the commenters that, 

when a hospital temporarily takes on 

residents because another hospital 

closes or discontinues its program, a 

temporary adjustment to the cap would 

be appropriate for rotation that occurs in 

an IPF setting (freestanding or units). In 

these situations, residents may have 

partially completed a medical residency 

training program at the hospital that has 

closed its training program and may be 

unable to complete their training at 

another hospital that is already training 

residents up to or in excess of its cap. 

We believe that it is appropriate to 

allow temporary adjustments to the FTE 

caps for an IPF that provides residency 

training to medical residents who have 

partially completed a residency training 

program at an IPF that closes or at an 

IPF that discontinues training residents 

in a residency training program(s) (also 

referred to as a ‘‘closed’’ program 

throughout this preamble). For this 

reason, we proposed to adopt the 

following temporary resident cap 

adjustment policies, similar to the 

temporary adjustments to the FTE cap 

used for acute care hospitals. We 

proposed that the cap adjustment would 

be temporary because it is resident 

specific and would only apply to the 

displaced resident(s) until the 

resident(s) completes training in that 

specialty. We proposed that, as under 

the IPPS policy for displaced residents, 

the IPF PPS temporary cap adjustment 

would apply only to residents that were 

still training at the IPF at the time the 

IPF closed or at the time the IPF ceased 

training residents in the residency 

training program(s). Residents who 

leave the IPF, for whatever reason, 

before the closure of the IPF hospital or 

medical residency training program 

would not be considered displaced 

residents for purposes of the IPF 

temporary cap adjustment policy. 

Similarly, as under the IPPS policy, we 

proposed that medical students who 

match to a program at an IPF but the IPF 

or medical residency training program 

closes before the individual begins 

training at that IPF are also not 

considered displaced residents for 

purposes of the IPF temporary cap 

adjustments. For detailed information 

on these acute care hospital GME/IME 

payment policies, see 66 FR 39899 

(August 1, 2001), 64 FR 41522 (July 30 

1999), and 64 FR 24736 (May 7 1999). 

We note that although we proposed to 

adopt a policy under the IPF PPS that 

is consistent with the policy applicable 

under the IPPS, the actual caps under 

the two payment systems may not be 

commingled. 

a. Temporary Adjustment to the FTE 

Cap To Reflect Residents Added Due to 

Hospital Closure 

We proposed to allow an IPF to 

receive a temporary adjustment to the 

FTE cap to reflect residents added 

because of another IPF’s closure. This 

adjustment is intended to account for 

medical residents who would have 

partially completed a medical residency 

training program at the hospital that has 

closed and may be unable to complete 

their training at another hospital 

because that hospital is already training 

residents up to or in excess of its cap. 

We proposed this change because IPFs 

have indicated a reluctance to accept 

additional residents from a closed IPF 

without a temporary adjustment to their 

caps. For purposes of this policy on IPF 

closure, we proposed to adopt the IPPS 

definition of ‘‘closure of a hospital’’ in 42 

CFR 413.79(h) to mean the IPF 

terminates its Medicare provider 

agreement as specified in 42 CFR 

489.52. Therefore, we proposed to add 

a new § 412.424(d)(1)(iii)(F)(1) to allow 

a temporary adjustment to an IPF’s FTE 

cap to reflect residents added because of 


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an IPF’s closure on or after July 1, 2011 

to be effective for cost reporting periods 

beginning on or after July 1, 2011. We 

would allow an adjustment to an IPF’s 

FTE cap if the IPF meets the following 

criteria: (a) The IPF is training displaced 

residents from an IPF that closed on or 

after July 1, 2011; and (b) the IPF that 

is training the displaced residents from 

the closed IPF submits a request for a 

temporary adjustment to its FTE cap to 

its Medicare contractor no later than 60 

days after the hospital first begins 

training the displaced residents, and 

documents that the IPF is eligible for 

this temporary adjustment to its FTE 

cap by identifying the residents who 

have come from the closed IPF and have 

caused the IPF to exceed its cap, (or the 

IPF may already be over its cap), and 

specifies the length of time that the 

adjustment is needed. After the 

displaced residents leave the IPF’s 

training program or complete their 

residency program, the IPF’s cap would 

revert to its original level. This means 

that the temporary adjustment to the 

FTE cap would be available to the IPF 

only for the period of time necessary for 

the displaced residents to complete 

their training. Further, as under the 

IPPS policy, we also proposed that the 

total amount of temporary cap 

adjustment that can be distributed to all 

receiving hospitals cannot exceed the 

cap amount of the IPF that closed. 

We also note that section 5506 of the 

Affordable Care Act, ‘‘Preservation of 

Resident Cap Positions from Closed 

Hospitals,’’ does not apply to IPFs that 

closed. Section 5506 only amends 

sections 1886(d) and (h) of the Act with 

respect to direct GME and IPPS IME 

payments. Therefore, the IME FTE cap 

redistributions under section 5506 only 

apply to ‘‘subsection (d)’’ IPPS hospitals. 

Section 5506 has no applicability to the 

IME teaching adjustments under the IPF 

PPS (or the IRF PPS, for that matter). 

b. Temporary Adjustment to FTE Cap 

To Reflect Residents Affected by 

Residency Program Closure 

We proposed that if an IPF that ceases 

training residents in a residency training 

program(s) agrees to temporarily reduce 

its FTE cap, another IPF may receive a 

temporary adjustment to its FTE cap to 

reflect residents added because of the 

closure of another IPF’s residency 

training program. For purposes of this 

policy on closed residency programs, 

we proposed to adopt the IPPS 

definition of ‘‘closure of a hospital 

residency training program’’ to mean 

that the hospital ceases to offer training 

for residents in a particular approved 

medical residency training program as 

specified in § 413.79(h). The 

methodology for adjusting the caps for 

the ‘‘receiving IPF’’ and the ‘‘IPF that 

closed its program’’ is described below. 

i. Receiving IPF 

We proposed that an IPF(s) may 

receive a temporary adjustment to its 

FTE cap to reflect residents added 

because of the closure of another IPF’s 

residency training program for cost 

reporting periods beginning on or after 

July 1, 2011 if— 

• The IPF is training additional 

residents from the residency training 

program of an IPF that closed its 

program on or after July 1, 2011; and 

• No later than 60 days after the IPF 

begins to train the residents, the IPF 

submits to its Medicare Contractor a 

request for a temporary adjustment to its 

FTE cap, documents that the IPF is 

eligible for this temporary adjustment 

by identifying the residents who have 

come from another IPF’s closed program 

and have caused the IPF to exceed its 

cap,(or the IPF may already be in excess 

of its cap), specifies the length of time 

the adjustment is needed, and, as 

explained in more detail below, submits 

to its Medicare contractor a copy of the 

FTE cap reduction statement by the IPF 

closing the residency training program. 

In general, the temporary adjustment 

criteria established for closed medical 

residency training programs at IPFs is 

similar to the criteria established for 

closed IPFs. More than one IPF may be 

eligible to apply for the temporary 

adjustment because residents from one 

closed program may migrate to different 

IPFs, or they may complete their 

training at more than one IPF. Also, 

only to the extent to which an IPF 

would exceed its FTE cap by training 

displaced residents would it be eligible 

for the temporary adjustment. 

Finally, we proposed that IPFs that 

meet the proposed criteria would be 

eligible to receive temporary 

adjustments to their FTE caps for cost 

reporting periods beginning on or after 

July 1, 2011. 

ii. IPF That Closed Its Program(s) 

We proposed that an IPF that agrees 

to train residents who have been 

displaced by the closure of another IPF’s 

resident teaching program may receive a 

temporary FTE cap adjustment only if 

the IPF with the closed program meets 

the following criteria— 

• Temporarily reduces its FTE cap by 

the number of FTE residents in each 

program year, training in the program at 

the time of the program’s closure. The 

yearly reduction would be determined 

by deducting the number of those 

residents who would have been training 

in the program during the year of the 

closure, had the program not closed; 

and 

• No later than 60 days after the 

residents who were in the closed 

program begin training at another IPF, 

submits to its Medicare contractor a 

statement signed and dated by its 

representative that specifies that it 

agrees to the temporary reduction in its 

FTE cap to allow the IPF training the 

displaced residents to obtain a 

temporary adjustment to its cap; 

identifies the residents who were 

training at the time of the program’s 

closure; identifies the IPFs to which the 

residents are transferring once the 

program closes; and specifies the 

reduction for the applicable program 

years. 

Unlike the proposed closed IPF policy 

at § 412.424(d) (1)(iii)(F)(1), we 

proposed under this closed program 

policy that in order for the receiving 

IPF(s) to qualify for a temporary 

adjustment to their FTE cap, the IPFs 

that are closing their programs would 

need to reduce their FTE cap for the 

duration of time the displaced residents 

would need to finish their training. We 

proposed this because the IPF that 

closes the program still retains the FTE 

slots in its cap, even if the IPF chooses 

not to fill the slots with residents. We 

believe it is inappropriate to allow an 

increase to the receiving IPF’s cap 

without an attendant decrease to the cap 

of the IPF with the closed program, 

because the IPF that closed a program(s) 

could fill these slots with residents from 

other programs even if the increase and 

related decrease is only temporary. 

We proposed that the cap reduction 

for the IPF with the closed program 

would be based on the number of FTE 

residents in each program year who 

were in the program at the IPF at the 

time of the program’s closure, and who 

begin training at another IPF. 

Comment: The majority of the 

commenters strongly supported the 

proposed policy to allow a temporary 

adjustment to the resident cap when an 

IPF closes or closes its residency 

teaching program. However, a few of the 

commenters urged CMS to modify the 

regulations to allow IPFs to receive the 

temporary cap adjustment if they are 

training displaced residents as of July 1, 

2011. One commenter requested the 

amendment at § 412.424(d)(1)(iii)(F)(l)(i) 

be modified to state, ‘‘The IPF is training 

additional residents as of July 1, 2011 

from an IPF that closed.’’ The 

commenter also requested that we 

modify § 412.424(d)(1)(iii)(l)(ii) to state, 

‘‘No later than 60 days after the IPF 

begins to train the resident or in the case 

where an IPF is training the residents as 


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of July 1,2011, by August 31, 2011, the 

IPF submits. * * * ’’ 

Response: We share the commenters’ 

concern for those FTE residents who 

have been displaced before July 1, 2011 

due to closure of an IPF. We carefully 

considered the commenters’ request that 

CMS modify the IPF temporary cap 

adjustment policy to allow IPFs that 

volunteered to train displaced residents 

before July 1, 2011, to receive the 

temporary cap adjustment. We realize 

that at present, IPFs provide this 

important service to displaced residents 

without extra compensation. However, 

this is a new policy that was proposed 

rather than a correction to an existing 

policy, and as such the effective date of 

the IPF closure policy must be applied 

prospectively. Therefore, as proposed, 

we are finalizing the IPF PPS temporary 

cap adjustment to apply where an IPF 

is training additional residents from an 

IPF that closed or closed its’ residency 

program on or after July 1, 2011. The 

policy is effective for cost reporting 

periods beginning on or after July 1, 

2011. We appreciate the support for the 

proposed policies to allow a temporary 

adjustment to the resident cap when an 

IPF closes or closes its residency 

teaching program. We are finalizing 

these policies as proposed. 

Comment: Several commenters 

expressed concern about the caps on the 

number of FTE residents that can be 

used to calculate the teaching 

adjustment. These commenters believe 

that the current cap is based on a 

snapshot of activity freezing the status 

of residency education at a random 

point in time-2004. The commenters 

stated that they continue to advocate for 

a substantial increase in the total 

number of residency training positions 

supported by the Federal Government. 

One commenter expressed concern 

about having caps in general since the 

current cap is based on 2004 data. 

Several commenters pointed out that the 

demand for health care services will 

continue with the growing needs of 78 

million ‘‘baby boomers’’ that started 

retirement in 2010 and with the passage 

of Paul Wellstone and Pete Domenici 

Mental Health Parity and Addiction 

Equality Act of 2008. These commenters 

stated that the U.S. already faces a 

shortage of psychiatrist, and these 

factors could potentially elevate what is 

now a problem to what could be a crisis. 

Response: We established the 

teaching adjustment in a manner that 

limited the incentives for IPFs to add 

FTE residents for the purpose of 

increasing their teaching adjustment. 

We imposed a cap on the number of 

FTE residents that may be counted for 

purposes of calculating the teaching 

adjustment, similar to that established 

by sections 4621 (IME FTE cap for IPPS 

hospitals) and 4623 (direct GME FTE 

cap for all hospitals) of the BBA. The 

cap limits the number of residents that 

teaching IPFs may count for purposes of 

calculating the teaching adjustment, not 

the number of residents that teaching 

institutions can hire or train. 

We acknowledge that the cap on the 

number of FTE residents that may be 

counted under the IPF PPS teaching 

adjustment is based on 2004 data and 

the cap freezes the number of residents 

that Medicare will recognize for 

payment under the IPF PPS teaching 

adjustment to that year. This policy is 

intended to exercise our statutory 

responsibility under the BBA to prevent 

any erosion of the resident caps 

established under the IPPS that could 

result from incentives created by the 

facility adjustment for teaching 

hospitals under the IPF PPS. In 

addition, we wanted to avoid creating 

incentives to artificially expand 

residency training in IPFs, and ensure 

that the resident base used to determine 

payments is related to the care needs in 

IPF institutions. We provided a detailed 

discussion in the November 15, 2004 

Federal Register (69 FR 66954–66955) 

of the BBA cap. We are continually 

monitoring the impact of our policies to 

assess the appropriateness of the 

policies and will continue to monitor 

the impact of this policy closely and 

consider the appropriateness of our FTE 

cap for future refinements for the RY 

2013. 

Comment: One commenter 

recommended that CMS work with the 

Congress to provide a permanent 

distribution of the resident cap for IPFs 

that close, similar to the Affordable Care 

Act for acute care hospital closures. 

Response: We believe the commenter 

is referring to section 5506 of the 

Affordable Care Act, ‘‘Preservation of 

Resident Cap Positions from Closed 

Hospitals,’’ which does not apply to IPFs 

that closed. In the absence of such 

authority, we are finalizing the 

temporary adjustment to the FTE 

resident caps for when an IPF closes or 

closes its residency teaching program, as 

described above. 

Final Rule Action: In summary, we 

are adding § 412.424(d)(1)(iii)(F)(1) and 

§ 412.424(d)(1)(iii)(F)(2) to implement 

policies related to temporary 

adjustments to FTE caps to reflect 

residents added due to closure of an IPF 

or an IPFs medical residency training 

program respectfully. 

4. Cost of Living Adjustment for IPFs 

Located in Alaska and Hawaii 

The IPF PPS includes a payment 

adjustment for IPFs located in Alaska 

and Hawaii based upon the county in 

which the IPF is located. As we 

explained in the November 2004 IPF 

PPS final rule, the FY 2002 data 

demonstrated that IPFs in Alaska and 

Hawaii had per diem costs that were 

disproportionately higher than other 

IPFs. Other Medicare PPSs (for example, 

the IPPS and LTCH PPS) have adopted 

a cost of living adjustment (COLA) to 

account for the cost differential of care 

furnished in Alaska and Hawaii. 

We analyzed the effect of applying a 

COLA to payments for IPFs located in 

Alaska and Hawaii. The results of our 

analysis demonstrated that a COLA for 

IPFs located in Alaska and Hawaii 

would improve payment equity for 

these facilities. As a result of this 

analysis, we provided a COLA in the 

November 2004 IPF PPS final rule. 

A COLA adjustment for IPFs located 

in Alaska and Hawaii is made by 

multiplying the nonlabor-related 

portion of the Federal per diem base rate 

by the applicable COLA factor based on 

the COLA area in which the IPF is 

located. 

The COLA factors are published on 

the OPM Web site at (http:// 

www.opm.gov/oca/cola/rates.asp). 

We note that the COLA areas for 

Alaska are not defined by county as are 

the COLA areas for Hawaii. In 5 CFR 

591.207, the OPM established the 

following COLA areas: 

(a) City of Anchorage, and 80- 

kilometer (50-mile) radius by road, as 

measured from the Federal courthouse; 

(b) City of Fairbanks, and 80- 

kilometer (50-mile) radius by road, as 

measured from the Federal courthouse; 

(c) City of Juneau, and 80-kilometer 

(50-mile) radius by road, as measured 

from the Federal courthouse; 

(d) Rest of the State of Alaska. 

As previously stated in the November 

2004 IPF PPS final rule, we update the 

COLA factors according to updates 

established by the U.S. Office of 

Personnel Management (OPM). 

Sections 1911 through 1919 of the 

Nonforeign Area Retirement Equity 

Assurance Act, as contained in subtitle 

B of title XIX of the National Defense 

Authorization Act (NDAA) for Fiscal 

Year 2010 (Pub. L. 111–84, October 28, 

2009), transitions the Alaska and Hawaii 

COLAs to locality pay. Under section 

1914 of Public Law 111–84, locality pay 

is being phased in over a 3-year period 

beginning in January 2010, with COLA 

rates frozen as of the date of enactment, 

October 28, 2009, and then 


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proportionately reduced to reflect the 

phase-in of locality pay. 

When we published the proposed 

COLA adjustment factors in the January 

2011 proposed rule, we inadvertently 

selected the FY 2010 COLA rates. The 

FY 2010 COLA rates were reduced rates 

to account for the phase-in of locality 

pay. We did not intend to propose 

reduced COLA rates, and we do not 

believe it is appropriate to finalize the 

reduced COLAs that we showed in our 

proposed rule. The 2009 COLA rates do 

not reflect the phase-in of locality pay. 

Therefore, we are finalizing the FY 2009 

COLA rates, which are the same rates 

that were in effect for both RY 2010 and 

RY 2011. We plan to address COLA in 

the future refinement process in FY 

2013. 

TABLE 14—COLA FACTORS FOR ALASKA AND HAWAII IPFS

Area 

Cost of living 

adjustment 

factor 

Alaska: ............................

City of Anchorage and 80-kilometer (50-mile) radius by road ................................................................................................. 1.23 

City of Fairbanks and 80-kilometer (50-mile) radius by road .................................................................................................. 1.23 

City of Juneau and 80-kilometer (50-mile) radius by road ...................................................................................................... 1.23 

Rest of Alaska .......................................................................................................................................................................... 1.25 

Hawaii: 

City and County of Honolulu .................................................................................................................................................... 1.25 

County of Hawaii ...................................................................................................................................................................... 1.18 

County of Kauai ........................................................................................................................................................................ 1.25 

County of Maui and County of Kalawao .................................................................................................................................. 1.25 

(The above factors are based on data obtained from the U.S. Office of Personnel Management Web site at: http://www.opm.gov/oca/cola/ 

rates.asp.) 

Final Rule Action: In summary, 

although we did not propose the FY 

2009 COLAs, in order to provide a full 

COLA, we are adopting the FY 2009 

COLA rates obtained from the OPM Web 

site and as shown in Table 14 above. 

5. Adjustment for IPFs With a 

Qualifying Emergency Department (ED) 

Currently, the IPF PPS includes a 

facility-level adjustment for IPFs with 

qualifying EDs. We provide an 

adjustment to the Federal per diem base 

rate to account for the costs associated 

with maintaining a full-service ED. The 

adjustment is intended to account for 

ED costs incurred by a freestanding 

psychiatric hospital with a qualifying 

ED or a distinct part psychiatric unit of 

an acute hospital or a CAH for 

preadmission services otherwise 

payable under the Medicare Outpatient 

Prospective Payment System (OPPS) 

furnished to a beneficiary during the 

day immediately preceding the date of 

admission to the IPF (see § 413.40(c)(2)) 

and the overhead cost of maintaining 

the ED. This payment is a facility-level 

adjustment that applies to all IPF 

admissions (with one exception 

described below), regardless of whether 

a particular patient receives 

preadmission services in the hospital’s 

ED. 

The ED adjustment is incorporated 

into the variable per diem adjustment 

for the first day of each stay for IPFs 

with a qualifying ED. That is, IPFs with 

a qualifying ED receive an adjustment 

factor of 1.31 as the variable per diem 

adjustment for day 1 of each stay. If an 

IPF does not have a qualifying ED, it 

receives an adjustment factor of 1.19 as 

the variable per diem adjustment for day 

1 of each patient stay. 

The ED adjustment is made on every 

qualifying claim except as described 

below. As specified in 

§ 412.424(d)(1)(v)(B), the ED adjustment 

is not made where a patient is 

discharged from an acute care hospital 

or critical access hospital (CAH) and 

admitted to the same hospital’s or 

CAH’s psychiatric unit. An ED 

adjustment is not made in this case 

because the costs associated with ED 

services are reflected in the DRG 

payment to the acute care hospital or 

through the reasonable cost payment 

made to the CAH. If we provided the ED 

adjustment in these cases, the hospital 

would be paid twice for the overhead 

costs of the ED, as stated in the 

November 2004 IPF PPS final rule (69 

FR 66960). 

Therefore, when patients are 

discharged from an acute care hospital 

or CAH and admitted to the same 

hospital’s or CAH’s psychiatric unit, the 

IPF receives the 1.19 adjustment factor 

as the variable per diem adjustment for 

the first day of the patient’s stay in the 

IPF. 

For RY 2012, we proposed to retain 

the 1.31 adjustment factor for IPFs with 

qualifying EDs. A complete discussion 

of the steps involved in the calculation 

of the ED adjustment factor appears in 

the November 2004 IPF PPS final rule 

(69 FR 66959 through 66960) and the 

May 2006 IPF PPS final rule (71 FR 

27070 through 27072). 

Final Rule Action: We are retaining 

the 1.31 adjustment factor for IPFs with 

qualifying EDs for RY 2012. 

D. Other Payment Adjustments and 

Policies 

For RY 2012, the IPF PPS includes an 

outlier adjustment to promote access to 

IPF care for those patients who require 

expensive care and to limit the financial 

risk of IPFs treating unusually costly 

patients. In this section, we also explain 

the reason for ending the stop-loss 

provision that was applicable during the 

transition period. 

1. Outlier Payments 

In the November 2004 IPF PPS final 

rule, we implemented regulations at 

§ 412.424(d)(3)(i) to provide a per-case 

payment for IPF stays that are 

extraordinarily costly. Providing 

additional payments to IPFs for 

extremely costly cases strongly 

improves the accuracy of the IPF PPS in 

determining resource costs at the patient 

and facility level. These additional 

payments reduce the financial losses 

that would otherwise be incurred in 

treating patients who require more 

costly care and, therefore, reduce the 

incentives for IPFs to under-serve these 

patients. 

We make outlier payments for 

discharges in which an IPF’s estimated 

total cost for a case exceeds a fixed 

dollar loss threshold amount 

(multiplied by the IPF’s facility-level 

adjustments) plus the Federal per diem 

payment amount for the case. 

In instances when the case qualifies 

for an outlier payment, we pay 80 


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percent of the difference between the 

estimated cost for the case and the 

adjusted threshold amount for days 1 

through 9 of the stay (consistent with 

the median LOS for IPFs in FY 2002), 

and 60 percent of the difference for day 

10 and thereafter. We established the 80 

percent and 60 percent loss sharing 

ratios because we were concerned that 

a single ratio established at 80 percent 

(like other Medicare PPSs) might 

provide an incentive under the IPF per 

diem payment system to increase LOS 

in order to receive additional payments. 

After establishing the loss sharing ratios, 

we determined the current fixed dollar 

loss threshold amount of $6,372 through 

payment simulations designed to 

compute a dollar loss beyond which 

payments are estimated to meet the 2 

percent outlier spending target. 

a. Update to the Outlier Fixed Dollar 

Loss Threshold Amount 

In accordance with the update 

methodology described in § 412.428(d), 

we proposed to update the fixed dollar 

loss threshold amount used under the 

IPF PPS outlier policy. Based on the 

regression analysis and payment 

simulations used to develop the IPF 

PPS, we established a 2 percent outlier 

policy which strikes an appropriate 

balance between protecting IPFs from 

extraordinarily costly cases while 

ensuring the adequacy of the Federal 

per diem base rate for all other cases 

that are not outlier cases. 

We believe it is necessary to update 

the fixed dollar loss threshold amount 

because an analysis of the latest 

available data (that is, FY 2009 IPF 

claims) and rate increases indicates that 

adjusting the fixed dollar loss amount is 

necessary in order to maintain an outlier 

percentage that equals 2 percent of total 

estimated IPF PPS payments. 

In the May 2006 IPF PPS final rule (71 

FR 27072), we describe the process by 

which we calculate the outlier fixed 

dollar loss threshold amount. We will 

continue to use this process for RY 

2012. We begin by simulating aggregate 

payments with and without an outlier 

policy, and applying an iterative process 

to determine an outlier fixed dollar loss 

threshold amount that will result in 

outlier payments being equal to 2 

percent of total estimated payments 

under the simulation. Based on this 

process, using the FY 2009 claims data, 

we estimate that IPF outlier payments as 

a percentage of total estimated payments 

are approximately 2.2 percent in RY 

2011. Thus, for this final rule, we are 

updating the RY 2012 IPF outlier 

threshold amount to ensure that 

estimated RY 2012 outlier payments are 

approximately 2 percent of total 

estimated IPF payments. The outlier 

fixed dollar loss threshold amount of 

$6,372 for RY 2011 will be changed to 

$7,340 for RY 2012 to reduce estimated 

outlier payments and thereby maintain 

estimated outlier payments at 2 percent 

of total estimated aggregate IPF 

payments for RY 2012. 

Final Rule Action: In this final rule, 

we are adopting $7,340 as the fixed 

dollar loss threshold for RY 2012. 

b. Statistical Accuracy of Cost-to-Charge 

Ratios 

As previously stated, under the IPF 

PPS, an outlier payment is made if an 

IPF’s cost for a stay exceeds a fixed 

dollar loss threshold amount. In order to 

establish an IPF’s cost for a particular 

case, we multiply the IPF’s reported 

charges on the discharge bill by its 

overall cost-to-charge ratio (CCR). This 

approach to determining an IPF’s cost is 

consistent with the approach used 

under the IPPS and other PPSs. In FY 

2004, we implemented changes to the 

IPPS outlier policy used to determine 

CCRs for acute care hospitals because 

we became aware that payment 

vulnerabilities resulted in inappropriate 

outlier payments. Under the IPPS, we 

established a statistical measure of 

accuracy for CCRs in order to ensure 

that aberrant CCR data did not result in 

inappropriate outlier payments. 

As we indicated in the November 

2004 IPF PPS final rule, because we 

believe that the IPF outlier policy is 

susceptible to the same payment 

vulnerabilities as the IPPS, we adopted 

an approach to ensure the statistical 

accuracy of CCRs under the IPF PPS (69 

FR 66961). Therefore, we adopted the 

following procedure in the November 

2004 IPF PPS final rule: 

• We calculated two national ceilings, 

one for IPFs located in rural areas and 

one for IPFs located in urban areas. We 

computed the ceilings by first 

calculating the national average and the 

standard deviation of the CCR for both 

urban and rural IPFs. 

To determine the rural and urban 

ceilings, we multiplied each of the 

standard deviations by 3 and added the 

result to the appropriate national CCR 

average (either rural or urban). The 

upper threshold CCR for IPFs in RY 

2012 is 1.8199 for rural IPFs, and 1.7643 

for urban IPFs, based on CBSA-based 

geographic designations. If an IPF’s CCR 

is above the applicable ceiling, the ratio 

is considered statistically inaccurate 

and we assign the appropriate national 

(either rural or urban) median CCR to 

the IPF. 

We apply the national CCRs to the 

following situations: 

++ New IPFs that have not yet 

submitted their first Medicare cost 

report. 

++ IPFs whose overall CCR is in 

excess of 3 standard deviations above 

the corresponding national geometric 

mean (that is, above the ceiling). 

++ Other IPFs for which the Medicare 

contractor obtains inaccurate or 

incomplete data with which to calculate 

a CCR. 

For new IPFs, we are using these 

national CCRs until the facility’s actual 

CCR can be computed using the first 

tentatively or final settled cost report. 

We are not making any changes to the 

procedures for ensuring the statistical 

accuracy of CCRs in RY 2012. However, 

we are updating the national urban and 

rural CCRs (ceilings and medians) for 

IPFs for RY 2012 based on the CCRs 

entered in the latest available IPF PPS 

Provider Specific File. 

Specifically, for RY 2012, and to be 

used in each of the three situations 

listed above, we estimate the national 

average CCR to be 0.6435 for rural IPFs 

and the national average CCR of 0.5055 

for urban IPFs. These calculations are 

based on the IPF’s location (either urban 

or rural) using the CBSA-based 

geographic designations. 

A complete discussion regarding the 

national median CCRs appears in the 

November 2004 IPF PPS final rule (69 

FR 66961 through 66964). 

2. Expiration of the Stop-Loss Provision 

In the November 2004 IPF PPS final 

rule, we implemented a stop-loss policy 

that reduced financial risk to IPFs 

projected to experience substantial 

reductions in Medicare payments 

during the period of transition to the IPF 

PPS. This stop-loss policy guaranteed 

that each facility received total IPF PPS 

payments that were no less than 70 

percent of its TEFRA payments had the 

IPF PPS not been implemented. This 

policy was applied to the IPF PPS 

portion of Medicare payments during 

the 3-year transition. 

In the implementation year, the 70 

percent of TEFRA payment stop-loss 

policy required a reduction in the 

standardized Federal per diem and ECT 

base rates of 0.39 percent in order to 

make the stop-loss payments budget 

neutral. As described in the May 2008 

IPF PPS notice for RY 2009, we 

increased the Federal per diem base rate 

and ECT rate by 0.39 percent because 

these rates were reduced by 0.39 percent 

in the implementation year to ensure 

stop-loss payments were budget neutral. 

The stop-loss provision ended during 

RY 2009 (that is for discharges occurring 

on or after July 1, 2008 through June 30, 


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2009). The stop-loss policy is no longer 

applicable under the IPF PPS. 

3. Future Refinements 

As we have noted throughout the RY 

2012 IPF PPS proposed rule as well as 

in this final rule, we have delayed 

making refinements to the IPF PPS until 

we have adequate IPF PPS data on 

which to base those decisions. Now that 

we are approximately 5 years into the 

system, we believe that we have enough 

data to begin that process. We have 

begun the necessary analysis to better 

understand IPF industry practices so 

that we may refine the IPF PPS as 

appropriate. While we did not propose 

to make the following refinements in the 

RY 2012 IPF PPS proposed rulemaking, 

we believe that in the rulemaking for FY 

2013 we will be ready to present the 

results of our analysis. 

Specifically, with the change from 

ICD–9–CM to ICD–10–CM coming in FY 

2013, we are analyzing the comorbidity 

categories and related codes for 

utilization and continued suitability. 

While we would continue to provide for 

comorbidity adjustments, we are 

analyzing whether the current groupings 

and codes continue to be warranted and 

whether other appropriate codes should 

be added. Also, we are analyzing our 

current policies for interrupted stays, 

readmissions, same-day transfers, and 

length of stays in order to assess 

whether these policies continue to be 

appropriate. Additionally, in 

accordance with section 1886(s)(4) of 

the Act, which was added by section 

10322 of the Affordable Care Act, IPFs 

must submit data on quality measures, 

as specified by the Secretary, for each 

RY beginning in RY 2014. If data is not 

submitted, any annual update to a 

Federal base rate for discharges for the 

payments shall be reduced by 2 

percentage points. Quality measures are 

currently being developed to effectuate 

this requirement. Lastly, for the first 

time MedPAC will become involved in 

evaluating facility margins and will 

likely make recommendations regarding 

the appropriate payment update to IPFs 

based on their findings. CMS is 

interested in gaining feedback on these 

areas for future refinements and 

therefore we invite comments on these 

issues described in this section at this 

time. 

Comment: A few commenters strongly 

supported the need to develop and 

implement quality measures for the IPF 

PPS. They strongly encouraged CMS to 

review and consider the Hospital-Based 

Inpatient Psychiatric Services (HBIPS) 

core measures as a foundation for 

quality measures for the IPF PPS. They 

pointed out that these quality measures 

are now in effect for all Joint 

Commission-accredited psychiatric 

hospitals and are available for use by 

psychiatric units in acute care hospitals. 

Response: We appreciate the support 

for the development and 

implementation of quality measures, as 

well as the recommendation regarding 

the Hospital-Based Inpatient Psychiatric 

Services (HBIPS) core measures for IPFs. 

In accordance with section 1886(s)(4) of 

the SSA (the Act), which was added by 

section 10322 of the Affordable Care 

Act, IPFs must submit data on quality 

measures as specified by the Secretary, 

for each RY (that coincides with a FY) 

beginning in FY 2014. Quality measures 

are currently being developed to 

effectuate this requirement. To 

implement this, a Technical Expert 

Panel (TEP) has been assembled to 

develop quality measures for inpatient 

psychiatric hospitals and psychiatric 

units. The TEP consists of a wide crosssection of today’s learned scholars and 

experts in the field including the Joint 

Commission on Hospital and 

Accreditation (formerly Joint 

Commission on Accreditation of 

Healthcare Organizations), to provide 

valued input on quality measure 

development. The TEP is charged with 

identifying measures that reflect current 

knowledge regarding effective, 

evidenced-based treatments for 

psychiatric disorders; addressing the 

range of treatments and care processes 

provided at IPFs; and identifying 

measures applicable to all Medicare 

beneficiaries treated in IPFs. Therefore, 

consistent with the views of these 

commenters, CMS is reviewing and 

taking into consideration those HBIPS 

core measures to help form a foundation 

for quality measures as directed under 

the Act. 

Comment: A few commenters stated 

that although the core adjustments to 

the system, such as age, length of stay, 

and comorbidities have been effective in 

addressing the variability in the costs of 

treating Medicare patients with 

psychiatric disorders, they recommend 

that the key adjustments (such as age, 

comorbidities, and length of stays) be 

analyzed to determine if any changes 

are warranted. 

Response: We agree with the 

commenters on the need to analyze 

patient characteristics such as age, 

comorbidities, and length of stays when 

we refine the IPF PPS system. As 

explained in the RY 2012 IPF PPS 

proposed rule, in preparation for the 

migration from ICD–9–CM to ICD–10– 

CM in FY 2013, we plan to analyze the 

comorbidity categories and related 

codes for utilization and continued 

suitability. We will make 

determinations as to whether the 

current groupings and codes continue to 

be warranted and whether other 

appropriate codes should also be added. 

We are also analyzing our current 

policies on interrupted stays, 

readmissions, same-day transfers, and 

length of stays in order to assess 

whether these policies continue to be 

appropriate. We welcome the support 

by these commenters for such future 

refinements. 

VII. Regulations Text Corrections 

We proposed several minor 

corrections to the regulations text to 

address typographical errors. We noted 

that these proposed changes do not 

impact policy. We proposed to correct 

typographical errors at § 412.404, 

‘‘Conditions for payment’’ under the 

prospective payment system for 

inpatient hospital services of psychiatric 

facilities; § 412.422, ‘‘Basis of payment;’’ 

and § 412.426, ‘‘Transition period.’’ In 

addition to these corrections, we 

proposed to add clarifying language at 

§ 412.426 and § 412.432(d), ‘‘Method of 

payment under the inpatient psychiatric 

facility prospective payment system.’’ 

The proposed revisions are described 

below. 

Section 412.404(a)(1) 

Under § 412.404, in paragraph (a)(1), 

‘‘General requirements,’’ we proposed to 

delete the word ‘‘in’’ between the words 

‘‘furnished’’ and ‘‘to Medicare’’. 

Section 412.422(b)(2) 

Under § 412.422, in paragraph (b)(2), 

we proposed to correct the reference to 

§ 413.80 to § 413.89. The regulations 

covered at § 413.89 include bad debts, 

charity, and courtesy allowances. 

Section 412.426(a) 

Under § 412.426, in paragraph (a), 

‘‘Duration of transition period and 

composition of the blended transition 

payment,’’ we proposed to replace 

‘‘Except as provided in paragraph (d) of 

this section’’ with ‘‘Except as provided 

in paragraph (c) of this section.’’ There 

is no paragraph (d); this exception 

should refer to paragraph (c), 

‘‘Treatment of new inpatient psychiatric 

facilities.’’ 

Also in paragraph (a), we proposed to 

add the words ‘‘of this part’’ after ‘‘as 

specified in § 412.424(d)’’ and ‘‘of this 

section’’ after ‘‘as specified under 

paragraph (b).’’ This regulatory language 

is required by the Federal Register. 

In each of paragraphs § 412.426(a)(1) 

through (a)(3), we proposed to delete the 

words ‘‘on or’’ directly before the words 

‘‘before January’’. For example, 

paragraph (a)(1) currently states, ‘‘For 


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cost reporting periods beginning on or 

after January 1, 2005 and on or before 

January 1, 2006 * * *’’ We proposed 

that this statement read: ‘‘For cost 

reporting periods beginning on or after 

January 1, 2005 and before January 1, 

2006 * * *’’ This correction does not 

represent a change in policy. Rather, it 

is a correction to conform the regulation 

text to our policy, which was 

established in our final rule that 

appeared in the Federal Register on 

November 15, 2004 (69 FR 66980) 

(which was subsequently corrected on 

April 1, 2005 (70 FR 16729)). It is clear 

that the current regulation text is 

incorrect. The same January date (for 

example, January 1, 2007) cannot be 

both the date on which a new transition 

period begins and the date on which the 

previous transition period ends. Our 

policy, since we established the 

transition, has been to begin a transition 

period on or after a January 1 date and 

to end that transition period before the 

next transition period begins. Because 

our regulation text does not accurately 

reflect our actual policy, we proposed 

this correction. 

At § 412.426(a)(4), we proposed to 

replace the statement, ‘‘For cost 

reporting periods beginning on or after 

July 1, 2008, payment is based entirely 

on the Federal per diem payment 

amount’’ with the following statement: 

‘‘For cost reporting periods beginning on 

or after January 1, 2008, payment is 

based entirely on the Federal per diem 

payment amount.’’ The transition period 

during which payment was based on a 

combination of the Federal per diem 

payment amount and TEFRA payments, 

ended on January 1, 2008, not July 1, 

2008. 

Comment: Two commenters 

expressed serious concern that CMS is 

making retroactive policy changes to the 

regulations text for the 3-year transition 

period for the IPF PPS rather than minor 

corrections to address typographical 

errors. 

Response: We disagree with the 

commenters. We are simply making 

minor corrections to the regulations at 

§ 412.426 covering the transition period 

to address typographical errors to the 

IPF PPS. In the November 2004 IPF PPS 

final rule, we provided for a 3-year 

transition period. During this 3-year 

transition period, an IPF’s total payment 

under the PPS was based on an 

increasing percentage of the Federal rate 

with a corresponding decreasing 

percentage of the IPF PPS payment that 

was based on reasonable cost concepts. 

However, effective for cost reporting 

periods beginning on or after January 1, 

2008, IPF PPS payments are based on 

100 percent of the Federal rate. This 

correction does not represent a policy 

change, and therefore is not a retroactive 

change. Rather, it is a correction to 

conform the regulation text to our 

policy, which was established in our 

final rule that appeared in the Federal 

Register on November 15, 2004 (69 FR 

66980) (which was subsequently 

corrected on April 1, 2005 (70 FR 

16729)). It is clear that the current 

regulation text is incorrect. The same 

January date (for example, January 1, 

2007) cannot be both the date on which 

a new transition period begins and the 

date on which the previous transition 

period ends. Our policy, since we 

established the transition, has been to 

begin a transition period on or after a 

January 1 date and to end that transition 

period before the next transition period 

begins. Because our regulation text does 

not accurately reflect our actual policy, 

we proposed this correction. 

In addition for § 412.426, in paragraph 

(a), ‘‘Duration of transition period and 

composition of the blended transition 

payment,’’ we intended to propose, but 

did not, to replace ‘‘on or after January 

1, 2005 through January 1, 2008’’ with 

‘‘on or after January 1, 2005 through 

December 31,2007’’. Here again, this 

correction does not represent a policy 

change; it is merely a correction to 

conform the regulation text to our 

policy, and it is consistent with the 

other typographical errors we are 

correcting in § 412.426. 

Section 412.432(d) 

Under § 412.432, in paragraph (d), 

‘‘Outlier payments,’’ we proposed to add 

the words ‘‘of this part’’ after ‘‘subject to 

the cost report settlement specified in 

§ 412.84(i) and § 412.84(m).’’ This 

regulatory language is required by the 

Federal Register and clarifies that 

§ 412.84(i) and § 412.84(m) refer to 42 

CFR part 412, ‘‘Prospective Payment 

Systems for Inpatient Hospital 

Services.’’ 

VIII. Collection of Information 

Requirements 

This document does not impose any 

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. 35). 

IX. Regulatory Impact Analysis 

A. Statement of Need 

This final rule will update the 

prospective payment rates for Medicare 

inpatient hospital services provided by 

inpatient psychiatric facilities for 

discharges occurring during the RY 

beginning July 1, 2011 through 

September 30, 2012. We are applying 

the 15-month FY 2008-based RPL 

market basket increase of 3.2 percent, 

adjusted by the 0.25 percentage point 

reduction, as required by section 

1886(s)(3)(A) of the Act. In addition, the 

rule implements policy changes 

affecting the IPF PPS teaching 

adjustment, as well as makes some 

clarifications and corrections to 

terminology and regulations text. 

B. Overall Impact 

We have examined the impact of this 

rule as required by Executive Order 

12866 on Regulatory Planning and 

Review (September 30, 1993), Executive 

Order 13563 on Improving Regulation 

and Regulatory Review (January 18, 

2011), the Regulatory Flexibility Act 

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

354), section 1102(b) of the Social 

Security Act, section 202 of the 

Unfunded Mandates Reform Act of 1995 

(March 22, 1995; Pub. L. 104–4), 

Executive Order 13132 on Federalism 

(August 4, 1999) and the Congressional 

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

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

($100 million or more in any 1 year). 

This final rule has been designated an 

‘‘economically’’ significant rule, under 

section 3(f) (1) of Executive Order 12866 

and a major rule under the 

Congressional Review Act. Accordingly, 

the rule has been reviewed by the Office 

of Management and Budget. 

We estimate that the total impact of 

these changes for estimated RY 2012 

payments compared to estimated RY 

2011 payments would be an increase of 

approximately $120 million (this 

reflects a $130 million increase from the 

update to the payment rates and a $10 

million decrease due to the update to 

the outlier threshold amount to decrease 

outlier payments from approximately 

2.2 percent in RY 2011 to 2.0 percent in 

RY 2012). 

The RFA requires agencies to analyze 

options for regulatory relief of small 

entities, if a rule has a significant impact 

on a substantial number of small 

entities. For purposes of the RFA, small 

entities include small businesses, 

nonprofit organizations, and small 


jlentini on DSKJ8SOYB1PROD with RULES2
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governmental jurisdictions. Most IPFs 

and most other providers and suppliers 

are small entities, either by nonprofit 

status or by having revenues of $7 

million to $34.5 million in any one year 

(for details, refer to the SBA Small 

Business Size Standards found at 

http://ecfr.gpoaccess.gov/cgi/t/text/textidx?c=ecfr&sid=2465b064

ba6965cc1fbd2eae60854b11&rgn=

div8&view=text&node=13:1.0.1.

1.16.1.266.9&idno=13). Because we lack 

data on individual hospital receipts, we 

cannot determine the number of small 

proprietary IPFs or the proportion of 

IPFs’ revenue that is derived from 

Medicare payments. Therefore, we 

assume that all IPFs are considered 

small entities. The Department of Health 

and Human Services generally uses a 

revenue impact of 3 to 5 percent as a 

significance threshold under the RFA. 

As shown in Table 15, we estimate 

that the revenue impact of this final rule 

on all IPFs is to increase estimated 

Medicare payments by about 2.74 

percent, with rural IPFs estimated to 

receive an increase in estimated 

Medicare payments greater than 3 

percent (an aggregate 3.80 percent). As 

a result, the Secretary has determined 

that this final rule will not have a 

significant impact on a substantial 

number of small entities. Medicare 

fiscal intermediaries, Medicare 

Administrative Contractors, and carriers 

are not considered to be small entities. 

Individuals and States are not included 

in the definition of a small entity. We 

solicited comment on the above 

analysis. 

In addition, section 1102(b) of the 

Social Security Act requires us to 

prepare a regulatory impact analysis, if 

a rule may have a significant impact on 

the operations of a substantial number 

of small rural hospitals. This analysis 

must conform to the provisions of 

section 604 of the RFA. For purposes of 

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

small rural hospital as a hospital that is 

located outside of a metropolitan 

statistical area and has fewer than 100 

beds. As discussed in detail below, the 

rates and policies set forth in this final 

rule will not have an adverse impact on 

the rural hospitals based on the data of 

the 320 rural units and 67 rural 

hospitals in our database of 1,653 IPFs 

for which data were available. 

Therefore, the Secretary has determined 

that this final rule will not have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

also requires that agencies assess 

anticipated costs and benefits before 

issuing any rule whose mandates 

require spending in any 1 year of $100 

million in 1995 dollars, updated 

annually for inflation. In 2011, that 

threshold is approximately $136 

million. This final rule will not impose 

spending costs on State, local, or Tribal 

governments in the aggregate, or by the 

private sector, of $136 million. 

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 final rule would 

not have a substantial effect on State 

and local governments. 

C. Anticipated Effects of the Final Rule 

We discuss below the historical 

background of the IPF PPS and the 

impact of this final rule on the Federal 

Medicare budget and on IPFs. 

1. Budgetary Impact 

As discussed in the November 2004 

and May 2006 IPF PPS final rules, we 

applied a budget neutrality factor to the 

Federal per diem and ECT base rates to 

ensure that total estimated payments 

under the IPF PPS in the 

implementation period would equal the 

amount that would have been paid if the 

IPF PPS had not been implemented. The 

budget neutrality factor includes the 

following components: Outlier 

adjustment, stop-loss adjustment, and 

the behavioral offset. As discussed in 

the May 2008 IPF PPS notice (73 FR 

25711), the stop-loss adjustment is no 

longer applicable under the IPF PPS. 

In accordance with § 412.424(c)(3)(ii), 

we indicated that we would evaluate the 

accuracy of the budget neutrality 

adjustment within the first 5 years after 

implementation of the payment system. 

We may make a one-time prospective 

adjustment to the Federal per diem and 

ECT base rates to account for differences 

between the historical data on costbased TEFRA payments (the basis of the 

budget neutrality adjustment) and 

estimates of TEFRA payments based on 

actual data from the first year of the IPF 

PPS. As part of that process, we will 

reassess the accuracy of all of the factors 

impacting budget neutrality. In 

addition, as discussed in section IV.C.6 

of this final rule, we are using the wage 

index and labor-related share in a 

budget neutral manner by applying a 

wage index budget neutrality factor to 

the Federal per diem and ECT base 

rates. Therefore, the budgetary impact to 

the Medicare program of this final rule 

will be due to the 15-month market 

basket update for RY 2012 of 3.2 percent 

(see section IV.C.5 of this final rule) as 

adjusted by the ‘‘other adjustment’’ of 

¥0.25 percentage point according to 

section 1886(s)(3)(A) of the Act, and the 

update to the outlier fixed dollar loss 

threshold amount. 

We estimate that the RY 2012 impact 

would be a net increase of $120 million 

in payments to IPF providers. This 

reflects an estimated $130 million 

increase from the update to the payment 

rates and a $10 million decrease due to 

the update to the outlier threshold 

amount to decrease estimated outlier 

payments from approximately 2.2 

percent in RY 2011 to 2.0 percent in RY 

2012. 

2. Impact on Providers 

To understand the impact of the 

changes to the IPF PPS on providers, 

discussed in this final rule, it is 

necessary to compare estimated 

payments under the IPF PPS rates and 

factors for RY 2012 versus those under 

RY 2011. The estimated payments for 

RY 2011 and RY 2012 will be 100 

percent of the IPF PPS payment, since 

the transition period has ended and 

stop-loss payments are no longer paid. 

We determined the percent change of 

estimated RY 2012 IPF PPS payments to 

RY 2011 IPF PPS payments for each 

category of IPFs. In addition, for each 

category of IPFs, we have included the 

estimated percent change in payments 

resulting from the update to the outlier 

fixed dollar loss threshold amount, the 

labor-related share and wage index 

changes for the RY 2012 IPF PPS, and 

the 15-month market basket update for 

RY 2012, as adjusted by the ‘‘other 

adjustment’’ according to section 

1886(s)(3)(A) of the Act. 

To illustrate the impacts of the RY 

2012 changes in this final rule, our 

analysis begins with a RY 2011 baseline 

simulation model based on FY 2009 IPF 

payments inflated to the midpoint of RY 

2011 using IHS Global Insight’s most 

recent forecast of the market basket 

update (see section IV.C.5 of this final 

rule); the estimated outlier payments in 

RY 2011; the CBSA designations for 

IPFs based on OMB’s MSA definitions 

after June 2003; the FY 2010 pre-floor, 

pre-reclassified hospital wage index; the 

RY 2011 labor-related share; and the RY 

2011 percentage amount of the rural 

adjustment. During the simulation, the 

total estimated outlier payments are 

maintained at 2 percent of total IPF PPS 

payments. 

Each of the following changes is 

added incrementally to this baseline 

model in order for us to isolate the 

effects of each change: 


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• The update to the outlier fixed 

dollar loss threshold amount. 

• The FY 2011 pre-floor, prereclassified hospital wage index and RY 

2012 labor-related share. 

• The 15-month market basket update 

for RY 2012 of 3.2 percent adjusted by 

the 0.25 percentage point reduction in 

accordance with section 1886(s)(3)(A) of 

the Act. 

Our final comparison illustrates the 

percent change in payments from RY 

2011 (that is, July 1, 2010 to June 30, 

2011) to RY 2012 (that is, July 1, 2011 

to September 30, 2012) including all the 

changes in this final rule. 


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3. Results 

Table 15 above displays the results of 

our analysis. The table groups IPFs into 

the categories listed below based on 

characteristics provided in the Provider 

of Services (POS) file, the IPF provider 

specific file, and cost report data from 

HCRIS: 

• Facility Type 

• Location 

• Teaching Status Adjustment 

• Census Region 

• Size 

The top row of the table shows the 

overall impact on the 1,653 IPFs 

included in this analysis. 

In column 3, we present the effects of 

the update to the outlier fixed dollar 

loss threshold amount. We estimate that 

IPF outlier payments as a percentage of 

total IPF payments are 2.2 percent in RY 

2011. Therefore, we are adjusting the 

outlier threshold amount from $6,372 in 

RY 2011 to $7,340 in RY 2012 in order 

to set total estimated outlier payments 

equal to 2 percent of total payments in 

RY 2012. The estimated change in total 

IPF payments for RY 2012, therefore, 

includes an approximate 0.2 percent 

decrease in payments because the 

outlier portion of total payments is 

expected to decrease from 

approximately 2.2 percent to 2 percent. 

The overall aggregate effect of this 

outlier adjustment update (as shown in 

column 3 of table 15), across all hospital 

groups, is to decrease total estimated 

payments to IPFs by 0.21 percent. We 

do not estimate that any group of IPFs 

will experience an increase in payments 

from this update. The largest decrease in 

payments is estimated to reflect a 1.57 

percent decrease in payments to urban 

government IPF units located in CAHs 

which is due to the small number of 

IPFs of that type and the high volume 

of outlier payments made to those IPFs. 

In column 4, we present the effects of 

the budget-neutral update to the laborrelated share and the wage index 

adjustment under the CBSA geographic 

area definitions announced by OMB in 

June 2003. This is a comparison of the 

simulated RY 2012 payments under the 

FY 2011 hospital wage index under 

CBSA classification and associated 

labor-related share to the simulated RY 

2011 payments under the FY 2010 

hospital wage index under CBSA 

classifications and associated laborrelated share. We note that there is no 

projected change in aggregate payments 

to IPFs, as indicated in the first row of 

column 4. However, there will be 

distributional effects among different 

categories of IPFs. For example, we 

estimate a 1.02 percent increase in 

overall payments to rural IPFs, with the 

largest increase in payments of 2.25 

percent for rural, for-profit freestanding 

psychiatric hospitals. In addition, we 

estimate the largest decrease in 

payments to be a 0.91 percent decrease 

for IPFs in the New England region. 

Column 5 shows the estimated effect 

of the update to the IPF PPS payment 

rates, which includes a 3.2 percent 15- 

month market basket update adjusted by 

the 0.25 percentage point reduction in 

accordance with section 1886(s)(3)(A). 

Column 6 compares our estimates of 

the changes reflected in this final rule 

for RY 2012, to our payments for RY 

2011 (without these changes). This 

column reflects all RY 2012 changes 

relative to RY 2011. The average 

estimated increase for all IPFs is 

approximately 2.74 percent. This 

estimated net increase includes the 

effects of the 3.2 percent 15-month 

market basket update adjusted by the 

‘‘other adjustment’’ of ¥0.25 percentage 

point, as required by section 

1886(s)(3)(A) of the Act. It also includes 

the overall estimated 0.2 percent 

decrease in estimated IPF outlier 

payments from the update to the outlier 

fixed dollar loss threshold amount. 

Since we are making the updates to the 

IPF labor-related share and wage index 

in a budget-neutral manner, they will 

not affect total estimated IPF payments 

in the aggregate. However, they will 

affect the estimated distribution of 

payments among providers. 

Overall, no IPFs are estimated to 

experience a net decrease in payments 

as a result of the updates in this rule. 

IPFs in urban areas will experience a 

2.57 percent increase and IPFs in rural 

areas will experience a 3.80 percent 

increase. The largest payment increase 

is estimated at 5.23 percent for rural, 

for-profit freestanding psychiatric 

hospitals. This is due to the larger than 

average positive effect of the FY 2011 

CBSA wage index and labor-related 

share updates for rural IPFs in this 

category. 

4. Effect on the Medicare Program 

Based on actuarial projections 

resulting from our experience with other 

PPSs, we estimate that Medicare 

spending (total Medicare program 

payments) for IPF services over the next 

5 years would be as shown in Table 16 

below. 

TABLE 16—ESTIMATED PAYMENTS

Rate year Dollars in 

millions 

July 1, 2011 to June 30, 2012 $4,615 

July 1, 2012 to June 30, 2013 4,945 

July 1, 2013 to June 30, 2014 5,330 

July 1, 2014 to June 30, 2015 5,775 

TABLE 16—ESTIMATED PAYMENTS— 

Continued 

Rate year Dollars in 

millions 

July 1, 2015 to June 30, 2016 6,273 

These estimates are based on the 

current forecast of the increases in the 

RPL market basket, including an 

adjustment for productivity, for the RY 

beginning in 2012 and each subsequent 

RY, as required by section 1886(s)(3)(A) 

of the Act, as follows: 

• 2.8 percent for rate years beginning 

in 2011 (RY 2012). 

• 1.7 percent for rate years beginning 

in 2012 (RY 2013). 

• 2.0 percent for rate years beginning 

in 2013 (RY 2014). 

• 2.2 percent for rate years beginning 

in 2014 (RY 2015). 

• 2.4 percent for rate years beginning 

in 2015 (RY 2016). 

The estimates in Table 16 also include 

the application of the ‘‘other 

adjustment,’’ as required by section 

1886(s)(3)(A) of the Act, as follows: 

• ¥0.25 percentage point for rate 

years beginning in 2011. 

• ¥0.1 percentage point for rate years 

beginning in 2012. 

• ¥0.1 percentage point for rate years 

beginning in 2013. 

• ¥0.3 percentage point for rate years 

beginning in 2014. 

• ¥0.2 percentage point for rate years 

beginning in 2015. 

We estimate that there would be a 

change in fee-for-service Medicare 

beneficiary enrollment as follows: 

• 3.3 percent in RY 2012. 

• 3.7 percent in RY 2013. 

• 4.3 percent in RY 2014. 

• 4.9 percent in RY 2015. 

• 5.6 percent in RY 2016. 

5. Effect on Beneficiaries 

Under the IPF PPS, IPFs would 

receive payment based on the average 

resources consumed by patients for each 

day. We do not expect changes in the 

quality of care or access to services for 

Medicare beneficiaries under the RY 

2012 IPF PPS. In fact, we believe that 

access to IPF services will be enhanced 

due to the patient- and facility-level 

adjustment factors, all of which are 

intended to adequately reimburse IPFs 

for expensive cases. Finally, the outlier 

policy is intended to assist IPFs that 

experience high-cost cases. 

D. Alternatives Considered 

The statute does not specify an update 

strategy for the IPF PPS and is broadly 

written to give the Secretary discretion 

in establishing an update methodology. 


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Therefore, we are updating the IPF PPS 

using the methodology published in the 

November 2004 IPF PPS final rule. 

We note that this final rule initiates 

policy changes with regard to the IPF 

PPS, and it also provides an update to 

the rates for RY 2012. We considered 

making refinements to the IPF PPS in 

this final rule. However, more time is 

required to assess the data and will 

therefore once again delay running the 

regression analysis until we have 

adequate IPF PPS data. We have 

initiated the necessary analysis to better 

understand IPF industry practices. We 

did not consider rebasing the IPF PPS 

for concerns that rebasing would be too 

costly (re-calculate the cost-per-day) and 

time consuming. 

E. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a-4.pdf), in Table 17 below, we 

have prepared an accounting statement 

showing the classification of the 

expenditures associated with the 

provisions of this final rule. This table 

provides our best estimate of the 

increase in Medicare payments under 

the IPF PPS as a result of the proposed 

changes presented in this final rule and 

based on the data for 1,653 IPFs in our 

database. All expenditures are classified 

as transfers to IPF Medicare providers. 

TABLE 17—ACCOUNTING STATEMENT: 

CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM THE 2011 IPF 

PPS RY TO THE 2012 IPF PPS RY 

[In millions] 

Category Transfers 

Annualized Monetized 

Transfers.

$120. 

From Whom To 

Whom? 

Federal Government 

to IPF Medicare 

Providers. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects in 42 CFR Part 412 

Administrative practice and 

procedure, Health facilities, Medicare, 

Puerto Rico, Reporting and 

recordkeeping requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

chapter IV as set forth below: 

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

■ 1. The authority citation for part 412 

continues to read as follows: 

Authority: Secs 1102, 1862, and 1871 of 

the Social Security Act (42 U.S.C. 1302, 

1395y, and 1395hh). 

Subpart N—Prospective Payment 

System for Inpatient Hospital Services 

of Inpatient Psychiatric Facilities 

■ 2. In § 412.402, the definition of 

‘‘Inpatient psychiatric facilities 

prospective payment system rate year’’ 

is added in alphabetical order to read as 

follows: 

§ 412.402 Definitions. 

* * * * * 

Inpatient psychiatric facilities 

prospective payment system rate year 

means— 

(1) Through June 30, 2011, the 12- 

month period of July 1 through June 30. 

(2) Beginning July 1, 2011, the 15- 

month period of July 1, 2011 through 

September 30, 2012. 

(3) Beginning October 1, 2012, the 12- 

month period of October 1 through 

September 30, referred to as Fiscal Year 

(FY). 

* * * * * 

■ 3. Section 412.404 is amended by 

revising paragraph (a)(1) to read as 

follows: 

§ 412.404 Conditions for payment under 

the prospective payment system for 

inpatient hospital services of psychiatric 

facilities. 

(a) * * * 

(1) Effective for cost reporting periods 

beginning on or after January 1, 2005, an 

inpatient psychiatric facility must meet 

the conditions of this section to receive 

payment under the prospective payment 

system described in this subpart for 

inpatient hospital services furnished to 

Medicare Part A fee-for-service 

beneficiaries. 

* * * * * 

■ 4. Section 412.422 is amended by 

revising paragraph (b)(2) to read as 

follows: 

§ 412.422 Basis of payment. 

* * * * * 

(b) * * * 

(2) In addition to the Federal per diem 

payment amounts, inpatient psychiatric 

facilities receive payment for bad debts 

of Medicare beneficiaries, as specified 

in § 413.89 of this chapter. 

■ 5. Section 412.424 is amended by 

adding a new paragraph (d)(1)(iii)(F) to 

read as follows: 

§ 412.424 Methodology for calculating the 

Federal per diem payment amount. 

* * * * * 

(d) * * * 

(1) * * * 

(iii) * * * 

(F) Closure of an IPF. (1) For cost 

reporting periods beginning on or after 

July 1, 2011, an IPF may receive a 

temporary adjustment to its FTE cap to 

reflect residents added because of 

another IPF’s closure if the IPF meets 

the following criteria: 

(i) The IPF is training additional 

residents from an IPF that closed on or 

after July 1, 2011. 

(ii) No later than 60 days after the IPF 

begins to train the residents, the IPF 

submits a request to its Medicare 

contractor for a temporary adjustment to 

its cap, documents that the IPF is 

eligible for this temporary adjustment 

by identifying the residents who have 

come from the closed IPF and have 

caused the IPF to exceed its cap, and 

specifies the length of time the 

adjustment is needed. 

(2) Closure of an IPF’s residency 

training program. If an IPF that closes 

its residency training program on or 

after July 1, 2011, agrees to temporarily 

reduce its FTE cap according to the 

criteria specified in paragraph 

(d)(1)(iii)(F)(2)(ii) of this section, 

another IPF(s) may receive a temporary 

adjustment to its FTE cap to reflect 

residents added because of the closure 

of the residency training program if the 

criteria specified in paragraph 

(d)(1)(iii)(F)(2)(i) of this section are met. 

(i) Receiving IPF(s). For cost reporting 

periods beginning on or after July 1, 

2011, an IPF may receive a temporary 

adjustment to its FTE cap to reflect 

residents added because of the closure 

of another IPF’s residency training 

program if the IPF is training additional 

residents from the residency training 

program of an IPF that closed a program; 

and if no later than 60 days after the IPF 

begins to train the residents, the IPF 

submits to its Medicare Contractor a 

request for a temporary adjustment to its 

FTE cap, documents that it is eligible for 

this temporary adjustment by 

identifying the residents who have come 

from another IPF’s closed program and 

have caused the IPF to exceed its cap, 

specifies the length of time the 

adjustment is needed, and submits to its 

Medicare contractor a copy of the FTE 

reduction statement by the hospital that 

closed its program, as specified in 

paragraph (d)(1)(iii)(F)(2)(ii) of this 

section. 

(ii) IPF that closed its program. An 

IPF that agrees to train residents who 

have been displaced by the closure of 

another IPF’s program may receive a 


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temporary FTE cap adjustment only if 

the hospital with the closed program 

temporarily reduces its FTE cap based 

on the FTE residents in each program 

year training in the program at the time 

of the program’s closure. This yearly 

reduction in the FTE cap will be 

determined based on the number of 

those residents who would have been 

training in the program during that year 

had the program not closed. No later 

than 60 days after the residents who 

were in the closed program begin 

training at another hospital, the hospital 

with the closed program must submit to 

its Medicare contractor a statement 

signed and dated by its representative 

that specifies that it agrees to the 

temporary reduction in its FTE cap to 

allow the IPF training the displaced 

residents to obtain a temporary 

adjustment to its cap; identifies the 

residents who were in training at the 

time of the program’s closure; identifies 

the IPFs to which the residents are 

transferring once the program closes; 

and specifies the reduction for the 

applicable program years. 

* * * * * 

■ 6. Section 412.426 is amended by 

revising paragraph (a) to read as follows: 

§ 412.426 Transition period. 

(a) Duration of transition period and 

composition of the blended transition 

payment. Except as provided in 

paragraph (c) of this section, for cost 

reporting periods beginning on or after 

January 1, 2005 through December 31, 

2007, an inpatient psychiatric facility 

receives a payment comprised of a 

blend of the estimated Federal per diem 

payment amount, as specified in 

§ 412.424(d) of this subpart and a 

facility-specific payment as specified 

under paragraph (b) of this section. 

(1) For cost reporting periods 

beginning on or after January 1, 2005 

and before January 1, 2006, payment is 

based on 75 percent of the facilityspecific payment and 25 percent is 

based on the Federal per diem payment 

amount. 

(2) For cost reporting periods 

beginning on or after January 1, 2006 

and before January 1, 2007, payment is 

based on 50 percent of the facilityspecific payment and 50 percent is 

based on the Federal per diem payment 

amount. 

(3) For cost reporting periods 

beginning on or after January 1, 2007 

and before January 1, 2008, payment is 

based on 25 percent of the facilityspecific payment and 75 percent is 

based on the Federal per diem payment 

amount. 

(4) For cost reporting periods 

beginning on or after January 1, 2008, 

payment is based entirely on the Federal 

per diem payment amount. 

* * * * * 

■ 7. Section 412.432 is amended by 

revising paragraph (d) to read as 

follows: 

§ 412.432 Method of payment under the 

inpatient psychiatric facility prospective 

payment system. 

* * * * * 

(d) Outlier payments. Additional 

payments for outliers are not made on 

an interim basis. Outlier payments are 

made based on the submission of a 

discharge bill and represents final 

payment subject to the cost report 

settlement specified in § 412.84(i) and 

§ 412.84(m) of this part. 

* * * * * 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: April 21, 2011. 

Donald Berwick, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: April 26, 2011. 

Kathleen Sebelius, 

Secretary. 

Note: The following Addendums will not 

appear in the Code of Federal Regulations. 

BILLING CODE 4120–01–P 


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[FR Doc. 2011–10562 Filed 4–28–11; 4:15 pm] 

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